As we have seen in other countries around the region, the majority of people will only get behind environmental and social issues if they can detect some tangible benefit for doing so. In the absence of fiscal incentive, or regulation, the onus is on the more enlightened investors to bring others along with them. AIG’s Tokyo-based head of SRI, Jonathan Schuman believes that SRI philosophy is theoretically something that should fit well within Japanese culture: “Japanese society is very conscious of nature and the environment. Its attitudes are determined not just by tradition, but to events such as the environmental damage caused by the high-growth period of Japan in the 1960s. At AIG, we consider that the SRI philosophy would dovetail nicely with what Japanese people expect of companies, as the stakeholder economy grows, so we decided to try to set an example.”

Schuman recognises that the interest in corporate governance pose problems for some Japanese companies, who might fall short of fundamental standards. This disconnect stems from two themes: “the first is the neglect of long term planning in favour of short term results; the second is the dramatic change in institutional investment, as cross shareholdings were unwound and foreign influence increased.

“Unfortunately, engagement by institutions was slow in developing, and this highlights the problem for SRI as a concept.” It is all very well to say that SRI is a popular concept in Japan, but what does the average Japanese understand by SRI, in comparison with someone in, say, Australia?

Schuman says, “Pressure is not there, in terms of regulations imposed on corporations and pension funds to report on their SRI activities. And we don’t have any leading responsible investors showing the way like, for example, the Childrens’ Fund, the Petroleum Fund in Norway or CalPERS. The Pension Fund Association, with its corporate governance guidelines, was a start, but it’s an isolated example.”

The other reality is that, as long term as these institutions are obliged to be in their outlook, they are actually very short in their strategic focus. SRI doesn’t really fit that timeframe. Results of an SRI approach are only discernible over the long term.

In 2005, AIG launched a fund for individual investors - SRI has been mainly an individual asset class in Japan. “And, whereas in other countries, the starting point has been negative screening,” Schuman says, “this has not resonated well with people in Japan. Positive screening (ie. best in class) works better here.”

AIG’s decision to set itself up as a standard bearer for SRI in Japan has resulted in approaches from institutional investors. Schuman says, “We think of ourselves as investors and as such we have a heightened sensitivity to risk. If you are not observing the environmental and all the non-financial risks a company is exposed to, you run the risk of significant losses in the future. We had a corporate pension fund come to us requesting to clone our existing SRI fund. We were helped by outperformance of our benchmark in the first three years. This was underpinned by a strong SRI ethos across the whole company. At a corporate level, AIG made the decision to engage in corporate and social responsibility across all business lines. So the pension fund came looking for ways to engage and they decided the best way was to make an allocation to our fund strategy.”

He believes we will see a lot more examples of companies engaging in SRI, either by investing in specific projects, and loans for ESG projects. “My belief is that there is a growing realisation that embedding ESG criteria in investment decision-making is not just the right thing to do, it’s the must thing to do. Japanese financial institutions have not done very much within this framework. The next step for any Japanese asset manager, insurance company or bank is to make this step. Fifteen years ago, that would have been more natural for them. But Japanese society and business have become much more capitalistic and short term. So the first question is always, is it going to make money? So can you make money from this? Schuman says, “We saw that the research has been mixed, so we decided to add some of our own data to the debate. We worked initially with IRRC, which has now been absorbed into RiskMetrics. The results show a clear out-performance over the long term.”

Shuman thinks regulatory support would help. “If there were some compunction, particularly on pension funds, to engage in SRI, that would be a great catalyst.”