My Vision No.34
2018.2

Becoming an Advanced ESG Nation
ESG investment – the adoption of a long-term perspective in investing in companies that are
actively working to resolve environmental and social issues – is gathering momentum. In Japan,
a Stewardship Code was established in 2014, followed by a Corporate Governance Code in 2015,
but the initiative towards ESG investment has been taken by other countries, and Japan is only
finally beginning to make efforts in this area. What issues will Japan have to resolve in future
in order to become an advanced ESG nation? What will be required of companies, and what will
be required of investors? In this issue of My Vision, five experts who have been at the forefrontof the promotion of ESG investment in Japan provide us with suggestions towards answers tothese questions.

About this Issue

Becoming an advanced ESG nation– What are the issues for companies, investors and the market?
Yuri Okina
NIRA Executive Vice President, Vice Chairman of the Japan Research Institute, Limited
Keywords…Fostering of human resources / creation of systems for investors, reform of corporate awareness,
disclosure of non-financial data, establishment of market infrastructure, deepening discussion of “E” and “S”

Expert Opinions

Becoming an Advanced ESG Nation
What must Japan do to become an advanced ESG nation?
What approach should companies and investors adopt?

Japanese companies must cultivate
We must not allow ESG to be merely ainformation disclosure practices and strategies fashion, but rather use it to realize sustainable
for the improvement of ESG
corporate growth
Hiro Mizuno

Executive Managing Director & Chief Investment
Officer, Government Pension Investment Fund

Akiyoshi Oba
Chairman, Japan Investment Advisers Association

Keywords…Principles for Responsible Investment,
universal owners, sanpo yoshi (“Benefit to buyer, sellerand society”), ESG index

Keywords…Stewardship Code, constructive dialogue,sustainable corporate growth, companies that are
essential for society

Aiming towards the achievement of businesstargets integrated with sustainability targets

Financial institutions must go back to thebasics, honing their ability to judge corporate
potential when financing

Tsutomu Igaki

Keisuke Takegahara

Executive Officer, Global Investor & Brand
Communications, OMRON Corporation

Executive Officer and Deputy Chief Research Officer,
Coordination Department, Development Bank ofJapan Inc.

Keywords…Dialogue with the market, SDGs,
sustainability, financial valuation

Keywords…Lehman Brothers collapse, value creation
messages, evaluation of business potential, cooperation
between direct and indirect financing

We should discuss the essence of ESG
investment in order to reconceive
management
Rintaro Tamaki

President, Japan Center for International Finance(Former Deputy Secretary-General, OECD)

Interview period：November – December, 2017
Interviewer： Yuji Hayashi (NIRA Senior Researcher)
Editor：Isao Arai

Keywords…Multinational corporations’ guidelines foraction, fiduciary duty, CSR, business strategy

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.34
2018.2
About this Issue

Becoming an Advanced ESG Nation– What are the Issues for Companies, Investors and the Market?
ESG Investment: A Focus of Expanding Initiatives
ESG is an abbreviation of environment, society, and(corporate) governance. ESG investment is an approach toinvestment in which institutional investors focus theirinvestments on companies which make active efforts tocontribute to the resolution of environmental and social issues.
The influence of this trend is being increasingly felt in theJapanese stock market. The background to the trend is thedesire, by means of investment activities, to support sustainable
Yuri Okina
increases in the value of the company that is the target of the
Executive Vice President, NIRA
investment, and, as a result, to contribute to the resolution of/ Vice Chairman of the Japan
Research Institute, Limitedsocial issues. This is a trend that is expected to expand further,but numerous issues still stand in the way of Japan becoming
an “advanced ESG nation.” In this issue of My Vision, we therefore asked Japanese leaders in thefield of ESG investment to discuss initiatives up to the present and directions and issues for the
future from the varying perspectives of asset owners, investors, financial institutions, corporations,and international institutions.

A Changing JapanOne factor that has worked to promote the current global recognition of ESG investment was
the United Nations’ publication of the Principles for Responsible Investment (PRI) in 2006. The
Principles for Responsible Investment urge investors, when analyzing and evaluating companies,
to incorporate ESG elements, and to take a long-term perspective and demand appropriate
disclosure from the company. In many cases, such investors as overseas pension fund investors
have incorporated ESG investment initiatives into their practice in advance of other countries. The
outstanding global balance of ESG investment was 23 trillion dollars in 2016, representing close to
30% of the world’s assets under management. This figure has grown by 25% from two years
previously, and data shows that the majority of this growth is due to European investors. In Japan,
the orientation of investors and companies in relation to ESG changed when the Government
Pension Investment Fund (GPIF), the world’s largest asset owner, became a signatory to the UN’s
PRI in 2015, and the Stewardship Code was revised in 2017. However, now that companies havelargely implemented basic responses to the 2015 Corporate Governance Code, looking at thequalitative elements of ESG we find that they have tended to first prioritize the “G” element, andmore than a few companies have yet to formulate strategic initiatives in relation to the “E” and “S”
elements.

Positioning ESG as an Investment Strategy
The first task confronting us in order to make Japan an advanced ESG nation is for investors
to position initiatives in the area of ESG investment as an important agenda in their future
investment strategies, and to foster the human resources and establish the systems necessary forthis. As Hiro Mizuno, the CIO of the GPIF, points out in this issue, companies that do not consider
society or the environment represent a high risk as investees, making ESG investment an
extremely rational choice. For institutional investors with a fiduciary duty, it is necessary first torecognize the importance of positioning ESG as part of an investment strategy. As Akiyoshi Oba,
Chairman of the Japan Investment Advisers Association, indicates here, in the case of Japaneseinstitutional investors which have been strongly oriented towards the short-term, it will beThis is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.34
2018.2necessary to foster human resources capable of gaining an understanding of those aspects of acompany’s value that cannot be expressed in figures through dialogue with the company, andpossessing the power of discrimination with regard to investment choices. In addition, it will beessential to create a system that consistently pushes companies toward the path of sustainablegrowth. If this can be realized, the attractiveness of investment will increase, ultimately
generating a flow of funds from Japanese savings toward investments.

Enhancing the Disclosure of Non-financial Data and Establishing Market Infrastructure
The second task towards Japan’s becoming an advanced ESG nation is, on the corporate side,
realizing a change in awareness regarding ESG and promoting the reconsideration of businessmodels based on the disclosure of non-financial data. Tsutomu Igaki of OMRON Corporation
indicates in this issue that this will involve the recognition on the part of all companies, managers
and company employees that we can no longer separate management and social issues, and active
attempts to increase the transparency of management and the visibility of non-financial data.
Making non-financial data more visible must be positioned as an important factor in promoting
companies to think more deeply about business models that will be sustainable into the future.
With regard to this point, Keisuke Takegahara of the Development Bank of Japan also
indicates the importance of information concerning non-financial factors that support financial
performance below the surface, for example information concerning a company’s ability to generateinnovation, the quality of its managers, and initiatives related to corporate social responsibility,and points out that it will be necessary for companies to establish a convincing logic in relation to
how the growth of their business will assist in addressing social issues, and to explain this logic toinvestors and financial institutions which engage in indirect investment.
The third task confronting us is the establishment of market infrastructure. The role ofcompanies that publish indexes will be of particular importance here. It will be necessary forindexing companies to provide guidance to companies by disclosing their methods of evaluation, in
addition to publishing results indicating long-term improvement in the performance of companies
selected as indexes. This will support the creation of a virtuous circle in which companies that
increase their corporate value while fulfilling their social responsibilities are positively evaluated.

Increasing Awareness in relation to “E” and “S”
It will be necessary for Japan to address these tasks as soon as possible. Overseas, national
leaders and central bank personnel such as Mark Carney, the Governor of the Bank of England, areactively making statements regarding climate change. There are other expressions of this trend –for example, the Government Pension Fund of Norway has recently suspended investments inJapanese companies using a high proportion of power from coal-fired power plants. It is clear that
global Japanese companies with a high proportion of overseas investors cannot ignore this trend. As
Rintaro Tamaki, formerly the Deputy Secretary-General of the Organisation for Economic
Cooperation and Development (OECD), points out in this issue, there is a conspicuous lack of
discussion regarding such subjects as economic disparity, gender and climate change in Japan, and
it is important for us to recognize this difference in the level of discussion regarding ESG between
Japan and other nations. What is demanded is ongoing discussion of the issues from an economic
perspective, not merely by individual companies, but by Japanese society as a whole.
As indicated above, awareness of the “G” element, which provides the foundation for the “E”
and the “S”, is steadily increasing in Japan. It is to be hoped that discussion of these latter twoelements will be deepened based on a solid foundation of corporate governance, and that theimplementation of practical initiatives will speed up.
Dr. Okina is NIRA’s Executive Vice President, and Vice Chairman of the Japan Research Institute, Limited.
She holds a doctorate in economics from Kyoto University.
This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.34
2018.2
Expert Opinions

Japanese Companies must Cultivate Information Disclosure
Practices and Strategies for the Improvement of ESG
In 2015, Japan’s Government Pension Investment Fund(GPIF) became a signatory to the Principles for Responsible
Investment (PRI) advocated by the UN for institutional investors,
agreeing to conduct investments that take ESG into
consideration. The GPIF is the world’s largest pension fund, andits full commitment to incorporating ESG can be considered tohave boosted momentum towards ESG investment in Japan in
one fell swoop. We began to pay attention to this movement at a
global conference about three years ago, where overseas CIOs
Hiro Mizuno
discussed ESG as a general topic. I felt that our situation was
critical, since at that time in Japan, only the “G” element, or
Executive Managing Director& Chief Investment Officer,
corporate governance, was being discussed. We realized that
Government Pension
unless this situation changed, it would be unlikely that Japan’s
Investment Fundstock markets would maintain their appeal for overseas
investors.
I would like to emphasize that the GPIF’s engagement with ESG investment is not the resultof ethical considerations, but rather a consequence of a rational judgment regarding its importanceas an investment strategy. The GPIF is a “universal owner”, holding stocks and bonds throughout
the world, and we own approximately 10% of the shares in the Japanese stock market (after float
adjustment). As a result, the success or failure of individual companies is not relevant to us. In
addition, because our projected investment horizon is long at 25 years, companies that do notconsider the environment or society represent a significant risk as investees. We therefore
considered that in order to improve GPIF’s investment performance, it would be important toencourage the optimization of the entire socioeconomic system and the reduction of long-term risk
factors, thereby raising the level of the market as a whole.
As demonstrated by the long-standing Japanese concept of “sanpo yoshi” (benefit to buyer,
seller and society), the Japanese worldview has an affinity with ESG principles, but unfortunately
Japanese companies have little expertise in the area of disclosure of information. The GPIF hastherefore selected a set of ESG indices, and we have requested the index providers to disclose ourassessment methodologies. We hope that companies will refer to these methodologies as guidelines
to enable them to determine what they should disclose in order to improve their evaluation. Up tothe present, fulfilling the duty of communication with investors has been the responsibility of
specific departments, but because evaluation now extends to the company’s activities as a whole, it
is no longer possible to leave the responsibility to others.

As CIO of the GPIF, Mr. Mizuno signed the Principles for Responsible Investment (PRI) in September 2015, andhas promoted ESG investment in the fund’s portfolio management practice since then. Mr. Mizuno is a graduateof Osaka City University’s Faculty of Law. Following graduation, he worked for Sumitomo Trust Bank, Limited(now Sumitomo Mitsui Trust Bank, Limited). He then received an MBA from Northwestern University’s Kellogg
School of Management. Since 2003, Mr. Mizuno has overseen investment in venture companies and unlistedcompanies throughout the world as a partner in the London-based private equity firm Coller Capital. He took his
present position in January 2015.

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.34
2018.2
Expert Opinions

We must not allow ESG to be merely a Fashion, butrather use it to realize Sustainable Corporate Growth
The formulation of Japan’s Stewardship Code in 2014,providing principles of action for institutional investors, played asignificant role in the emergence of ESG investment as a major
trend. I was involved in the formulation of the Stewardship Code; theconcept of ESG investment was incorporated in the Code, and it
positions the role of responsible investors as one of contributing to
the realization of sustainable growth. In May 2017, the Code wasrevised to more clearly state the stipulation that institutional
Akiyoshi Oba
investors should possess an accurate understanding of the companies
Chairman, Japanin which they invest, including ESG.
Investment Advisers
We must not allow ESG to become merely a fashionable buzzword.
Association
To ensure that this does not happen, it will be necessary to consider ESG
investment within a broader framework. Why is it that a flow from savings to investments has failed todevelop in Japan? Isn’t it a result of the fact that because we have not sought to realize sustainable
increases in corporate value, the appeal of investment has failed to increase? What will be necessary inorder to change this situation will be for institutional investors to return to the essence of the
Stewardship Code – Taking action to encourage the realization of sustainable corporate growth throughconstructive dialogue. The practice of ESG investment is one method of doing so. Investors must
contribute to growth with this type of awareness.
Japanese companies themselves have a long history of ESG-like initiatives, and many companies
have long incorporated ESG-like concepts in their corporate philosophies. However, perhaps as a resultof the characteristic Japanese reluctance to blow our own trumpet, it is considered that Japan is lagging
behind in this area overseas. Indexes have been developed to make it possible to evaluate companies
from the ESG perspective, but ESG information is inherently difficult to quantify as data, and to theextent to which these indexes are effective is still unknown. If we over-emphasize formal requirements,
we may overlook the essential element, which is the orientation towards sustainable growth.
First, it will be important for corporate top management to ensure that an ESG philosophy,
culture and mission take root in their companies. I would encourage management to question theirorganizations on a daily basis as to what they need to do to remain a company that is necessary tosociety. And it will also be important for investors to grasp this corporate value that cannot be expressedin figures through dialogue. In both cases there will be considerable difficulty, but these are challenges
that are vital to the realization of sustainable corporate growth.

Mr. Oba has long been engaged with the issue of the appropriate direction for the market from the investor’s
perspective, and contributed to the formulation of Japan’s Stewardship Code and Corporate Governance Code as amember of the Council of Experts. A graduate of Waseda University’s School of Political Science and Economics,
Mr. Oba held positions as a Managing Director of Mizuho Trust & Banking Co., Ltd. and President and Chairmanof Tokio Marine Asset Management Co., Ltd. before taking his present position in 2017. From 2013 to 2017, heserved as the Chairman of the Securities Analysts Association of Japan.

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.34
2018.2
Expert Opinions

Aiming towards the Achievement of Business
Targets integrated with Sustainability Targets
It is vital for all companies and all businesspeople to understandwhy ESG investment is important, and why it has become a focus ofattention. One reason for this is increasing demand on the part ofinvestors for the minimization of risks that might manifest in future.
From the perspective of investors, the types of corporate scandals thathave occurred quite frequently in Japan and other countries in recent
years are events that manifest suddenly. In order to avoid such risks, itwill be necessary to reconsider the type of short-termism that evaluatescompanies based only on short-term business results, and create means
Tsutomu Igakiof rendering visible companies’ intrinsic value, including non-financial
Executive Officer,
Global Investor &data.
Brand Communications,
The increasing impact of corporate activities on society is another
OMRON Corporation
factor. Today, as companies conduct their activities globally, the effectthat they have on social issues such as the environment and human rights, and the responsibility
that they bear in these areas, have grown to the extent that it is no longer possible tocompartmentalize management and social issues. Given this, companies will be required to returnsustainable value to society through their business activities over the medium- to long-term, bymeans of increasing their management transparency and pursuing well-grounded dialogue withthe market. At present, approximately 50% of OMRON’s shareholders are international
institutional investors. We believe that it is essential for us to remain a company that generates
exceptional value judged by global standards, and a brand that is the first choice.
Since OMRON’s founder defined “To improve lives and contribute to a better society” as our
corporate motto, Our Mission, in 1959, OMRON’s Principle has been to contribute to society
through its business. In 2015, we revised our Principles based on Our Mission, and at the sametime formulated our Sustainability Policy with a high degree of compatibility with the UN’s SDGs.
We have introduced measures to help ensure that all of our employees put the company’s principles
into practice, and we are making efforts to advance dialogue with our stakeholders by publicizingthese initiatives through a variety of media.
We do not, however, believe that we can be neglectful of our financial status under thebanner of contributing to society. It is certainly not the case that our financial valuation should
compare unfavorably with that of US and European companies because we attempt to benefit
society. To realize profits that are not inferior to those of US and European companies bycontributing to the development of society through our business is our challenge for the future.

Following his graduation from Waseda University’s School of Commerce, Mr. Igaki joined the Mazda Motor
Corporation. He later gained experience working for an international consulting firm, after which he served as theManager of the Public Relations Department of an international consumer goods manufacturer for a period ofaround 10 years. In February 2013, he joined OMRON as a general manager responsible for overseeing corporate
communications. He took up his present position in April 2017. Mr. Igaki is responsible for overseeing thecompany’s IR, SR, PR, internal communications, and brand strategy at the global level. As the Director of theJapan Society for Corporate Communication Studies and the Representative Secretary of the Osaka Machinery
Public Relations Council, he is also highly active in extending public relations activities outside the company.

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.34
2018.2
Expert Opinions

Financial Institutions must go back to the Basics, honing
their Ability to Judge Corporate Potential when Financing
The collapse of Lehman Brothers in 2008 prompted reflection
among investors regarding the fact that investment practices had
previously been skewed towards an extremely short-termorientation. This reflection increased momentum among investors torecognize that while short-term profits were important, a balancewith long-term profits should also be considered. In order to conduct
long-term investment, it is necessary to have access to and toevaluate non-financial information regarding the factors that
support financial performance below the surface, such as ability to
Keisuke Takegahara
generate innovation, quality of management, and initiatives in the
Executive Officer andarea of corporate social responsibility.
Deputy Chief Research
What is required of companies is to establish a logical
Officer, Coordination
Department, Development
framework regarding the types of social problems that the growth of
Bank of Japan Inc.
their business can address, and to explain this framework toinvestors. The delineation by a company of its own corporate logic
and the presentation of this logic as a value creation message promotes high-quality dialogue
between the company and investors. Dialogue also opens up opportunities for growth for thecompany. Previously, thinking of this type was regarded as ethically sound but costly andunprofitable, but more recently, such thinking has come to be recognized as rational in relation toinvestment-related activity, among investors no less than among academics.
In the case of indirect financing, once a loan is made, long-term business relations are agiven. Because of this, careful consideration of non-financial evaluations of the company that will
receive the funds should be considered perfectly natural. From this perspective, ESG investment isquite consonant with indirect financing. In offering loans on the basis of assessment-based
certification, the DBJ seeks to understand corporate potential that cannot be judged based on
financial data. In order to do so, the responsible member of staff gains extensive access to thecompany’s information under a confidentiality contract, and checks more than 120 items. While
this requires effort, this type of evaluation of business potential makes it possible to identify
companies that possess strength in terms of non-financial value. By contrast with the ability ofinvestors to evaluate a large number of companies when directly financing, in the case of indirect
financing, i.e., face-to-face transactions, the number of companies is limited and the impact ispresumably lower. However, while investors engaging in direct investment are able to evaluate
large numbers of companies using published data, indirect financing enables deeper judgmentsthat also take in unpublished data. It will also be important to establish cooperation and build a
relationship of trust between direct and indirect, making use of the detailed, ground-levelevaluations of indirect financing in decisions on investments made by investors using a “bird’s-eyeview” approach.
Involved in the areas of the environment and CSR for more than 20 years, Mr. Takegahara is a leading Japaneseenvironmental finance specialist and an architect of the DBJ’s Environmentally Rated Loan Program. Following his
graduation from Hitotsubashi University’s Faculty of Law, Mr. Takegahara joined the Japan Development Bank
(now the Development Bank of Japan). He took his present position in July 2017, following positions including
Chief Representative of the bank’s Frankfurt Overseas Representative Office and Director of the Environment andCSR Department. Mr. Takegahara has also served in a number of public positions, including as Co-Chairman of theSteering Committee of the Ministry of the Environment’s Principles for Financial Action for the 21st Century and amember of the Ministry of the Environment’s Working Group on Incorporating Issues regarding Sustainability into
Investment. He has written extensively on the subject of environmentally-conscious financing.
This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.34
2018.2
Expert Opinions

We should discuss the Essence of ESG
investment in order to Reconceive Management
The Organisation for Economic Cooperation and Development(OECD) formulated its Guidelines for Multinational Enterprises 41
years ago, in 1976. These offered guidelines for the activities ofcompanies in contemporary society. Incorporating themes including
employment, human rights and environmental awareness, they could
be considered to be the beginning of the “ESG approach.” Since thepublication of the Guidelines, the OECD has continued to explore
individual related issues with a range of concerned parties in a variety
Rintaro Tamaki
of committees, forums and other venues.
President, Japan Center for
Attention has been focused on ESG investment recently, but weInternational Financehave still not reached a point at which understandings of the essentials(Former Deputy Secretaryof ESG investment are aligned. For example, it has long been a point ofGeneral, OECD)
contention as to whether elements of ESG other than those relating to
immediate profits can be reconciled with fiduciary duty. Investors seeking short-term profits are notinterested in the behavior of the companies they invest in, and the financial institutions working on
behalf of the investors have an obligation to focus on the pursuit of financial profit in order to
respond to the trust of their investors – this has been the traditional way of thinking. This way of
thinking has been considerably transformed on a global scale, and a shared consensus is forming thatthe incorporation of ESG within an investment strategy does not violate fiduciary duty. Having said
which, determining how to balance this approach with the pursuit of profit remains difficult, anddiscussion of this issue continues unabated.
In the sense that it encompasses activities that are not represented on financial statements,
for companies ESG can be considered to be close to CSR. In Japan, CSR tends to be understood as
an aspect of a company’s PR activities, but in essence it should form part of a business strategy
based on non-financial data. For example, if a boycott campaign were to arise over child labor, thiswould represent a risk.The transition to a business model that considers social impact would create
the opportunity for future profit. It will be essential for companies to rethink their business models
and adequately discuss the issues to be addressed. I was surprised on my return to Japan to
discover that there was a tendency to shy away from discussion of topics such as economic
disparities (in particular, child poverty), gender and climate change. I believe that it will be
important for society as a whole, not merely companies, to engage in discussion on these ESGrelated issues. In the absence of such discussion, there is every likelihood that the current interest
in ESG investment will be largely without meaning.

Boasting a broad range of experience, Mr. Tamaki is an expert in areas including international economics,
development and taxation. Following graduation from The University of Tokyo’s Faculty of Law, he joined theMinistry of Finance. Mr. Tamaki held positions as the Alternate Executive Director for Japan with the World Bank,
Finance Minister at the Embassy of Japan in the United States of America, and Director-General of theInternational Bureau and Vice Minister for International Affairs at the Ministry of Finance, before being appointed
the Deputy Secretary General of the OECD 2011, where his portfolio included overseeing OECD policy in theareas of the environment, green growth, taxation, financial and enterprise affairs, and anti-corruption measures.
He took his present position in October 2017.

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement