Japanese sustainable investment assets have increased fivefold from 2016 to 2020, reaching $2,874 billion in 2020.
Figures from the 2021 Global Sustainable Investment Alliance report (GSIA) reveal that Japan increased allocations to responsible assets from just $474 billion in 2016 to $2,180 billion in 2018, before adding $694 billion in the following two years.
The country’s astronomical increase in sustainable investment assets over those four years means it accounts for 8 percent of the $35.3 trillion run by the five major markets of Europe, the United States, Canada, Australasia and Japan.
Separate figures from the Japan Sustainable Investment Forum published in May reveal a 65.8 percent year-on-year increase in responsibly invested assets, representing a balance of $3.7 trillion by the end of 2021.
That Japan is becoming a responsible investment success story is attributable to greater collaboration between policymakers, companies and the financial services sector to create a robust framework with environmental, social and governance (ESG) factors at its core.
There is a clear appetite from Japanese investors for products that take account of ESG factors. About 70 percent of asset management firms believe ESG factors will affect future corporate value.
The nation’s Government Pension Investment Fund (GPIF), which with $1.6 trillion in assets is the world’s largest retirement plan, has been a dedicated ESG investor since 2017, making significant allocations to low-carbon indices.
More recently, GPIF asked all its external asset managers to "take ESG into consideration" as a fundamental measure of investment strategies.
The Japanese government is also an advocate for ESG investment as it aims to meet its net-zero goal by 2050. In July 2021, the Bank of Japan announced it would use some of its $10 billion in foreign reserves to purchase green bonds.
Individual investors also have a clear appetite for sustainable investments. Globally, 8 in 10 retail investors expressed interest in companies that are socially and environmentally responsible according to a 2021 survey. Interest is equally growing among individuals. A 2021 survey of more than 3,000 individuals found two-fifths would like to make ESG-related investments in the future with human rights and other social issues listed as top areas of importance. With only 3.1 percent of respondents already investing in ESG issues, this presents a substantial opportunity to grow individual interest in ESG investments.
In April, Japan was one of the first countries, along with the U.K., to impose mandatory reporting requirements on the country’s largest companies in line with the Task Force on Climate-related Financial Disclosures (TCFD).
This move enhances amendments made to the Tokyo Stock Exchange’s Corporate Governance Code in 2021, which made specific mention of sustainability topics including climate change, human rights and the fair and appropriate treatment of the workforce.
In 2020, the Financial Services Agency (FSA) revised the Stewardship Code to include sustainability and ESG.
In the same year, the Ministry of the Environment updated the Green Bond Guidelines, giving them greater prominence to investors while reducing the cost and administration barriers for issuers.
Implications for asset managers
Introducing enhanced codes and best practices are important steps in allowing asset managers to identify those companies taking ESG seriously, which in turn means they can create authentic sustainable products that will not run afoul of greenwashing accusations.
However, research into the asset management industry published by the FSA in May reveals room for improvement.
According to the FSA: "Some asset management firms do not adequately disclose their basic approach to ESG investment and their relevant initiatives in reports or other materials for investors."
It criticizes asset managers for being "abstract" in how they describe incorporation of ESG factors and "many firms refer to the name of top 10 investees in a fund and their ESG related activities at best, in their monthly reports or investment reports."
To better enable investors to understand a fund’s ESG credentials, the FSA appears to be aligning with the European Union’s 2021 Sustainable Finance Disclosure Requirements, which demand asset managers be clear on how they integrate ESG factors into financial products.
From the same research, the regulator says that where a fund accounts for ESG factors "the investment approach and process should be further strengthened on a continuous basis, and clear explanations and disclosures should be made in a consistent manner based on the investment processes so that investors can make appropriate investment decisions."
Japan has all the tools to construct a successful ESG investment industry; there is support from policymakers, appetite from investors and an asset management industry capable of offering suitable products.
However, the financial sector will need to be flexible in its ESG offering. Growth in responsible investing has — thus far — largely been driven by subjective, personal feelings, rather than conviction in ESG strategies’ performance. For example, almost 70 percent of financial institutions responding to an Investment Japan survey in 2021 say they participate in ESG investments because it "fosters empathy" with individual investors.
Consequently, asset managers need to offer product strategies, marketing and reporting that meet ESG investors’ differentiated needs.
This flexibility from asset managers needs to be supported by a concerted effort from all stakeholders — including product providers, companies, policymakers, investors and regulators — to create a transparent, consistent reporting framework.
If ESG investing is to avoid being derailed by greenwashing and to ensure investors fully understand the benefits of long-term responsible investing, the theory must be made credible by verifiable data. If all pieces come together, Japan’s sustainable investment momentum is headed for even greater prosperity.