Dialogue: ESG Investment Through Engagement

Dialogue: ESG Investment through Sustainable Engagement

We have included third party comments from Mr. Hideto Kawakita in our CSR Communication Report since 2001. Continuing on from last year, Mr. Kawakita shared his thoughts with our Group company, Sompo Asset Management (SAM), on ESG investment through constructive dialogue with corporations (engagement), one of our long-standing initiatives, as well as on issues to be tackled in the future. (Date of dialogue: June 14, 2019)

Goya Nakao
Managing Executive Officer and Manager of Equity Investment Department, Sompo Asset Management

Hideto Kawakita
CEO, International Institute for Human, Organization and the Earth (IIHOE), Publisher, Socio Management Review

Nobuhiro Kojima
President and CEO, Sompo Asset Management

SAM’s Long-standing Initiatives through Sustainable Engagement

Kojima: During Sompo Asset Management’s 30-year history since our founding in 1986, we have continued to develop our operations by focusing on active investment, despite the trend worldwide shifting towards passive investment. From a long-term perspective, we have fulfilled our role of linking customers and corporations by ascertaining the intrinsic value of investee companies through sustainable dialogue with corporate executives and corporate research, and providing our customers (investors) with returns from investments of those companies.
To ensure a functioning sustainable investment chain^*1, we must focus on the long-term perspective, on sustainability, and on solving social issues. As a long-term investor, SNAM plays a key role in the sustainable growth of companies and in solving social issues, and I feel that we have a responsibility to fulfill such role.

Sustainable investment chain involving corporations and long-term investors

In April 2017, we established Responsible Investment Office and appointed ESG specialists to strengthen our organization. Back in 1999, before environment, society, and governance (ESG) was even a concept, we launched Sompo Japan Green Open fund (nicknamed Buna no Mori), a forerunner of the SRI fund. This fund is now in its 20th year. Few funds can boast of having such long life and we will consider using this data in the future.

As part of our governance system, we have established a Customer First Committee to reflect external input in our management. We have also established a Responsible Investment Committee to promote responsible investment initiatives within the Company. Such efforts have improved investors’ views on our initiatives, particularly among international investors, and I believe that our activities are partly responsible for solving social issues.

Kawakita: Thank you very much. Is the role of the Responsible Investment Committee to monitor performance or to obtain prior approval for the exercising of voting rights?

Nakao: Instantaneous decisions are required for managing investments. The Responsible Investment Committee plays a key role in providing guidance to employees on how to make the correct investment decisions. The Committee thoroughly discusses and decides our initiative policies, and employees make decisions based on these policies.

Kawakita: In other words, the Responsible Investment Committee provides guidelines and monitors activities through reports aligned with the guidelines.

Nakao: That’s correct. The Responsible Investment Committee establishes guidelines for investment decisions, and employees comply with such guidelines. The state of initiatives is then reported to the Customer First Committee to ensure further transparency.

Kawakita: Over the past few years, ESG investing has finally started to attract the attention of society. As a company with over 20 years of experience managing SRI products, I would like to know if there are any aspects of your investment activities that have evolved over time.

Nakao: One significant recent change is the Climate Action 100+^*2 movement, a global collective engagement initiative that we have signed onto. Engagement through the cooperation of the international community is said to be an effective means of tackling climate change and other ESG issues that affect the whole world. As activities start in earnest, we play the role of lead investor in engagement with a Japanese company, representing investment companies around the world.

Kojima: It is extremely important to note here that by working together to tackle global initiatives we can develop individual actions into collective power and achieve better results.

Nakao: Engagement used to be thought of as being unilateral requests by investors to companies. Recently more and more companies are starting to recognize that engagement is a means of creating value. As a result, I am starting to sense a positive trend that welcomes engagement.

*2First announced at a general meeting of the Principles for Responsible Investment (PRI) in 2017 and launched in December 2017 at the One Planet Summit, the initiative aims for a five-year collective engagement to reduce greenhouse gas emissions. SAM signed on in January 2018, and is working to reduce greenhouse gas emissions in cooperation with participating organizations in Japan and overseas.

Efforts to Improve Investment Value from a Long-Term Perspective

Kawakita: Social (S) issues such as health and working styles are attracting attention in Japan. Initiatives by financial institutions are vital to tackle issues that are becoming more serious but have yet to be addressed. Can you tell me about the initiatives you have been working on from a social (S) perspective or in such areas?

Nakao: Naturally the issues are different when looked at from a long-term and from a short-term perspective. The market tends to focus on the short-term and to overlook the long-term. Personnel development is an example of a social issue in Japan. In the long-term, how to train employees affects a company’s competitiveness and resources but in the short-term it is viewed as a cost. It is important to take time to engage in solid dialogue with companies from a long-term perspective to avoid being overly focused on the short-term.

Kojima: From an ESG perspective, governance (G) is a factor that can be assessed easily from the outside. We need to get fully involved in both environmental (E) and social (S) issues, and to understand, through engagement, long term strategy of companies.

Nakao: I am not surprised to hear that ESG is easy for millennials to accept. Millennials take a long-term view and have a keen interest in the issues that will affect them in the long-term. Take the issue of plastic as an example, working on business activities that will be a plus in the long-term will determine long-term corporate competitiveness.

Kawakita: The same applies to the Task Force on Climate-related Financial Disclosures (TCFD). When required to take long-term initiatives spanning 50 years, it is also important to check social and global trends every five years and show specifically how companies lose their position if they fail to address environmental issues. What are your views on the extent to which environmental and social factors are being incorporated into management’s long-term perspectives and customer evaluation criteria?

Nakao: There is no doubt that the factors we need to consider are increasing. This is why dialogue between companies and investors needs to focus on investment value (fair value) that is evaluated from a long-term perspective. We have recorded investment value data over the past 15 years. Investment value is a present discounted value of future cash flow, and thus the investment value of companies indifferent to ESG issues will fall rapidly. Investment value is like a mirror that reflects a company’s future, and is an important tool in communication with that company.

Realigning Attitudes to ESG Issues

Kojima: It used to be considered difficult for companies to link ESG to earnings but that is definitely changing. The younger generation’s consumer behavior in particular is linked strongly to ESG and companies are starting to understand that how to address ESG issues directly affects corporate performance. I also feel that tackling ESG issues has become a more realistic motivator for companies and governments to act as leaders. I sense that momentum for Japan to catch up with the rest of the world and take the lead in this area has increased over the last year. We must not allow this trend to end, rather we should develop it into nationwide and global collaborative initiatives.

Kawakita: European companies are sensitive to changes in momentum. I would like Japanese companies to take a leaf out of their book when it comes to making the first move. From an investor’s perspective, it is important to think about how we can show that investors need to make appropriate investment decisions while macro trends are changing, or they will lose expected value in the long-term. We can do this by illustrating the extent of past losses in value resulting from inappropriate decisions. Proposing regulations and standards rather than waiting for them to be imposed is vital for companies to create future value. What are your thoughts on evaluating this corporate stance as one form of engagement?

Nakao: As you mentioned, there are competitive aspects to ESG, involving the creation of a competitive environment that is advantageous to one’s own company. There are many companies in Japan that still consider ESG to be an extension of CSR and this is somewhat different to the way ESG is viewed by companies overseas. We have appointed ESG specialists because we want to play a supporting role for companies by communicating the latest global trends to Japanese companies.

Kojima: Japanese industry needs to change as technology, such as digitalization, evolves.
We will do our absolute best to take on these changes.

Issues Going Forward and the Role of SNAM

Kawakita: I agree that you are taking a solid approach to raising awareness and understanding among Japanese companies. Going forward, how do you see yourself further improving your contribution within the global investment chain?

Kojima: At present, institutional investors are our main customers in Japan and overseas. Increasing ESG investment products in the retail sector is an issue we need to address going forward. Long-term investment involves social participation and thus will help build your assets in the mid- to long-term. We need to spread the idea and eradicate the negative image associated with investing. Expanding retail markets should be treated as both a challenge and an opportunity by SNAM and by Japan as a whole.

Nakao: Emerging markets, particularly Asian markets are showing great promise in terms of unearthing stocks going forward. We aspire to be an entity that is needed by both customers and companies by evaluating ESGs from a long-term perspective with respect to Asian companies, in the same way that we evaluate Japanese companies.

Kawakita: Young people tend to be more keenly aware of the need to solve social issues such as through the hometown tax system (system in which taxpayers divert part of their inhabitants tax bill to a local government of their choice) and crowdfunding. When considering how to go about revitalizing financial institutions in aging communities, I feel that it would be good to establish community funds or other framework for supporting companies that have the ability to solve local issues. Do you agree?

Kojima: I believe that we will be able to address more detailed needs as the adoption of digital technology continues. The opportunity to participate in society and to contribute to solving social issues will be a major motivator in the future.
I also believe asset management business is capable of offering support to the elderly so that they can extend the life of their assets. Having funds is essential to living longer. Supporting the elderly in terms of assets is vital to solving social issues and we would like to contribute to the realization of a “theme park for security, health, and wellbeing,” our Group vision.

Kawakita: It is a shame that in Japan, “nursing care” evokes the image of care giving services. Japan needs to develop a response to social issues as well as environmental issues and I have high hopes in your future endeavors. Thank you for giving me this opportunity to talk with you today and learn about your initiatives.

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