Experts tell how investment sector is changing

Hikima went on to explain that consideration of risk and return in investment is only two-dimensional. “Both social return and investment return need to be achieved at the same time. To do that, ‘impact’ is the important factor, along with risk and return,” he said.

Onozuka also noted that it is critical to have the perspectives of both financial return and environmental impact in engaging with investee companies. Japan Catalyst recently issued a press release to announce that it will vote against proposals for the election of sustainability directors or top management if the companies are not making sufficient efforts in addressing climate change, among other efforts. “Climate change response is a corporate governance issue,” Onozuka said. Out of the various ESG factors, “Climate change may seem like an issue dealt within environment and social categories, but it eventually leads to the question of how successful the company is in responding to the business environment, consumer trends or political changes.”

Ozeki said Nissay Asset Management has its own rating system for its ESG fund: “We don’t just evaluate if a company is making ESG efforts or not, but also if such efforts are integrated into the company’s business model and contribute to boosting the corporate value.” He added that companies that rate especially high on governance have been doing well in terms of stock prices too. “High ratings in the social factor started to result in good performance since around the adoption of the Paris Agreement in 2015, and the environmental factor followed suit, even though in the past, the worse the rating was in the environmental factor, the better the performance was. The reversal was drastic,” Ozeki said.

However, in judging how well a company is doing in terms of climate change, there are persistent issues involving the accuracy and completeness of data and the creation of a common standard. Hikima emphasized the need for the standardization and increased availability of data in order for the asset management industry as a whole to promote climate-aware investing.

Ozeki agreed and said, “Many different parties have called for disclosure from various positions and perspectives,” adding that this has resulted in the formation of multiple standards “referred nowadays as an alphabet soup.” To change this situation, he noted, a unified standard is being formulated under the Task Force on Climate-related Financial Disclosures (TCFD), which he sees as a welcome step. He added, “Nonfinancial information should also be disclosed in a way that illustrates how the business is impacted by the 1.5-degree-Celsius scenario” in a report by the Intergovernmental Panel on Climate Change deeming it necessary to hold global warming to no more than 1.5 degrees above preindustrial levels. He said that how a company recognizes the impact and adopts a strategy is an important key in the ESG rating.

Hikima pointed out that higher levels of disclosure of information related to climate change will be required of enterprises, especially those that will be listed in the Prime market, a new section to be introduced by the Tokyo Stock Exchange next year. “Such companies need to be in line with global standards because they will attract attention from international investors,” Hikima said.

He also said a recent proposal on revising Japan’s corporate governance code includes items regarding human rights in addition to climate change. “Even though human rights have always been an important topic, it wasn’t something that affected the corporate value for most companies,” said Hikima. “But look at the example of Uyghur issue. Human rights have an increasing effect on corporate management. People started to consider the issue as a substantial risk.”

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