Japanese companies aim to draft a set of new standards in environment, social and governance disclosures that will take local factors into account in two years, in a bid to draw more interest from ESG-minded investors locally and abroad.
Nearly 20 Japanese companies — including Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. — launched a study group in June to explore an ESG disclosure framework and a set of indicators that will reflect local characteristics such as an aging population and higher life expectancy, according to a spokesman at Hitachi Ltd., a Japanese electronics conglomerate leading the ESG framework project.
"We need our own ESG assessment framework as the existing international indicators are difficult to evaluate the characteristic of Japanese companies based on our culture," the spokesman told S&P Global Market Intelligence. "We need to take action because ESG investments are borderless."
The world's third-largest economy, which is seen as lagging other major economies in ESG disclosures as well as ESG-compliant investing, is under increasing pressure from investors and the international community to focus more on sustainability and societal impact.
Mizuho, for instance, recently said it would stop issuing loans to new coal-fired plants, following the country's first shareholder-led climate change resolution on a listed company. Japan's Government Pension Investment Fund, the world’s largest pension fund, also became a signatory to the United Nations Principles for Responsible Investment in 2015.
In 2018, assets in Japan that were committed to sustainable and responsible investment strategies more than quadrupled to $2.1 trillion from 2016, according to the Global Sustainable Investment Alliance. Still, that was about 7% of the global total of $30.6 trillion, and far below $14.1 trillion of Europe and $12.0 trillion of the U.S., the alliance said.
Of the total investment in Japan, sustainable investing assets accounted for 18% in 2018, lower than 49% in Europe, 50.6% in Canada and 26% in the U.S., according to the alliance.
Skeptical
Some analysts are skeptical about the initiative.
"Would they [Japanese companies] need their own [ESG] standards as they operate globally?" said Yoshihiro Fujii, executive director of the Research Institute of Environmental Finance in Japan.
It should be a daunting task to formulate the ESG framework or to set indicators for global investors, he added, partly as Japanese senior management could risk underestimating the ESG activity, seeing it as a "cost center."
Another analyst from a subsidiary of one of the participating companies said formulating the Japanese ESG framework from the scratch would be difficult, suggesting that Japanese companies should attempt to modify the existing ESG criteria that are already agreed globally.
The Hitachi-led study group aims to meet twice a month to work on the initiative. The group could also rely on Japanese financial institutions such as MUFG to provide what ESG information overseas investors are seeking for, the spokesman from Hitachi added. An MUFG spokesman declined to comment.
He did not provide more details about the study group, nor a roadmap of the plan.
"Let's see them in action," Fujii said.