JFS Newsletter No.149 (January 2015)
http://www.japanfs.org/en/news/archives/news_id035167.html

The Global Sustainable Investment Review 2012 issued by the Global Sustainable Investment Alliance (GSIA) states that the global market for socially responsible investment (SRI) is approximately 13.6 trillion dollars. By contrast, Japan's SRI market is quite small at about 10 billion dollars, less than 0.1 percent of the global market. One reason for this difference is the lack of active participation by institutional investors in the market.

On the other hand, there are some movements emerging to enhance monitoring functions of investee company management by involving institutional investors, raising hopes for expansion of SRI in Japan.

See JFS Article:
Japanese Investors Adopting New Stewardship Code (Principles for Responsible Institutional Investors)

In this issue, we report on the current status of SRI in Japan and surrounding issues by introducing excerpts from the Executive Summary of the 2013 Review of Socially Responsible Investment in Japan released on March 31, 2014, with the permission of its authors, the NPO Japan Sustainable Investment Forum (JSIF).

Japan Sustainable Investment Forum
http://www.jsif.jp.net/#!english/c1tc5

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Individual Investors and SRI

Hopes for "Abenomics" have brought rapid stock price growth. As a result, in the two years from September 30, 2011 to September 30, 2013, the net assets of all publicly offered investment trusts in Japan increased by 24.6 percent, and the number of trusts increased by 12.6 percent. At the same time, however, the number of publicly offered SRI trusts fell from its peak of 93 at the end of July 2010. The number of trusts reaching maturity has increased, and since April 2011 there have been no new trusts created, so net decreases have become consistent. Net assets for SRI trusts have dropped 7 percent, to 243.5 billion yen (about $2.1 billion), although these results have mainly been supported by robust market conditions rather than new capital inflow.

More than 70 percent of capital remains focused on investment trusts that use the environment as a screening standard, and environmentally themed international equity funds in particular represent about half of the total capital. As of September 30, 2013, social contribution-themed bond sales had reached 790.0 billion yen in total (about $6.8 billion).With total outstanding bonds of 498.3 billion yen (about $4.3 billion), that is a remarkable expansion.

In terms of social contribution field, 29 bonds, amounting to 267.9 billion yen in sales (about $2.3 billion), were for ventures addressing climate change; 11, amounting to 182.6 billion yen (about $1.6 billion), were for vaccines; nine, amounting to 155.7 billion yen (about $1.3 billion), were for ventures addressing poverty (of which five were microfinance institutions); three, amounting to 101.7 billion yen (about $869.2 million), were for ventures addressing water issues; three, amounting to 47.6 billion yen (about $406.8 million), were for food and agriculture-related ventures; and two, amounting to 34.3 billion yen (about $293.2 million), were for education-related ventures.

Small-scale social impact investment is sometimes observed, mainly among young people particularly concerned about social issues, and expectations are rising that impact investment bonds may be a new way to encourage a shift from saving to investment.

In order to promote a robust market moving forward, not only should products be developed that promote participation from institutional investors, but new guidelines must also be formulated. There is also a strong need to develop a framework addressing domestic issues affecting Japan. This has not been widely discussed in Japan to date, but the social investment scheme, so-called social impact bonds based on partnerships between the government and private sector, could play a big role in helping to tackle social issues domestically. It is essential that a comprehensive framework, including one that pertains to investment tax systems, be established through government-industry coordination.

Institutional Investors and SRI
Workers' Capital Owners and Responsible Investment

In December 2010, the Japanese Trade Union Confederation (RENGO) drew up "Guidelines on Responsible Investment of Workers' Capital." Following this, RENGO established the Workers' Capital Responsible Investment Committee in April 2011, which provided support to labor unions for two years through such activities as sharing information. In April 2013, RENGO drew up the "Implementation Guide Based on the Guidelines on Responsible Investment of Workers' Capital," which provides ground rules for putting responsible investment into practice. The Implementation Guide examines corporate pensions, and gives concrete steps for affiliates and individual unions to work with funds and for business owners to decide on ways of investing responsibly. In June 2013, the Workers' Capital Responsible Investment Council was launched.

In February 2010, the Pension Fund Association for Local Government Officials began implementing socially responsible investment focused on environmental, social, and governance (ESG) factors in Japanese equity. In addition, it established guidelines for stakeholder voting rights.

In April 2010, the Rokinren Bank implemented Rokinren Socially Responsible Investment Principles. In fiscal 2012, it increased its invested capital to approximately 10 billion yen (U.S.$85.47 million).

In April 2013, the Federation of Non-Life Insurance Workers' Unions of Japan (FNIU) became a member of the JSIF and a supporting member of the Corporate Pension Network. In the FNIU, numerous companies and affiliated asset managers serve as UN Principles for Responsible Investment (UNPRI) signatories. The fact that labor and management are working together in the same direction at the FNIU provides an excellent example to labor and management at other companies in the financial and non-financial industries.

Shareholder Advocacy

The Shinzo Abe government's growth strategy covers the ESG issues of corporate governance reform and female employment. Within the accelerating structural reform program, three measures were scheduled to be completed by the end of 2013: 1) design a bill to amend the Companies Act regarding the introduction of outside directors, 2) discuss and establish principles for institutional investors to discharge their stewardship responsibilities appropriately, and 3) disclose a summary for a stock index and develop it.

A decision on making outside directors compulsory as part of the first measure was deferred, but auditing and supervisory committees were made mandatory. Standards titled "Japan's Stewardship Code" are being discussed under the second measure, and under the third, a stock index summary, the JPX-Nikkei Index 400, was announced. The new index is based on both business performance and corporate governance factors and will begin operation from January 2014.

Interest is growing in shareholder engagement in Japan too. There has been little public reporting of investor engagement, however, with only the visible engagement represented by shareholder proposals being noticed generally.

In Japan, shareholder proposals are usually submitted by groups of individual shareholders who have gathered enough people to exercise shareholder voting rights under applicable rules. In recent years, however, proposals by individual investors acting alone, funds, and municipal bodies that are major shareholders have become increasingly common. They target increased involvement in company management through recommendations to appoint outside directors and calls to increase the transparency of management.

A notable change since 2011 has been the involvement of municipal bodies in companies, such as the Tokyo Metropolitan Government as a major shareholder of Tokyo Electric Power Company and Osaka City as a shareholder of Kansai Electric Power Company. Their involvement includes shareholder proposals and direct negotiation with companies regarding ESG issues.

As yet, however, there has been no participation by Japanese UNPRI signatory bodies in joint engagement. Institutional investors have also been reluctant to support shareholder proposals, remaining cautious about associating themselves with proposals concerning social and environmental issues.

Sustainable Finance
Principles for Financial Action toward a Sustainable Society

Internationally, various guidelines exist for financial action to create a sustainable society such as the United Nations Environmental Program, Financial Initiative (UNEP FI), Principles for Responsible Investment (PRI), Principles for Sustainable Insurance (PSI), and Equator Principles in project finance business. The Japanese version of these guidelines is "Principles for Financial Action for the 21st Century." As of the end of September 2013, 188 financial institutions have come to adopt these principles, including major businesses, regional banks from all prefectures, and credit unions.

The principles aim at steering society toward sustainability by changing the flow of money to those activities which correspond to such sustainability goals. What this means is that by directing money to where society most needs it, the sustainability of society increases because the most appropriate distribution of various resources is accomplished between economic agents, regions and generations. In addition, the principles specify the two main roles for the Japanese financial services sector in transforming Japan into a sustainable society. The first is to secure the safety of vital infrastructure against natural disasters, and support local communities and national industries in improving their sustainability and strengthening their competitiveness. The second is to increase sustainability as a global citizen. Thus the principles emphasize the need to cooperate with international organizations such as the PRI and UNEP FI to work toward solving global environmental and social issues.

To promote the systematic implementation of these principles, an operations committee and business-based/theme-based working groups have been established. They are as follows:

Asset Management / Securities / Investment Banking Working Group
Insurance Working Group
Deposits, Loans, and Leasing Working Group
Theme-based Working Groups (Environmentally Friendly Real Estate Working Group, Sustainable Community Support Working Group)
In their second year now, working group activities have been enhanced and expanded upon. The range of activities has extended into not only the environment, but also social themes. The Principles for Financial Action for the 21st Century have 188 signatory financial institutions from diverse business categories from all over Japan. This kind of framework, however, remains in need of effective utilization.

The Growth of Community Investing

In Japan, we had to wait until the start of the 2000s to see community investing. Currently, activity is becoming vigorous among NPO banks, micro investment funds (MFIs), and other organizations, making it possible to grasp overall trends.

NPO banks steadily continue investing. As of December 1, 2013, the number of NPO banks in Japan has risen to 23. Of these, 14 provide funding primarily for social enterprises, and nine help individuals in financial need. At the end of March 2013, the accumulated total of loans provided by the 14 groups that primarily fund social enterprises rose impressively to 2.7 billion yen (about US$22 million). We are also seeing a number of NPO banks actively cooperating with financial institutions, and retail NPO banks have started commercializing new investment services.

There has been substantial positive growth in micro investment funds in the past two years. "Securite' Disaster Area Support Funds" have attracted attention, and feed-in tariffs (FITs) have provided a boost. The number of community-owned power plants, which utilize micro investment funds, has also been growing.

See JFS article:
Regional Japanese Banks, NPO Establish Mutual Funds to Support Affected Area Businesses
Citizen-funded Solar Power Plant in Fukushima Built

Since 2012, we have noted an expansion of crowdfunding, which is a way many non-experts can raise monetary contributions, primarily using the Internet. Crowdfunding is attracting a great deal of attention as a new method of fundraising. Currently, over 50 platforms have been created.

Microfinance project efforts are making steady progress in developing countries. Political measures to support developing countries are also beginning to make headway.

Moving forward, there are two tasks that need to be accomplished in order to strengthen community investment capacities. The first is establishing a systematic framework for general community investment. The second is enhancing capacity by strengthening supporter networks.

2013 Review of Socially Responsible Investment in Japan
http://japansif.com/2013review.pdf
Edited by Junko Edahiro