In March 2019, the Financial Services Agency of Japan appointed Satoshi Ikeda its Chief Sustainable Finance Officer. The newly created position oversees initiatives addressing social and other issues from a financial perspective, as well as green bonds and other forms of green finance. Below, Mr. Ikeda explains the unique attributes of Japanese ESG investment.

ESG investment in Japan has rapidly expanded since 2015 when Japan’s Government Pension Investment Fund (GPIF) signed the Principles for Responsible Investment (PRI).  By 2018, it had grown 300% annually since 2015.



Japanese ESG investment strategies differ somewhat from those of other developed countries, which, I would say, is one reason Japan was slow in embracing ESG investment.  If ESG investment worldwide is ranked in terms of strategy, the most favored one is "negative screening".  In other words, the most commonly adopted strategy in Europe and the US is to exclude companies or industries that do not comply with specific pre-set social or environmental criteria.  Negative screening could be a relatively easy entry point for ESG investment, but it is notably rare in Japan.  That sort of divestment culture would seem not to sit well with Japanese investors.

Instead, most Japanese institutional investors prefer to approach ESG investment by integrating ESG factors into the investment process, or engaging with companies to achieve ESG goals.  The domination of these two strategies among ESG investment is quite unique to Japan.  ESG integration and engagement tend to have a more positive association, which is likely favored by Japanese institutional investors.  Integration embeds ESG factors into the assessment of corporate value, and engagement promotes constructive dialogue based on ESG factors to enhance corporate value.  Integration and engagement are essential in fulfilling the fiduciary duty in ESG investment but often entail very challenging tasks.  They require a deep understanding of investee companies and an in-depth knowledge of their ESG issues.  Solving ESG issues can improve corporate value of an investee company.  But actively engaging with companies to enhance corporate value takes more time than merely omitting those associated with a certain business or product.  In my view, it is for this reason that it took ESG investment more time to take root in Japan.



With the enactment and subsequent revisions of the Japan’s Stewardship Code and Corporate Governance Code, the Financial Services Agency of Japan (JFSA) has been driving corporate government reform in Japan.  At the same time, investment chain reform is taken in parallel with corporate governance reform.  The investment chain consists of asset owners, asset managers, and investee companies.  Reforming the investment chain means  encouraging and facilitating constructive dialogue among them, which leads to enhanced corporate value, and which ultimately creates a virtuous circle for the entire economy.  In this context, engagement is considered as the key contributor to  enhancement of corporate value.  This year marks the 7th year since the first enactment of Japan’s Stewardship Code in 2014.  It is no coincidence that now we find strong growth in ESG investment in Japan through increased activities of ESG integration and ESG-themed engagement. 

JFSA released the 2nd revision of the Stewardship Code in March this year.  By this revision, the coverage of the Code is extended to any asset classes from just only listed stocks, as far as stewardship activities are relevant.  In this revision, it is also clarified that consideration of sustainability including ESG factors is an integral part of the stewardship responsibilities in the Code.  Through these changes, I anticipate that 2020 is a pivotal year for asset owners, particularly for pension funds, to further identify ESG factors to enhance corporate value of investee companies and accelerate their engagement activities for this purpose.