Foreign investor engagement with Japanese company boards is bringing climate and ESG issues to the fore. Yet, some analysts suggest that for many Japanese companies, ESG is still more of a marketing tool than a serious business issue.
In June, Mitsubishi UFJ Financial Group blocked shareholder efforts to change how it deals with environmental, social and governance factors.
The Japanese bank’s annual meeting on June 29 voted on a shareholder resolution calling for a transition plan that would set out how its lending and investments are aligned with the Paris Agreement’s 1.5C limit.
Shareholders also voted on prohibiting transactions “with companies that neglect defamation” and a resolution urging MUFG to show caution in deals with male-dominated companies.
The three resolutions failed, although 17 per cent of votes cast backed aligning MUFG’s operations with the Paris Agreement.
Banking peers Sumitomo and Mizuho faced similar resolutions at their June AGMs — as did automotive giant Toyota, which recorded waning shareholder support for its president over perceived problems around governance.
Listed Japanese businesses have only recently been forced to reckon with growing shareholder demands over ESG disclosure. The first climate resolution in Japan was submitted at Mizuho Bank’s AGM in 2020, gaining 34 per cent backing from shareholders.
Among the big Japanese banks, “the level of disclosure is quite detailed and very well-prepared”, says Schroders deputy head of Japanese equities Taku Arai. The asset manager has positions in MUFG, Sumitomo and Mizuho.
Corporate governance reforms and the rising influence of foreign investors in the Japanese market are viewed as partially responsible for a shift in attitudes towards ESG in Japanese boardrooms. But not all experts are convinced by the sincerity of Japanese companies’ engagement with ESG.
“It is quite difficult to say at this stage how credible the ESG engagement of Japanese companies actually is,” Professor Kim Schumacher, visiting lecturer in sustainability and ESG at Kyushu University, tells Sustainable Views.
Fruits of Abenomics
Former prime minister Shinzo Abe’s economic manifesto, known as “Abenomics”, brought about a wholesale modernisation of Japanese companies. The Japan Stewardship Code was introduced in 2014, targeting greater investor engagement with the aim of helping Japanese businesses grow.
The Corporate Governance Code entered into force in 2015, and has precipitated a surge in independent directors on boards, the founding of remuneration committees, and a rise in female boardroom representation.
In 2022, Japan’s prime minister, Fumio Kishida, said women should make up at least 30 per cent of the boards of companies listed on Japan’s prime market, reported Nikkei Asia. In comparison, the EU is aiming for at least 40 per cent of non-executive directors, or at least 33 per cent of all directors, to be women by 2026.
The governance code likewise insists that independent directors should make up at least a third of boards in companies operating in the Japanese prime market.
These companies must also have nomination and remuneration committees, and should disclose policies and voluntary measurable targets for promoting women, non-Japanese and mid-career professionals to boards.
The code also expects companies to “develop a basic policy and disclose initiatives on the company’s sustainability”, and improve climate-related disclosures based on recommendations from the Task Force on Climate-related Financial Disclosures, or equivalent frameworks.
Japanese companies are performing well against some ESG metrics, at least according to the information they release, says Raphaël Soffer, a lawyer at non-profit organisation ClientEarth. There is, however, a lack of integrity around their climate strategies, he argues.
“Investors increasingly want to understand how capital expenditure matches businesses’ net zero targets,” Soffer tells Sustainable Views. “Many Japanese companies are falling behind here.”
The Japanese government has set a target of net zero emissions by 2050.
Marketing versus action
Nomura Asset Management senior client portfolio manager Andrew McCagg describes the level of disclosure in Japan as “still poor”.
Understanding Japanese companies’ Scope 3 emissions is proving particularly challenging for the purpose of reporting against the EU’s Sustainable Finance Disclosure Regulation, while “the gender diversity point has also been very difficult”, McCagg tells Sustainable Views.
“Japanese companies have been embracing and supporting various international initiatives in this space such as the TCFD, CDP, SBTi, and ISSB, yet when it comes to the disclosure of material ESG data, especially across the highly diversified supply chains of many Japanese conglomerates, it is harder to measure the concrete progress and positive sustainability impacts these efforts have had,” says Schumacher.
“A large amount of ESG-related resources are spent on sustainability marketing, which includes the creation of public outreach instruments highlighting their [sustainable development goals] and ESG efforts, yet many of these efforts seem more reputational in nature and less [focused] on reporting tangible ESG integration efforts and the impacts the latter have had,” he continues.
“There remains a stark disconnect between ESG claims or sustainability-related expectations raised and the evidence presented or resources dedicated to said matters.”
Silent no more
The number of shareholder proposals in Japan reached a record high of 292 last year, says Nomura Asset Management.
Foreign investors own around 30 per cent of the Japanese stock market, despite having been net sellers of the Japanese market over the five years to 2022, says McCagg. These shareholders, along with investment trusts, which own around 10 per cent of the market, are more likely to engage with boards than Japan’s traditional shareholder base.
Toyota’s AGM was a clear example of overseas shareholders taking the fight to senior management. A resolution filed by Kapitalforeningen MP Invest, Storebrand Asset Management and APG Asset Management called on the company to be more transparent about its climate-related lobbying.
The resolution was backed by two of the US’s largest pension funds — the California Public Employees’ Retirement System and the Office of the New York City Comptroller — and the Church of England Pensions Board, and supported by 15 per cent of votes cast.
Foreign investors have made an impact on the Japanese market, agrees Schroders’ Akai. Putting pressure on company management and voting against boards “never happened in the past. It’s totally changed,” he says.