A year after the GPIF began full-scale ESG investment, there has been a noticeable rise in ESG performance at Japanese corporations, and signs of rising contribution by women. Additional improvement is still needed, including TCFD.
The Government Pension Investment Fund (GPIF) of Japan, which manages investments worth roughly 160 trillion yen, began using the ESG Index for investment about a year ago, and summarized the results in the ESG Utilization Report issued in August. While the FY2017 rate of return for its three indexes was below TOPIX performance, short-term returns were not perceived as a problem because ESG-sensitive investment is considered long-term. In fact, results showed that Japanese companies are making steady progress implementing ESG initiatives.
The three indexes are the FTSE Russell's Blossom Japan Index for Japanese firms with strong ESG practices, the MSCI Japan ESG Select Leaders Index, and the MSCI Japan Empowering Women Index (WIN) covering firms advancing fuller participation by women. The indexes include 155, 251 and 215 companies, respectively.
ESG evaluation by the FTSE shows that while the average score for Japanese stocks held by GPIF in March 2017 was only 2.44 on a 5-point scale, it had risen to 2.62 as of March 2018. The GPIF report ascribes this to wider appreciation of ESG evaluations by Japanese firms.
Over 30% of board of directors women in some companies
There are also signs of improvement in empowerment of women. MSCI’s ESG evaluation showed an improvement from 25% to 28% in a year for percentage of new hires who were women. In some companies, including Lawson, Inc., Astellas Pharma Inc., and Shiseido Co., Ltd., more than 30% of board of directors are women.
The companies comprising the indexes were revised in May–June 2018. The Select Leaders Index saw 12 firms replaced, but Seiichiro Uchi, managing director of MSCI Japan, points out “The key factor in dropping the firms was a decline in market value, not in ESG performance.” Rakuten, Inc. showed an impressive gain in ESG performance, jumping two ranks from BB in 2017 to A. In addition to strengthening protection for personal information, the firm also developed company-wide policy, enhanced in-house training, and expanded encryption application.
The FTSE reviews ESG performance indexes regularly, and from last year has added indexes based on Task Force on Climate-related Financial Disclosures (TCFD) recommendations on climate change, reviewing how Japanese companies anlyze the effects of climate change on management. It further promotes ESG awareness among Japanese companies.
Between them, the three GPIF ESG indexes represent about 1.5 trillion yen of investment. In September 2018 the GPIF announced that it started to include the S&P Carbon Efficient Index as a global environment index representing 1.2 trillion yen of investment. As the impact of these indexes is felt, efforts by Japanese corporations are expected to further accelerate.