Asset managers everywhere are looking for more sophisticated and nuanced sustainable investment strategies. And the Japanese equity market is a major hotspot for sustainable investment.
New opportunities are springing up in the Japanese equity market due to population dynamics and corporate governance reform. A transition towards a more value-focused mindset is underway, and Japanese companies are opening up to investors looking for sustainable assets.
Why are there increasing sustainable investment opportunities in Japan?
Anyone interested in Japanese equities knows that the market struggled for many years until Abenomics came along in 2012. This is largely down to a total lack of shareholders.
For an astonishing 70 years, shareholders were absent from Japanese markets. Instead, bank governance was at the helm from the end of the second world war onwards.
When the then Prime Minister Shinzo Abe introduced his stimulus plans, the door opened for shareholders to return. Corporate Governance Reform began to happen in 2013, with impressive results. If we look at the Tokyo Stock Exchange First Section, in 2013 just 18% of companies had more than two independent directors. By 2020, the number stood at 95.3%.
During the Second World War Japan transitioned from shareholder to bank governance. Before then the private sector was hugely successful, with companies like Mitsui and Mitsubishi dominating. To prepare for war, however, the Government decided to implement a controlled economic model leading to the public sector becoming the major shareholder. The Government siphoned corporate money into strategic sectors, with financial institutions becoming the major shareholder before the bubble burst in 1989.
Between 1989 and 2012, there was an extended transitional period, and today the shareholder structure has come full circle with the private investor holding the most sway.
Change in attitude driven by consumer shift
There is an emerging understanding and recognition of the fact that there are major returns available through Environment, Social and Governance (ESG) investment. By identifying the ESG fundamentals within a company, investors can assess the chances of making decent returns from an ethical investment decision. The ESG scores received by companies are useful for investors, but there are always challenges regarding accuracy and consistency.
Investors must ensure that there is true underlying structural transformation in the ESG fundamentals of a company, rather than just relying on a score. A long-term investment strategy is essential to be successful, as some companies need to engage in long-term reforms.
It’s difficult to identify which companies in Japan will become key contenders for ESG investment. There are more than 3,700 listed companies to consider, and the traditional corporate culture in Japan can make it even trickier for investors to understand their options. Therefore, experience in thorough research is vital for any investor looking into sustainable opportunities in Japan.
Internal and external barriers to corporate sustainability
There are other internal barriers for some Japanese companies. For example, some simply don’t know how to develop a workable ESG strategy. In addition, investors can be sceptical of newly announced strategies, which can in turn discourage the company from developing them further. However, the kinds of companies that are open to improving its ESG fundamentals are generally open to interest from overseas and private investors.
Keeping engaged with companies regarding their plans for sustainable growth is really important for investors too. Establishing strong relationships with all kinds of stakeholders, ranging from business partners to employees, can help devise a long-term investment strategy.
It’s worth noting that the companies that have plenty of potential and drive to improve their ESG fundamentals are usually undervalued. This presents valuable opportunities for savvy investors who are doing the research and looking for a way in.
Japan is a major growth market for sustainable investment
Sustainability is on everyone’s minds. Governments, private sectors and public bodies are all waking up to the fact that sustainable strategies must be implemented now. There is no more time to waste. We are seeing first-hand what global disasters can do. From destructive weather patterns due to climate change to global pandemics, forest fires and displaced populations, there are many challenges ahead of us all.
Investors should strategise for sustainability, not only of their investment portfolio but for the wider world too. This means reviewing and understanding the companies that they choose to invest in, as well as their own business activities. We should all contribute to a better investment chain, where each investment decisions helps to change society and businesses for the better.
Japanese companies actually have a long history of supporting the principles of sustainability. Of the 2,000 global companies that have been around for a couple of centuries, 65% are in Japan. And one of the main reasons for such longevity is the philosophy of ‘sanpo-yoshi’, which ensures that the three most important stakeholders benefit. The three stakeholders are the buyer, seller and the community.
For many years, this was the normal corporate governance practice in Japan. And now that shareholder rights are reaching levels of true clarification, Japan has everything going for it in terms of sustainable opportunities for businesses and investors alike.
To be considered a sustainable investment opportunity, a business should be able to demonstrate stakeholder value and economic value. They should be working to improve their ESG credentials and fundamentals – investing in late adopters could be a good move for investors with an eye to the long-term.
Investors should look for companies with strong leadership teams that can present a clear vision. They should be able to explain their business strategy and rationale and their exact position on ESG and sustainability issues. Taking a holistic view of the whole company’s ethics is a good idea. For example, do they use environmentally friendly technology if applicable? Do they actively contribute to the community? What is the impact of their business not just on the bottom line but on the world around them?