October 16, 2019Engagement Agenda“Materiality Identification and Disclosure in Relation to Sustainability of Business Model”

Status of Responses by Japanese Companies as of 2018and Request for Their Future Identification and Disclosure

Since January 15, 2018, the Institutional Investors Collective Engagement Forum (hereinafterreferred to as “IICEF”) has held engagement meetings with multiple companies, together with thefive companies participating in IICEF’s collective engagement program, namely Mitsubishi UFJ Trustand Banking Corporation, the Pension Fund Association, Resona Bank, Limited, Sumitomo Mitsui DS
Asset Management Company, Limited and Sumitomo Mitsui Trust Asset Management Co., Ltd. (inalphabetical order; hereinafter referred to as the “Participating Investors”), the agenda of which is“Materiality Identification and Disclosure in Relation to Sustainability of Business Model.”It has been one and a half years since we started the engagement meetings with this agenda, andwe analyzed the status of responses by Japanese companies concerning this agenda. Based on theresult of the analysis, recently we summarized thoughts of the Participating Investors and started tosend out letters describing the new common views to multiple companies.
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1. Overview of this agenda (perspectives of the Participating Investors on ESG and requests tocompanies)
Nowadays, environmental and social issues have been bringing about tightening of laws,
regulations and rules of various countries, changes in awareness of labor and in consumer behavior
and innovations for products and services, causing “a game changing phenomenon” in which thecompetitive environment radically changes overnight. In conjunction with the transition to
decarbonized economy on a global scale, responding to environmental and social issues has now
become “requisites for a company to survive” rather than “good things to do for the environmentand society” which should be done by a company as part of its social responsibility.
If there is a risk of losing advantages of management resources, intangible assets, etc., which
are the sources of value creation by and competitive advantages of a company, due toenvironmental and social issues and associated changes in the management environment, it would
be a significant risk which has an impact on the sustainability of the corporate value and business1
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model in the medium- to long-term. Meanwhile, responding to environmental and social issues,
utilizing the source of value creation and competitive advantages, could be a new growth
opportunity. Nowadays, while an increasing number of companies have been declaring to address
Sustainable Development Goals (SDGs), many cases seem to have only presented the significanceof the business in society. We recognize SDGs provide worldwide business opportunities. It is
important for a company to, if its business is able to contribute to SDGs, indicate the strategies,
i.e., how much investment is going to be made in the efforts, how long time of frame is to be taken
and how much return is expected, as a growth driver for the business.
Investors do not evaluate ESG-related activities of a company based on appearance such as dataand examples, but do evaluate them based on how the company considers environmental andsocial issues as risks and growth opportunities from the viewpoint of the sustainability of its
business and what strategies the company is taking. Investors consider them to be information tounderstand what are the important environmental and social issues which are the risks whensustaining the business, and on the other hand, what are the important environmental and social
issues which may possibly serve as a new opportunity for growth, as well as how the company istrying to address these important issues with its medium- to long-term strategies; or in short,whether it is possible for the company to grow sustainably. Based on these perspectives ofinvestors, we requested companies to organize important issues (Materiality issues) arising fromenvironmental and social issues and the specific countermeasures, including examinationprocesses at bodies such as the board of directors, by categorizing them based on the two aspects,
namely risk and growth opportunity, and disclose the information.

2. Status of holding collective engagement meetings
We summarized the contents of this agenda as the common views of the Participating Investors,
sent letters to companies which had been actively working on ESG-related activities and have hadcollective meetings between their executive officers and department heads in charge and theParticipating Investors. At the same time, we have disseminated the contents of this agendabroadly to Japanese companies with the cooperation of securities companies, IR supporting
companies and others, by, for example, providing explanations in seminars at various locations andposting the agenda materials on our website. We received responses from the companies
participated in the engagement meetings that, among other things, they did not have objection
against the contents, they had already started the examination in line with the formulation of thenext medium-term management plan and they had gained insight into various matters related toawareness and concerns and disclosure expected from investors. On the other hand, the2www.iicef.jp

Participating Investors also gained insight through discussion with the other investors who had
similar awareness and concerns and learned in detail from the companies about their actual
management circumstances, top management’s mindset and future direction of the companies,
which led to their deeper understanding of the target companies.

3. Status of disclosure of Materiality in integrated reports and response from stock market
According to “Integrated Report Survey 2018: Materiality” (June 2019) published by Edge
International, Inc., 18% companies identified and disclosed the Materiality specified in this agenda.
It was pointed out that there were more movements toward enhancing Materiality disclosure
expected from investors as compared with the time of the survey in 2017, with nearly 20%
companies were making disclosure in line with the approach of this agenda.
With respect to how the stock market evaluates the companies which have disclosed theMateriality through the integrated report, etc., with the cooperation of Edge International, Inc.
(“Edge Inc.”) IICEF categorized the companies into three groups; “companies which have disclosed
the Materiality from the perspective of investors”, “companies which have disclosed theMateriality from the perspective of multi-stakeholders (excluding those which have disclosed theMateriality from the perspective of investors)” and “companies which have not disclosed theMateriality”. Then we analyzed response of the stock market to each group based on the survey
data.
* Materiality from the perspective of investors:
Materiality defined by the International Integrated Reporting Council (IIRC) and in the“Guidance for Collaborative Value Creation” by the Ministry of Economy, Trade and Industry,
among others. Issues in which environmental and social issues have a material influence acompany’s ability to create value. That is to say, issues related to the sustainability of the said
company, which are underlying issues for this agenda.
Materiality from the perspective of multi-stakeholders:Materiality defined by Global Reporting Initiative (GRI), among others. Items in which acompany has a significant impact on economy, the environment and society and items inwhich a company has a substantial impact on evaluation and decision-making of stakeholders.
That is to say, issues related to the sustainability of stakeholders.

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[Analysis results]
Target: Among 398 companies which issued the 2018 integrated report covered by the survey, 393
companies having stock price data for the data collection period(Figure (i)) Number and ratio of companies by group
Category

Number of companies(A) Companies which have disclosed the materiality from the71 companies (ratio: 18%)
perspective of investors(B) Companies which have disclosed the materiality from the 154 companies (ratio: 39%)
perspective of multi-stakeholders (excluding those which havedisclosed the materiality from the perspective of investors)(C) Companies which have not disclosed the materiality
168 companies (ratio: 43%)
* Calculations for the above categories were made based on the categories used by Edge
International in order to prevent arbitrariness of IICEF.
(Figure (ii)) Status of PBR, beta value and ROE by group (stock price: closing price of July 18, 2019)(A) Companies which havedisclosed the materiality
from the perspective ofinvestors: 71 companies(B) Companies which havedisclosed the materiality
from the perspective ofmulti-stakeholders(excluding those which havedisclosed the materiality
from the perspective ofinvestors): 154 companies(C) Companies which havenot disclosed themateriality: 168 companies

Average
PBR

Ratio ofcompanies
with PBR ofless than 1time

1.69

44%
31/71
companies

0.97

1.02

9.75

1.32

49%
75/154companies

1.08

1.11

8.58

1.33

55%
93/168companies

1.11

1.15

6.68

Beta value
Beta value(for the(for the last
past twosix months)
years)

Average
ROE

Measuring the evaluation by the stock market in the form of the price book-value ratio (PBR)
which indicates value brought by ESG-related activities in human assets, brands and other nonfinancial assets, group (A) had the highest PBR of 1.69 times among the three groups, whereas
groups (B) and (C) had the same level of PBR of 1.32 times and 1.33 times, respectively. The ratio

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of companies with PBR of less than 1 times, non-financial assets for which are evaluated negative,
was the lowest in group (A), followed by group (B) and then group (C) which have greater ratios.
The beta value indicating the market sensitivity also showed high volatility in order of group (A),group (B) and then group (C), indicating the tendency of group (A) having lower risks. Return onequity (ROE) representing capital efficiency was the highest in group (A), followed by group (B) andthen group (C) which have lower ROE.
As seen from the above, companies disclosing the Materiality from the perspective of investors
seem to be relatively highly evaluated by the stock market in terms of their ability to create value
as compared with companies disclosing the Materiality from the perspective of multi-stakeholders
and companies which have not disclosed the Materiality.
In addition, looking at the distribution of company size, the ratio of larger-cap companies washigh in order of group (A), group (B) and then group (C).
(Figure (iii)) Distribution of company size (market capitalization)

42%

20%

55%

38%

18%

75%

0%

20%

40%

27%

15% 10%

60%

80%

100%

We divided companies by market capitalization and conducted similar analysis on them, because
companies larger in size (market capitalization) were deemed to be able to spend more manpowerand expenses as compared with companies smaller in size and therefore to proactively work on
disclosure of the Materiality from the perspective of investors and IR activities.

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(Figure (iv)) Status of PBR, beta value and ROE by company size
Market capitalization(A) Companies which havedisclosed the materiality fromthe perspective of investors: 71
companies
Average PBR
Ratio of companies with PBRof less than 1 times
Beta value (for the past twoyears)
Beta value (for the last sixmonths)
Average ROE(B) Companies which havedisclosed the materiality fromthe perspective of multistakeholders (excluding thosewhich have disclosed themateriality from the perspectiveof investors): 154 companies
Average PBR
Ratio of companies with PBRof less than 1 times
Beta value (for the past twoyears)
Beta value (for the last sixmonths)
Average ROE(C) Companies which have notdisclosed the materiality: 168
companies
Average PBR
Ratio of companies with PBRof less than 1 times
Beta value (for the past twoyears)
Beta value (for the last sixmonths)
Average ROE

Less than 500
billion yen

30 companies (42%)

500 billion yen ormore
Less than 1 trillionyen

1 trillion yen or
more

14 companies (20%) 27 companies (38%)

1.26
21/30 companies
(70%)

1.61
5/14 companies
(36%)

2.20
5/27 companies
(19%)

1.05

1.12

0.80

1.15

1.10

0.84

6.35

10.97

12.90

85 companies (55%)

28 companies (18%) 41 companies (27%)

1.14
48/85 companies
(56%)

1.53
11/28 companies
(39%)

1.55
16/41 companies
(39%)

1.08

1.10

0.95

1.11

1.14

0.98

7.20

9.47

10.85

126 companies(75%)

25 companies (15%) 17 companies (10%)

1.27
76/126 companies
(60%)

1.55
11/25 companies
(44%)

1.40
6/17 companies
(35%)

1.13

1.09

1.04

1.18

1.11

1.01

5.72

9.41

9.85

Not only companies with market capitalization of 1 trillion yen or more but also companies withmarket capitalization of between 500 billion yen or more and less than 1 trillion yen seem to havethe similar tendency with companies as a whole. However, companies with market capitalizationof less than 500 billion yen did not indicate the similar tendency. This may be interpreted as an
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impact of factors such as uneven distribution of financial information and liquidity of shares, whichis resulted from the ever-smaller amount of financial information due partly to limited coverageby security- analysts.
4. Future expectations (requests from the Participating Investors)
As described above, identification from the perspective of investors has significant meanings inmanagement issues of important issues (Materiality) arising from environmental and social issues.
With respect to companies which have not identified and disclosed the Materiality and companies
which have identified the Materiality from the perspective of multi-stakeholders, the relevance
between the activities for environmental and social issues and the sources of the business model,value creation and competitive advantages is unclear, and it is difficult to well understand why
these activities are undertaken and why these issues are deemed important. In addition, it is often
the case that the Materiality is not reflected in their medium- to long-term strategies, andtherefore, investors cannot properly evaluate the impact of the activities for environmental andsocial issues on long-term corporate value. Furthermore, non-financial key performance indicators(KPIs) tend not to be presented, and thus the progress of the activities cannot be measured.
We would like companies to clarify their issues by adding information such as expected changes
in the management environment and the degree of impact seen as risk and an expected increasein profitability seen as growth opportunity, and provide investors with more details clearly on how
the sustainable growth of the business model is planned to be achieved or how the business modelis planned to be changed. At the same time, as Materiality is an important issue in future
management, we expect that it is included as part of the medium- to long-term strategies, and itwould help us to gain deeper understanding if companies also provide explanations on the specificdetails, targets and periods, the size of investment and return, systems to promote the strategies
and in addition, KPIs to assess the progress.
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Since October 2019, IICEF have summarized the common views and started to send letters tocompanies with market capitalization of a certain amount or more and identifying and disclosing theMateriality to the effect that we would like them to clarify the Materiality from the perspective ofinvestors in a way easier for investors to understand and endeavor on it as an important pillar among
their medium- to long-term strategies.

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Contact information:
Institutional Investors Collective Engagement Forum
Directors in charge: Yuki Kimura, Naomi Yamazaki and Ryusuke Ohori
Address: Tokyo Entre Salon, Shinmaki-chou Building Annex 1, 3-2-14, Nihonbashi, Chuo-ku,
Tokyo 103-0027 JAPANE-mail: info@iicef.jp

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<Reference>
Edge International, Inc.
“Integrated Report Survey 2018: Materiality” June 2019 (excerpt)
http://www.edge-intl.co.jp/library/s2019_17.html■ Overview and result of survey
A survey was conducted against Japanese listed companies which issue self-declared
integrated report (*) on whether the following elements related to “Materiality” weredisclosed in their integrated report.
(i) Materiality from the perspective of investors: 17.8% (71 companies)(ii) Separate disclosure concerning (i) for opportunity and risk: 9.0% (36 companies)(iii) Disclosure of risks and countermeasures or opportunities and risks arising from climatechange: 20.4% (81 companies)(iv) Opportunity and risk by business unit: 17.1% (68 companies)(v) Materiality from the perspective of multi-stakeholders: 47.5% (189 companies)(vi) Specific processes of Materiality : 24.6% (98 companies)(vii) Consideration for SDGs concerning (vi): 23.1% (92 companies)(viii)Reference to SDGs: 76.1% (303 companies)(*) 398 listed companies in Japan, among the 414 companies in “List of Organizations in Japan Engaged in thePublication of Self-Declared Integrated Reports (2018)” which are covered by the survey by CORPORATEVALUE REPORTING LAB (operated by Edge International, Inc.).

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