How Japan is becoming a success story in responsible investment

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Japanese sustainable investment assets grew fivefold between 2016 and 2020, reaching $2.874 billion in 2020.

Figures from the Global Sustainable Investment Alliance (GSIA) 2021 report reveal that Japan increased allocations to responsible assets from just $474 billion in 2016 to $2.180 billion in 2018, before adding $694 billion over the next two years.

The country’s astronomical increase in sustainable investment assets over those four years means it accounts for 8% of the $35.3 trillion managed by the top five markets in Europe, the United States, Canada, from Australasia and Japan.

Separate figures from the Japan Sustainable Investment Forum released in May show a 65.8% year-over-year increase in responsibly invested assets, resulting in a balance of $3.7 trillion by the end of 2021.

The fact that Japan is becoming a success story in responsible investment is attributed to greater collaboration between policymakers, businesses and the financial services industry to create a robust framework with environmental, social and governance (ESG) factors ) in his heart.

Investor appetite

There is a clear appetite among Japanese investors for products that take ESG factors into account. Around 70% of asset management companies believe that ESG factors will affect the future value of the company.

The country’s Government Pension Investment Fund (GPIF), which at $1.6 trillion in assets is the world’s largest pension scheme, has been a dedicated ESG investor since 2017, making significant allocations to low-emission indices. of carbon.

More recently, the GPIF asked all its external asset managers to “consider ESG” as a fundamental measure of investment strategies.

The Japanese government is also an advocate for ESG investing as it aims to achieve its goal of net zero by 2050. In July 2021, the Bank of Japan announced that it would use part of its $10 billion in reserves to change to buy green bonds.

Individual investors also have a clear appetite for sustainable investments. Globally, 8 in 10 retail investors expressed interest in socially and environmentally responsible businesses according to a 2021 survey. Interest is also growing among individuals. A 2021 survey of over 3,000 people found that two-fifths would like to make ESG-related investments in the future, with human rights and other social issues listed as top areas of importance. With only 3.1% of respondents already investing in ESG issues, this represents a substantial opportunity to develop individual interest in ESG investing.

Regulatory impulse

In April, Japan was one of the first countries, along with the UK, to impose mandatory reporting requirements on the country’s largest companies, according to the Task Force on Climate-related Financial Disclosures (TCFD).

The move reinforces changes made to the Tokyo Stock Exchange’s 2021 Corporate Governance Code, which specifically mentioned sustainability topics, including climate change, human rights, and fair and appropriate treatment of labor. -work.

In 2020, the Financial Services Agency (FSA) revised the code of stewardship to include sustainability and ESG.

In the same year, the Ministry of the Environment updated the guidelines on green bonds, giving them greater importance for investors while reducing costs and administrative obstacles for issuers.

Implications for asset managers

Introducing improved codes and best practices is an important step in enabling asset managers to identify companies that take ESG seriously, meaning they can create genuine sustainable products that won’t be against charges of greenwashing.

However, a survey of the asset management industry released by the FSA in May reveals room for improvement.

According to the FSA: “Some asset management companies do not adequately disclose their basic approach to ESG investing and relevant initiatives in reports or other investor materials.”

He criticizes asset managers for being “abstract” in how they describe ESG integration and “many companies refer to the names of the top 10 companies issuing a fund and their ESG-related activities. ‘ESG at best, in their monthly reports or their investment reports’.

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To better enable investors to understand a fund’s ESG credentials, the FSA appears to be aligning with the European Union’s 2021 Sustainable Finance Disclosure Requirements, which require asset managers to be clear about how which they integrate ESG factors into financial products.

From the same research, the regulator says that when a fund takes ESG factors into account, “the investment approach and process should be continuously reinforced, and clear explanations and disclosures should be made in a consistent basis of investment processes so that investors can make appropriate investment decisions.”

The future

Japan has all the tools to build a thriving ESG investing industry; there is the support of political decision-makers, the appetite of investors and an asset management industry capable of offering suitable products.

However, the financial sector will have to show flexibility in its ESG offer. So far, the growth of responsible investing has largely been driven by subjective, personal feelings, rather than belief in the performance of ESG strategies. For example, nearly 70% of financial institutions responding to an Investment Japan survey in 2021 say they participate in ESG investing because it “promotes empathy” with individual investors.

Therefore, asset managers must offer product strategies, marketing and reporting that meet the differentiated needs of ESG investors.

This flexibility of asset managers must be supported by a concerted effort by all stakeholders – including product providers, companies, policymakers, investors and regulators – to create a transparent and consistent reporting framework.

If ESG investing is to avoid being derailed by greenwashing and ensure that investors fully understand the benefits of responsible investing over the long term, the theory must be made credible by verifiable data. If all the pieces are in place, Japan’s sustainable investment momentum is heading for even greater prosperity.

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