GLOBAL - Investing according to environmental, social and governance (ESG) criteria is on the rise in Japan and the rest of Asia, but remains a niche area for now, according to Tokio Marine Asset Management.
The call by Japanese unions on members to adopt ESG criteria, the set-up of an ESG committee by the Ministry of Environment and the disclosure of ESG data on Bloomberg have led to ESG becoming more and more popular in Japan, with pension funds and the government paying particularly close attention.
Since the revision of Chinese corporate law in 2006, more Chinese companies have started to release corporate social responsibility (CSR) information, while several Korean investors have signed the UN Principles for Responsible Investment (PRI), and the Singapore Stock Exchange has introduced a voluntary code, which requires its listed companies to report on CSR.
Kenichi Kubo, senior fund manager of Japanese equity at Tokio Marine Asset Management, said: “Thematic and focus funds are becoming more popular in Japan - however, here and in the rest of the region, ESG still remains a minor priority and has yet to become mainstream.
“Until recently, ESG was only an issue for Japan’s private, corporate pension funds, which were trying to raise their image and improve their sponsor’s brand.
“However, since then, the public Government Pension Investment Fund has also started to discuss ESG.”
The improvement in disclosure of small and medium-sized Japanese companies has had direct consequences for Tokio Marine because its Japanese Equity Leaders Strategy fund now includes more small and mid caps - 20% - than it did in the past.
“It is a good time to invest in Japanese small and mid caps, also because the level of bankruptcy for Japanese companies has fallen,” says Kubo.
The fund’s ESG analysis is currently weighted 25% environmental, 25% society, 35% governance and 15% risk management.
However, this could change depending on the outcome of the UN Conferences of the Parties, COP 17, in December.
“If Japanese emission targets are met, we will consider increasing the environmental weighting of the fund,” says Kubo.
“But if the meeting fails to reach some conclusions, it would mean investment managers like us that take ESG into account would have to continue with the existing weights within the portfolio.
“In such a case, we would have to concentrate on individual themes such as energy and water efficiency.”