Japanese Companies Improve ESG Performance: MSCI Report

(3BL Media/Justmeans) – Following decades of recession and slow growth, Japan’s Prime Minister Shinzo Abe introduced a revitalization plan in 2012 – dubbed Abenomics – to address the key barriers of economic growth. One of the initiatives impacting corporations and capital markets was the establishment of Japan’s Stewardship Code and Corporate Governance Code. Implementation of these codes has led to greater attention among Japanese companies and investors on sustainable corporate earning capabilities.

To highlight the trends in corporate governance, human capital and innovation for Japanese companies, MSCI ESG Research has released a report titled Measuring the Sustainability of Abenomics. The report analyzes the constituents of the MSCI Japan Index, which showed return on equity (ROE) growth of 13 percent compound annual growth rate (CAGR) between 2012 and 2015.

The report found that while companies significantly improved their performance over key parameters, in aggregate, there are still gaps to make up in the areas of governance and human capital. An intense competitive landscape has also raised the bar for Japan to keep up with the pace of innovation among global firms.

Key Findings

  • The number of constituents of the MSCI Japan Index with zero outside directors fell from 54 in 2014 after the Corporate Governance Code was introduced to three in August 2016.
  • Policy makers have pushed for greater female inclusion in the workforce, including getting a target of 30 percent women in leadership positions by 2020.
  • Japanese companies enjoyed far greater exposure than global peers to opportunities arising from clean technologies.

Stewardship and the Governance Code

In February 2014, Japan’s Financial Services Agency introduced a stewardship code to improve stewardship and promote sustainable growth of Japanese companies with the support of institutional investors. By November 2015, more than 200 institutional investors had signed up to the Stewardship Code.

Following the launch of the Stewardship Code, Japan’s Corporate Governance Code was introduced in March 2015. Japan Exchange Group’s reported data shows that by the end of December 2015, nearly 2,500 Japanese companies have submitted corporate governance reports in accordance with the Corporate Governance Code; 78 percent of these companies have reported their compliance to 90 percent or more of the Code’s principles.

Based on MSCI ESG Research’s analysis on board independence, among 317 constituents of the MSCI Japan Index as of August 2016, about 94 percent of companies had appointed two or more external directors, up from 60 percent in 2014.

Green Innovation

Based on patent filing data from Japan Patent Office (JPO) research on the World Patent Index, Japan’s cumulative green innovation patent filings as defined by the JPO outnumbered other industrialized countries during Fiscal Years 2011-2014.

Over the same period, Japan’s patent filings on green innovation grew by 5 percent CAGR. About 80 percent of Japanese green innovation patents during this time involved energy technology, which included power generation, energy efficiency and energy storage, ensuring leading position of the country in energy efficiency areas.

According to the MSCI Report, companies with the strongest positive ESG Rating momentum include Sumitomo Chemical, Fast Retailing, Secom, Shionogi & Co., Tokio Marine Holdings, Calbee, Mitsubishi Electric, Otsuka, and Tobu Railway.

Source and Image: MSCI