Public pensions

It goes without saying that the public pension fund trends on ESG have been led by the Japanese Government Pension Investment Fund, commonly known as GPIF.

FTSE Russell has been supporting GPIF's stewardship and ESG journey since 2014 when GPIF first issued a research mandate to understand how stewardship and ESG was implemented in other markets.

Since then, the adoption of the FTSE Blossom Japan Index, an index in the FTSE4Good Index family, has had ripple effects across the region.

The clear rules-based ESG selection criteria combined with the very visible selection and assets allocated by GPIF have encouraged companies to improve their disclosure and ESG activities to maintain and increase inclusion in the Index.

This model has been replicated in other markets, including in Taiwan where the Taiwan Labour Pension Fund adopted the FTSE4Good TIP Taiwan ESG Index for its domestic ESG asset allocation.

Corporate pensions

Whilst consolidations in the corporate pension schemes continue, the remaining schemes are slowly becoming more vocal or active in the sustainable investment space.

We have seen such schemes allocate a portion of their assets to funds, such as those managed against the FTSE Blossom Japan Index. Managed by firms such as Mizuho Trust Bank, AM One, and Daiwa Asset Management, these funds have collected approximately 15 billion JPY in total as of May 2019.

As the ESG activities by the sponsor company improves, and as employees as beneficiaries become more engaged with the ESG debate, we anticipate further debate and action by the schemes they are invested in.

Retail market

Compared to markets such as the US and Australia, the Japanese retail market have been less keen to voice their sustainability interests through their investments. However, a number of factors are changing this trend.

First, due to the rise of interest in the Sustainable Development Goals (SDGs) and the wider dissemination of "ESG" in the media, the average individual is more clued onto sustainable investment.

Second, exchange traded funds (ETFs) have seen an increase of interest by retail investors as a cheaper, and more transparent option for investments.

Third, as the Japan Exchange (JPX) increases the market making schemes for listed products, it is likely to support investors who are investing in products other than the standard domestic benchmarks such as TOPIX and Nikkei 225. This includes ETFs that are based on the FTSE Blossom Japan Index. Whilst still a budding area, it is an area we would like to continue to observe and support.

Market in 2019

Interest and action in ESG integration continues to be strong. Compared to European markets that have been strongly focused on climate change as a theme and now re-focusing on wider ESG issues including the SDGs, Japan has seen the opposite trend.

Starting with the wider ESG debate and investment, there is currently an additional push on environmental issues, as companies and investors alike grapple with how to address the recommendations outlined in the TCFD, which is both realistic and meaningful for their business.

As a result, we expect that discussions with institutional investors this year would cover a broader spectrum from ESG themed, climate-focused, SDG aligned, to ESG integration into multi-asset strategies.