Selective Investment and other active management strategies seeking total returns have attracted much attention of late. What type of ESG engagement is occurring between asset managers leading these strategies and listed companies in Japan?
The following article focusing on domestic equities is translated from a feature originally published in AL-IN, vol. 61, September 2021.

Engagement has progressed

Engagement -- purposeful dialogue between institutional investors and investee companies -- is steadily gaining ground in Japan.  According to GPIF’s “Report of the 6th Survey of Listed Companies Regarding Institutional Investors’ Stewardship Activities”*, 48.3% of respondents said they have received requests for dialogue from activists and engagement funds and 94.4% reported they engaged in the requested dialogue.


That is a marked departure from Japan’s recent past.  Cross-shareholding among affiliated group companies and financial institutions was common through the 1990s and while active managers sometimes reached out in “soft” engagement to support research, as recently as the mid-2000s, companies shuddered at the rise of ESG activists and their “hard” engagement style.  Gaku Wakatsuki, Principal of Investment Consulting at Mercer Japan, considers the introduction of Japan’s Stewardship and Corporate Governance Codes as a catalyst for development of engagement in Japan.  “Many activist-minded asset managers recall how difficult just meeting with corporate board members used to be, but these codes have awakened more companies to the need to listen to their shareholders, thereby creating more opportunities for constructive dialogue,” he notes.  Consequently, "friendly activists" have been gaining investor interest, and major asset managers have organized dedicated ESG teams to enhance their sustainability-related proposals.

ESG investment / sustainability and engagement

According to Wakatsuki, sustainability factors can be broken down into two broad categories: external factors, such as macroeconomic and industry trends, regulations, and relationships with external stakeholders; and internal factors, such as the company's own competitiveness, management structure, and relationships with internal stakeholders.  Wakatsuki also classifies sustainability into fundamentals and ESG factors.  Fundamentals and S straddle both external and internal factors.  E comprises external factors such as regulations, and G comprises internal factors such as the neutrality of management by outside directors and capital policies.

Sustainability as a Whole

“Engagement is a way to encourage companies to enhance sustainability by addressing these issues, and ESG is positioned as a part of the theme for engagement,” Wakatsuki explained.

Asset managers' skills are key to constructive discussions on E and S

He continued that although Fundamentals and ESG elements are evenly distributed in the chart above, the fundamental factors related to business strategy are the most common topic of dialogue with companies, followed by Governance factors such as capital policy. 

The GPIF survey supports this view.  When asked what topics were discussed in dialogues between companies and activists, the most common were management and business strategy and fundamentals (63.9%).  ESG factors figured somewhat less often, with governance a topic cited by 28.3% of respondents and environment and society a topic listed by less than 10%.  Not surprisingly, Environmental and Social issues are not yet at the forefront of engagement.  Environmental and Social themes are still relatively new and loosely defined and the impact of environmental and social current efforts will not be apparent for years.

Source: GPIF “Report of the 6th Survey of Listed Companies Regarding Institutional Investors’ Stewardship Activities” (May 2021)

The GPIF survey also asked whether the content and themes of conversations with institutional investors had changed in the wake of COVID-19 to which 78.1% of companies answered “yes”.  Naturally, those conversations covered business strategy in response to the pandemic, but respondents revealed in the free comments that “most centered on the S aspect of ESG”. 

The coronavirus pandemic has elevated concerns about employee safety, security, and supply chain sustainability to the level of “business risk.”  Meanwhile, global demand for carbon neutrality has placed environmental issues at the forefront of business concerns.  Given these developments, dialogue on environmental and social themes is expected to increase.  Wakatsuki noted, “As ESG investment becomes more common, the relation between CSR-oriented social contribution and increasing enterprise value have come to be seen as more compatible or complementary than before.  The difficulty is that each company or industry must identify the meaningful relation between social contribution and increasing enterprise value while giving consideration to its specific circumstances and the issues to be resolved.  Competent fund managers will approach their research and engagement focusing on social contribution and increasing enterprise value.  At the same time, corporate executives would seek productive dialogues with their asset managers and to receive meaningful engagement proposals.”

As those efforts expand, some light could be shed on whether ESG factors generate returns.  If we formulate the concept as "Stock Price = EPS x PER (Earnings Per Share/results of corporate activities x Price Earnings Ratio/level of investor interest)”, the impact of ESG on corporate activities and investor interest are key issues.  “Investors already appear interested in ESG.  If ESG factors are incorporated effectively into corporate activities, it follows that the ESG factors may prove to have an effect on returns,” according to Wakatsuki.

Gaku Wakatsuki


It is no longer an exaggeration to say that the ability to dialogue with companies is a significant component of good investment management skills.  The quality and quantity of engagement should be a key factor in judging a manager’s performance.


< Masayoshi Koike >