Impact investing was virtually non-existent in Japan. That is rapidly changing because of one man.
Government Pension Investment Fund (GPIF) of Japan is the largest pension fund in the world - about $1.5 trillion in assets, or 1% of the entire global market. It was big news when, in 2015, GPIF's newly appointed Chief Investment Officer, Hiromichi (Hiro) Mizuno, announced that from then on, their external money managers would be required to:
Integrate environmental, social, and governance (ESG) factors into their investment process and
To engage with the stocks they hold on critical environmental issues.
ESG integration in itself isn't shocking - ESG has been adopted by most large asset managers. It was surprising because this mandate was happening in Japan.
Japan is a clean and modern country, but they are a laggard compared to other developed countries with regards to ESG factors.
Environmental (E)
Virtually all of Japan's energy is sourced from fossil fuels. This jumped up after the Fukushima disaster in 2011 when the government shifted away from using nuclear power.
Social (S)
15 out of every 100 leadership roles in Japan are held by women. Many women work, but they don't necessarily have full-time, reliable, well-paying jobs that are stimulating the economy. This is due to a variety of reasons including cultural norms and Japan's tax structure.
Governance (G)
It is common for company boards in Japan to lack independence from the company. Cross-shareholdering (where one corporation holds stock in another corporation) is also common. Both of these factors are known to negatively affect a company's performance.
Why did GPIF pivot towards ESG integration?
Hiro Mizuno was a partner at a London-based private equity firm before taking over GPIF of Japan. He was not an advocate of ESG investing until fairly recently. He stated publicly that the turning point for him was when Kofi Annan asked him why Japan is a “desert in responsible investment.” That spurred Mr. Mizuno to begin researching ESG. He determined that it was something GPIF needed to integrate into its investment process not just for performance or risk mitigation, but for the long-term sustainability of the capital markets. He is not alone in his conclusion - central bankers worldwide are concerned by the risk climate change poses to capital markets. They are actively trying to factor climate and weather-related risks into their models and debating over whether they should have a hand in promoting “green” policies.
Since GPIF has mandated ESG integration, there have been ripple effects across Japan.
Japan is now the fastest-growing region for sustainable investing. 3% of Japan's assets under management (AUM) was being managed by ESG standards in 2016. By 2018, that number jumped to 18%.
The number of Japanese companies disclosing ESG data has increased 5X.
The number of PRI signatories in Japan has more than doubled from 2015 to 2019. PRI signatories are asset managers that sign a pact to incorporate ESG factors into their investment due diligence and processes.
There is an unprecedented realization that “investing as usual” is unsustainable.
Most large asset managers are integrating ESG factors into their investment analysis. Small to mid-size advisors and individual investors have been slow to adopt. As an individual investor, here are some steps you can take:
Determine if your retirement plan at work has a sustainable investing option.
If not, ask your HR person to add one next year. They may not say "yes" right away, but my experience has been that they listen and as long as you follow-up consistently (and encourage others to ask too) they will consider it.
Ask your Financial Advisor if they are integrating ESG factors into their investment process.
Just as some companies provide a "check in the box" financial plan, some advisors may invest in one or two funds labeled as "sustainable" and say they are educated on the topic. Ask what impact investing conferences they have attended, how much of their portfolio is truly sustainable, and if they provide an annual impact report.
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This is an important time for finance. There is a shift towards sustainable investing, but it is happening at a much faster pace among larger investment firms than with smaller ones. Small to mid-size advisors have been slow to integrate ESG, especially if they are planning to retire in 5 years or less. They are not going to make any major changes to their models or take the time to become educated on a new topic. It is up to you to seek out what is best for your long-term financial picture.