With the global rise of environmental concern, Japanese market players are increasingly taking into consideration the impact their investments may have on the environment and society. This paves the way for sustainable investment, that which takes into account environmental, social, and corporate governance standards – ESG investing for short. Publicly listed companies are required to create an ESG report, to inform investors thoroughly. The issue was that many companies had no idea how or where to start, until Japan Exchange Group Inc. (JPX) developed a handbook to assist in the disclosure of ethical credentials.
Sustainable investing refers to those investments that aim for a positive return that has a long-lasting impact on society, the environment, and business performance. This method of investing can help generate competitive investment returns, and as a bonus, investors will feel good about the stocks they own. Companies in Japan that successfully implement ESG might see a positive effect on their share prices, fueling more interest amongst Japanese traders utilizing various platforms for trading company shares. ESG has been growing rapidly in Japan since 2018. Within two years, investment assets tripled to $2.2 Trillion – or 18% of the total assets.
The Japanese government has set about several initiatives to support ESG. In 2019, the Tokyo Metropolitan Government (TMG) created the Tokyo ESG Fund, with an amount of roughly $50 billion. Further, the Ministry of Environment is working towards the popularization of sustainable investment and has introduced an “ESG Finance Award”. Finally, there has been a huge push by the TMG towards environmental measures, when they introduced a green bond in 2017.
The ESG Handbook
The handbook aims to support businesses in declaring their ethical credentials and contains four steps of the most important ESG issues:
- Step 1 – Helps to outline what ESG is and why it is important to disclose such information.
- Step 2 – Connecting ESG issues to strategy. This step guides companies on how to incorporate ESG into their business model. Further, it helps them to identify which issues apply to their business.
- Step 3 – Oversight and implementation to make suggestions on how to consider key issues during decision-making – it also aims to help companies create a tracking process to measure their progress in managing issues.
- Step 4 – Information disclosure and engagement tie everything together to enable companies to arrange the contents of their disclosure.
Information had already been published by the government and stock exchanges around the world; however, the Japanese companies had great difficulty in understanding them. JPX noticed this and sought to improve transparency and help companies, the government, and the stock exchange get on the same page.
There is sufficient evidence to support a rise in sustainable investment in Japan. Through government initiatives, and the number of businesses getting on board with ESG disclosure. The clear growth of ESG investment assets between 2018 and 2020 speaks volumes in showing the rise of ESG investment; time will only tell what Japan’s next steps will be.