Koichiro Miyahara is President & CEO of Tokyo Stock Exchange (TSE) and Executive Officer & Director of Japan Exchange Group (JPX). He writes about efforts at JPX to move Japan’s securities markets toward sustainability. This is Part 1 of the article in 2 parts.
Given the broad participation of foreign investors in Japan's stock market (representing about 60% of flow and 30% of stocks), it is imperative that we align our practices more closely with global investment standards and practices. Following are some initiatives taken by JPX toward sustainability.
1. ESG investment increasing in Japan
In recent years, ESG investment has quickly gained pace in capital markets, as investors increasingly seek to assess companies and their business plans in terms of corporate sustainability and mid- to long-term corporate value.
Japan is a latecomer to the scene, but since the world's largest pension fund, Japan's GPIF, signed up to the Principles for Responsible Investment in 2015, ESG investments in Japan have risen rapidly, growing almost ninefold, from 27 trillion yen in 2015 to 232 trillion yen in just four years.
2. JPX's initiatives in ESG investment: governance reform
At JPX, our initiatives in ESG investment can be considered as two pillars, supporting ESG initiatives at listed companies and providing ESG-related indices and products to our investors.
The first pillar is tied to corporate governance reform. In 2015, Tokyo Stock Exchange incorporated Japan's Corporate Governance Code into its listing rules. With the cooperation of all stakeholders, the Code now covers proactive and flexible approaches to ESG, and the disclosure of ESG and other information that is not required under laws and regulations.
As a measure of the Code's positive impact on corporate governance reform, according to an Exchange survey (July 2018) regarding independent directors in 1st Section companies, 91% appoint two or more independent directors, and 34% have more than one-third independent representation on their boards. The second figure for the JPX-Nikkei Index 400 is even higher, at 41% of index constituents.
Though these figures are encouraging, we continue to hear comments that the initiatives taken by listed companies largely remain a check-box exercise without much substance. And similarly for dialogue with investors, comments note that companies sometimes provide boilerplate responses.
To address such issues, JPX sought to deepen corporate governance reforms, and the Corporate Governance Code was revised in June 2018 to make corporate responses more substantive. The revisions address five major management areas:
- Changes in the business environment;
- Policies on investment strategies and financial management;
- CEO appointment and dismissal as well as the function of the board of directors;
- Cross-shareholdings; and
- Asset owners.
In collaboration with the Ministry of Economy, Trade and Industry, we select and publish Nadeshiko Brand issues recognizing corporate efforts that encourage women's success in the workplace, and the Health & Productivity Stock Selection, highlighting companies that focus on and implement health-conscious management.
Corporate governance reforms in Japan are aimed at enhancing corporate value over the mid- to long-term by encouraging Japanese corporate managers to make bold management decisions. I look forward to seeing the changes make their mark on corporate value.
(Part 2 of this article will appear in IJ's next issue: https://investmentjapan.jp/esg/1217/)
About JPX's sustainability: https://www.jpx.co.jp/english/corporate/sustainability/index.html