Addressing ESG Issues in Sompo Group Business Operations

As a solutions provider, the Sompo Group is committed to providing products and services that promote security, health and wellbeing as part of the global effort to create a resilient, sustainable society. Our policies, including the Group CSR Vision, put climate change, human rights and local communities at the heart of our business processes as we integrate environmental, social and governance (ESG) considerations into our investment, lending and insurance underwriting activities.

Sompo Japan was one of the initial signatories to the UN Principles for Responsible Investment (PRI) and the first Japanese insurance company to sign it when the initiative was launched in 2006; Sompo Asset Management followed suit in 2012. Sompo Japan also participated in the drafting of the UN Principles for Sustainable Insurance (PSI) and became a signatory at its official launch at the United Nations Conference on Sustainable Development (Rio+20) held in Rio de Janeiro, Brazil, in June 2016, declaring the company's commitment to promoting the Principles.

Guided by these international principles, the Sompo Group is committed to the creation of a resilient, sustainable society through the advancement of ESG-integrated investment, lending and insurance underwriting.

ESG Risk Management System

The Sompo Group is developing a more sophisticated system of ESG-related risk management. Risks that can have a significant impact on the Group are defined as our material risks, and risks related to climate change are defined as material risks. Risks related to climate change include risks such as storm and flood damage of an unforeseen scale due to climate change, risks such as reputational damage as a result of not taking appropriate actions in light of the increasing social demands on companies regarding environmental and human rights issues, and risks such as asset devaluation resulting from the transition to a low-carbon society.

Our Sustainability/CSR Committee, chaired by the Group COO and attended by the officers of the Group companies, along with its sub-groups, review and discuss issues of importance in our underwriting, investment and lending operations. We also engage with our stakeholders to collect information and exchange views in order to embed ESG factors into our business processes and address ESG risks.

Responsible Investment and Lending

As a responsible institutional investor, Sompo Japan takes account of the investee companies' ESG actions in investment and financing decisions. The company prioritize environment-friendly renewable power generation projects as part of our effort to drive greenhouse gas reduction and transition to a low-carbon economy. As a signatory to the PRI, the company actively engages in responsible investment across asset classes, including listed equities and fixed-income asset management.

Sompo Asset Management is guided by its Responsible Investment Policy, which sets out SAM's social responsibility as an institutional investor and the code of conduct. In active asset management, where the aim is to generate medium- to long-term investment returns, the company pays close attention to non-financial information such as ESG performance as well as financial data. ESG is integrated into our asset management process through the continuous monitoring of corporate ESG data and holistic assessment of asset value.

In order to facilitate access for Japanese investors to overseas assets, Sompo Asset Management offers products provided by leading asset managers from around the world. When introducing such third-party products, Sompo Asset Management conduct our own due diligence assessments, which look at the provider's ESG and stewardship policies and systems as well as the status of their implementation, with regular reviews afterwards. The product assessment uses a four-level scale (A+, A, B and C), measuring factors such as the asset managers' commitment to responsible and ESG investing, their approach to ESG in the product's asset management process, and their proxy voting system as well as voting records. Only the products that have achieved grade A and higher are recognized as ESG investment products and, as of the end of March 2020, around 80% of the third-party products are recognized as ESG investments. In addition, more than 90% of the external asset managers (based on investment balance) are PRI signatories. Examples of Sompo Asset Management’s engagement with external asset managers include a case of a non-PRI signatory, where our dialogue led to the company to sign the PRI. In another case, Sompo Asset Management was able to share information previously undisclosed by the asset manager, such as proxy voting records and the guidelines and organizational framework for responsible investment, to achieve the standard of reporting expected in ESG investment and required by asset owners engaged in stewardship activities.

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Responsible Insurance Underwriting

As a responsible insurer, Sompo Japan ensures that ESG factors are considered in its insurance underwriting decisions.

Sensitive Projects and Sectors

The Sustainability/CSR Committee, chaired by the Group COO and hosted by the CSR department of SOMPO Holdings, discusses the reduction of ESG risks and the identification of opportunities to promote initiatives for the group.
As shown in the table below, Sompo Japan identifies businesses and sectors that require attention with respect to underwriting and financing that may have a negative impact on the environment and society.

Investing and financing:

As for investment and financing that may have a negative impact on the environment and society, in addition to the cluster bomb manufacturers that prohibit investment and financing, the company identifies the projects as shown in the table below, evaluates the risks, and responds appropriately.

Insurance underwriting:

For insurance underwriting, Sompo Japan prohibits “Anti Social” corporations and persons, which threatens the order of civil society, the safety of citizens, and employees.
The company also identifies projects which have potentially negative environmental or social impact, evaluates their impact on the environmental and society, and takes an appropriate approach.
As necessary, the CSR Department of SOMPO Holdings discusses with the sales department and underwriting department on matters to be addressed from the perspective of ESG.
The results are reported to ESG/Sustainability Working Group under the Sustainability CSR Committee, chaired by the Group COO in order to accumulate the knowledge on ESG risks group wide.

< List of Sensitive Projects/Sectors >

Category Related to
Environment ・Projects with negative impact on UNESCO World Heritage Sites
・Projects with negative impact on Ramsar-listed wetlands
・Coal-fired power generation with excessive environmental impact
・Coal mining projects with excessive environmental impact
Social ・Human rights violations
・Inhumane weapons
Nuclear, biological or chemical weapons, anti-personnel mines and other inhumane weapons.

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Response to Organized Crime Forces
https://www.sompo-hd.com/company/compliance/antisocial/ (Japanese only)

Engagement

(1) Investees
Sompo Asset Management engages with investee companies as part of its stewardship responsibilities. Analysts and fund managers build relationships with existing and potential investee companies through which regular dialogue can be maintained. The focus of our dialogue is to understand their intrinsic value from a medium- to long-term point of view, which forms the basis for our investment decisions, and we strive to understand the investees' processes of creating and distributing added value from which their intrinsic value is derived. ESG considerations are integrated into our asset management process to facilitate dialogue on ESG. In fiscal 2019, around 700 companies were selected as potential investees and, through our analysts' research activities, 2,539 engagement opportunities were provided (of which 656 were individual dialogue and 1,883 were participation in briefings).

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(2) Business Partners/ Equity Ownership
Sompo Japan also engages with business partner companies on ESG as well as management strategy and business risks. Sectors and companies highly exposed to ESG risks are identified, and engagement efforts are made to encourage risk reduction. Sompo Japan supports Japan's Stewardship Code: Principles for Responsible Institutional Investors and engages in constructive dialogue with investee companies as part of its stewardship responsibilities to enhance investees' corporate value, prevent impairment and promote sustainable growth. Between July 2018 and June 2019, companies were selected for engagement activities based on a holistic review of factors such as the market value of holdings, proportion of voting rights, financial results, ROE, dividend payout ratio and ESG/SDG initiatives. Some examples of our ESG engagement work are given below:

Environmental

The company engaged in the dialogue with Company C on their environmental initiatives. The company learned that they had embarked on a number of environmental initiatives including a green power purchase agreement with a biomass power plant and the use of power derived from renewable energy in their processes. The company also discussed further environmental efforts to be made.

Environmental

The company engaged in the dialogue with Bank D. The company learned of their environmental initiatives, which included the introduction of tablets to provide minutes of meetings and approval documents electronically, which cut down the use of paper by 30%; the private placement of an eco bond; and the offering of preferential interest rates to companies engaged in environment-friendly activities.

Social

The company engaged in the dialogue with Company E on their SDG initiatives. The company found out that their efforts focused on the environment, next generation and local communities, and that they had a plan to take their business succession-related business, one of their next-generation offerings, to profitability.

Governance

The company engaged in the dialogue with Company F on empowering outside directors to play their expected role. The company learned that they have been active in their effort to address the asymmetry of information, hosting workshops to help outside directors understand their industry sector better, joining inspection visits, and providing detailed reports on meetings between officers.

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Since 2020, Sompo Japan has engaged listed companies in industries with high greenhouse gas emissions and industries closely related to ESG issues (Gas, electricity, food, land transportation, fisheries, agriculture and forestry, transportation equipment, iron and steel, shipping, air transportation, etc.), such as supply chain management that includes environmental and human rights issues. The selection of individual stocks takes into account market capitalization, Climate Action 100 + engagement list, regionality, etc. In the engagement process, in addition to confirming whether or not there is a sustainability related policy, the company plans to hold hearings based on the 4 elements of TCFD, and hold dialogues regarding the establishment of GHG reduction methods and reduction targets.

Proxy voting

Sompo Asset Management has drawn up proxy voting guidelines, which set out the objectives of the guidelines, basic policy on proxy voting, guidelines for individual resolutions and operational framework for proxy voting.

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Sompo Japan is guided by its own proxy voting standard for the exercise of its voting rights. Proxy voting is an important opportunity to support the sustainable growth of investee companies, and voting decisions are made by holistically looking at factors such as the state of corporate governance, compliance system and environmental actions.
Where a resolution requires particularly careful consideration, a thorough investigation is conducted, including requesting the investee companies to explain the objective and background of the resolution, in order to arrive at a decision.

The following are examples of resolutions the company voted against:

  • Governance: payment of retirement bonuses to outside company auditors
    Company G pays retirement bonuses to its outside company auditors. The company communicated our concern that the expectation of bonus payments makes it difficult for auditors to criticize the management. As the company responded that there was no plan to abolish the practice, the company voted against the resolution.
  • Governance: effectiveness of board of directors
    Company H has less than two outside board directors and, since last year, the company has been asking for an increase in the number of independent board members to improve governance. However, company H did not increase the number and showed no intention to do so. As a result, the company voted against the reappointment of its representative director.

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The Sompo Japan Green Open fund, one of Sompo Asset Management's environmental funds for individual investors, invests in companies that are highly rated for their environmental actions and for their investment value. With a net asset balance of 26 billion yen as at the end of March 2020, it is one of the largest ESG funds in Japan. Adding to this, Sompo Asset Management also manages ESG funds for institutional investors such as the Sustainable Fund and Green Fund as well as the SRI fund for individual investors, with a total net asset balance at the end of March 2020 of 128 billion yen.

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ESG investment

As part of ESG investment, Sompo Japan is investing in green bond and social bonds. The company will continue to invest in green bonds and social bonds in order to promote the reduction of greenhouse gases and the transition to a low-carbon economy, to achieve economic and social development in developing regions, and to contribute to environmental consideration and solving social issues from a long-term perspective.

  • Green bonds are bonds issued on the assumption that the funds raised will be used for environmental measures such as greenhouse gas reduction. Social bonds are bonds issued on the assumption that the funds raised will be used to address social issues, such as developing basic infrastructure and improving access to social services.

■Past investment performance/record
2019 Tokyo Green Bond and others

ESG-related insurance products

For customers of our automobile insurance policies, Sompo Japan provides services to support safe driving, helping to reduce the number of traffic accidents. These include “Smiling Road”, a safe driving support service for companies; “Portable Smiling Road”, a safe driving app for individual drivers; and “DRIVING!”, a telematics-based service using a drive recorder for older drivers. Our “Eco Car Discount Policy” offers discounted insurance premiums for environment-friendly vehicles such as hybrid and electric cars. The company has introduced web-based systems allowing customers to view insurance policies and other documents online. The company also promotes the use of recycled products to fix cars damaged in traffic accidents, such as using reusable parts recovered from scrapped cars.

Insurance underwriting

Weather indexed insurance

Weather index insurance is an insurance product that pays out a contractually predetermined insurance amount when a weather index – such as temperature, wind speed, rainfall, or hours of sunshine – fulfills certain conditions. Utilizing risk assessment technology of SOMPO Risk Management and know-how generated by AgriSompo*, we have been providing the Weather Index Insurance aiming at reducing agricultural business risks associated with extreme weather in Southeast Asian countries, where agriculture is a key industry that is vulnerable to climate change.

  • Sompo International Holdings (SIH) is developing AgriSompo, an integrated platform on the global market, and provides a wide range of insurance and reinsurance products to agriculture markets, mainly in North America and Europe.

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Microinsurance

In developing countries, access to basic financial services like insurance and banking is an issue for many people. By offering microinsurance services, we are helping to address growing social needs and contributing to sustainable community development. For example, we are expanding our provision of microinsurance services including agricultural insurance in India.

■Past Results of Financial Inclusion Initiatives (premiums written, number of policies)