ESG investment in Japan lags behind Europe and the US, where it is common asset management practice. Kenji Fuma, CEO of Neural Inc., considers whether the COVID-19 pandemic has changed how Japanese asset managers view ESG investment. Neural runs “Sustainable Japan”, a news website focusing on ESG information, and provides sustainability management consultation to public corporations and institutional investors.

In spring of this year, when concerns about COVID-19 mounted worldwide, the status of ESG investment in Japan was uncertain.  Many major cities around the world instituted lockdowns and Japan’s government declared a national state of emergency.  Japanese corporations and investors recognized the challenge posed by the pandemic.  Some business leaders predicted the SDG boom would end or that support for ESG would dry up.  I have long argued that an economic downturn would test Japan’s commitment to ESG thinking and that enthusiasm for ESG investment here would ultimately prove to be transient.

However, in their annual reports for the fiscal year ending March 31, 2020, top executives at leading companies, including Toyota, Nidec and First Retailing, signaled that sustainability thinking is precisely what is needed most during the current situation.  It’s a good omen that some leaders already understood ESG’s importance to their companies’ well-being.

In my book "ESG Thinking" (April 2020), I identify four basic perceptions of the economy: New Capitalism, Old Capitalism, Anti-Capitalism, and Conspiracy Theory.  Since the global financial crisis of 2008, most global-scaled corporations, larger asset owners and asset managers have embraced “New Capitalism", whereas most Japanese companies and investors remained adherents of "Old Capitalism."

Corporations subscribing to  New Capitalism have shifted their thinking in the last 10 or more years, from viewing environmental and social impacts as costs and damaging to profits to seeing them as contributors to long-term future profit.  Old Capitalism corporations, meanwhile, still view CSR activity as giveaway to society at the expense of profits.  Hence, when the economy goes into recession, Old Capitalists will tend to eliminate SDG and ESG efforts.

My concerns were realized when most Old Capitalism corporations suspended their ongoing consideration of SDGs and ESG from February to June.  Under pressure from the Western investors and enterprises urging the pursuit of long-term actions on issues ranging from climate change to human rights, Old Capitalism holdouts were forced to acknowledge New Capitalism.



Prior to COVID-19, I would say the GPIF’s shift to active ESG investment had a greater effect on the transformation of Japanese corporate governance than enactment of the Stewardship and Governance codes in 2014-2015.  The GPIF, a signatory to the Stewardship Code and PRI, is the most active in ESG investment and Stewardship commitments among Japanese asset owners.  That the GPIF, the world’s largest asset owner (AUM of JPY 150 trillion), has become a major ESG investor has had an immeasurable impact on Japanese corporations. 

Japanese asset owners are traditionally silent, passive investors.  The sea huge change in the GPIF’s approach shock up Japanese corporate executives and business groups, awakening them to new investor priorities.  The change also encouraged asset managers to conduct ESG investing and proactive engagements with portfolio companies.  Eventually, some business leaders recognized that their investors seek long-term perspectives, one of the base concepts of the New Capitalism, but most Japanese CxOs still cling to the short-term thinking of Old Capitalism.  

It is encouraging that Japan's government is migrating toward New Capitalism.  In his inauguration speech on October 26th, Japan's new prime minister Yoshihide Suga announced his goal to reach "carbon neutrality" by 2050.  Since then, a number of industrial policy changes have been considered at the Cabinet level.  The private sector, in turn, should vigorously implement forward-looking strategies to completely transform business models and economic systems.  Japanese stock exchanges could start that process by introducing environmental and social listing criteria, as Western and Asian exchanges have already done.


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