1

Initiatives by Life Insurers to Reinvigorate the Equity
Market and Achieve a Sustainable Society throughAsset Management

April 2019
The Life Insurance Association of Japan

2

Contents

1. Social role of asset management by life insurers
2. LIAJ initiatives to date (stewardship activities)• Recommendations for equity market reinvigoration
3. LIAJ initiatives in FY2018 (stewardship activities, ESG investment)(1) Upgraded activities by life insurers(2) Implementation of collective engagement(3) Formulation of ESG investment guidelines(4) Recommendations for companies, investors and government

3

1. Social role of asset management by life insurers
Through providing long-term finance, life insurers have supported major structural and social changes to aid Japan’s economic
growth.
● Their role in achieving a sustainable society has been broadening recently through ESG investment and stewardship activities.
●

Change in social role of asset management (AM) by life insurers
Corporate債
bonds

JGBs/munis
国債・地方債社

金

Note: Figures from 2007 include Japan Post Insurance

Foreign

Stocks 式株外国 証 券
securities

Total LI
assets

Other
その他

生保総資産 (Trillions of yen)
400

Loans

20%

300

Global financial crisis

40%

Asset bubble collapse

60%

First Oil Crisis

StocksSecond Oil Crisis

350
80%

Tokyo Olympics

Life insurer AM portfolio weights

100%

Loans付
貸Source: LIAJ publications

250
200
150

JGBs
Municipal
bonds

50

Postwarrecovery

Postwar boom

Stable growth

Slower growthSocialstructure

Heavy chemical industry-driven growth

PolicyissuesUrban housing supply

Macroeconomic stimulus

Higher social security spending

Investing in heavy chemical industry

Investing in tertiary industry

Investing in JGBs

Life insurer
asset
management

Investing in public sector housing

Industrial diversification

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

1966

1964

1962

1960

1958

1956

1954

1952

0
1950

0%

100

Greater interest in
sustainability

Declining birthrate, aging population
Society5.0

More overseas investment
ESG investment
Stewardship activities

Social role of asset management by life insurers: Postwar boom

4

Helping heavy industry-led economic growth during boom via loans
and equity investments
 Long-term loans and equity investments in heavy chemicals and other critical industrial sectors helped drive Japan’s
rapid economic growth from the 1950s to the early 1970s.
 Life insurers also helped fund construction of public housing stock amid rapid influxes of population into urban
centers.
Growth in funding to heavy chemical industry

Growth in funding to public housing sector(Ten thousands(Billions of yen)

Heavy chemicalindustry accountingof GDP (%)

25,000
2.500

万

500
5,000

80

4,000
400

Public housing units
10%
60

3,000
300

40

2,000
200

8%

Loan funding

2,000
20,000

12%100

15,0001,500

1,000
10,000

6%

4%

5,000
500

2%

0

0%

20

1,000
100

Funding bylife insurers

1960

1965

Source: Cabinet Office, ESRI (SNA)

1970

1975
Source: “History of JHC,” Japan Housing Corporation

1975

1973

1971

1969

1967

1965

1963

1961

1959

0

1957

0

1955

30,0003,000

14%Equityinvestments

3,500
35,000(Billions of yen)of houses)

Social role of asset management by life insurers: Stable growth period

5

Aiding development of tertiary industry via investment in diverse sectors
 Japan’s economy diversified between the two oil shocks and 1990, achieving stable growth as new tertiaryindustries emerged.
 Life insurers supported the development of a diverse range of companies in many sectors.
Growth of tertiary industries

Funding diverse range of companies[Funding composition by industry segment]

70%

100%

Tertiary (other)

90%

60%

[Tertiary]■Other■Transport/
communications■Electricity/gas■Real estate■Wholesale/retail/hospitality■Services■Finance/insurance

80%
50%

70%

Secondary (mining,
manufacturing, construction)

40%

60%
50%

30%

40%
20%

30%

Primary (agriculture,
fisheries, forestry)

10%

10%

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

Source: Cabinet Office (SNA)[Secondary]■Mining■Construction■Manufacturing

20%

0%

1970

百

[GDP composition by industry segment][Primary]■Agriculture, fishery,
forestry0%
1970
Source: LIAJ publications

1975

1980

1985

1990

Social role of asset management by life insurers: Slower growth period

6

Fiscal support through JGB investment amid rapid aging of Japan’s society
 JGB balance has expanded due to increased social security spending linked to aging.
 Since the mid-1990s, life insurers have played a fiscal support role by investing mainly in JGBs.

Aging, growth in social security spending(Trillions of yen)

JGB balance, JGB ownership by life insurers

（％）

60

30
Population aged
65 years or older(%)

50(Trillions of yen)

1,200

25

1,000

40

20

800

30

15

600

20

10

400

20%
JGB ownership bylife insurers (%)

10%

JGBs outstanding

Sources: “Financial Statistics of Social Security,” National Institute of Population andSocial Security Research; “World Population Prospects,” United Nations
Note: Social security spending includes both insurance premiums (paid by individuals andcompanies) and public-sector spending (from JGBs/taxes).

Source: “Flow of Funds,” Bank of Japan
Note: JGBs include FILP agency bonds

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

0%

1996

0

1994

0

1992

200

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

0

5

1990

Social security
budget10

Social role of asset management by life insurers: Period since mid-2000s

7

Helping to achieve a sustainable society through ESG investment
 Social demands on institutional investors have increased globally with the creation of the PRI and Japan’s
Stewardship Code.
 As PRI and Stewardship Code signatories, Japanese life insurers are contributing to achieving a sustainable
society through ESG investment and stewardship activities.
(Trillions of yen)(firms)■# of life insurers among signatories of Japan’s Stewardship Code

300

18

18

18

18

20

17
250
▶Launch of PRI

200▶Adoption of
the Paris
Agreement▶Establishmentof Japan’s
StewardshipCode

200 trillion yen(6 firms)▶Adoption of
SDGs

150
100
50

15
200 trillion yen(6 firms)

10

123 trillion yen(5 firms)

7 trillion yen(1 firm)

7 trillion yen(1 firm)

7 trillion yen(1 firm)

50 trillion yen(3 firms)

FY2006
2006年度FY20132013年度FY20142014年度FY20152015年度

5

AUM for PRI-signatory life insurers*(# of signatories)

00
FY20162016年度FY20172017年度FY20182018年度*AUM: Total assets as of March 31, 2018
United Nations Principles for Responsible Investment (PRI)

Global standard for ESG investing, signed by over 2,000 financial institutions worldwide.

Japan’s Stewardship CodePrinciples for responsible stewardship by Japanese institutional investors.

Sustainable Development Goals (SDGs)

17 targets adopted by UN as part of the 2030 Agenda for Sustainable Development

Paris Agreement

International accord adopted as part of UN Framework Convention on Climate Change

8Contents

1. Social role of asset management by life insurers
2. LIAJ initiatives to date (stewardship activities)• Recommendations for equity market reinvigoration
3. LIAJ initiatives in FY2018 (stewardship activities, ESG investment)(1) Upgraded activities by life insurers(2) Implementation of collective engagement(3) Formulation of ESG investment guidelines(4) Recommendations for companies, investors and government

9

2. LIAJ initiatives to dateSince 1974, the LIAJ has helped invigorate stock markets by proposing systemic reforms and ways of promoting
sustainable corporate growth via repeated recommendations to companies, investors and governments.
Theme

Target1974

Companies
Government

ESG

2017

•
•

Securing shareholder returns by shifting from book value
issuance to market value issuance
Improving the market value issuance system (to reduce
discounting of public offerings)

Companies••

Improving returns through dividends to shareholders
Setting ROE targets and raising ROE

Government••

Share buybacks to help boost returns
Systemic reforms to foster use of stock options in remuneration•

Boosting shareholder returns, disclosure of related policies•

Appointing more external directors•

Managing AGMs for shareholder interests

Companies•

Improving disclosure to support dialogue

Investors•

Upgrading dialogue capabilities

Companies•

Improving ESG disclosures

Investors••

Promoting long-term dialogue
Making shareholder voting processes more transparent

Companies

Dialogue2015

Corporate governance1998

Shareholder returns

1990

Recommendations

Equity market invigoration

LIAJ initiatives to date: Recommendations for equity market reinvigoration

10

Contribution to greater diversity in returns to shareholders by advocating
share buybacks
 Recommendations in the 1990s to promote share buybacks for boosting shareholder returns helped to ease strict
regulations.
 Since the 2000s, shareholder returns have been diversified as firms gained flexibility to tailor buybacks to internal
aims.
1995

2000

2005

2010

2015

2018

12

9

Strict rule on repurchased
share cancellation(Trillions of yen)
15

Buyback
approval level

Approvalby AGM

1997:
1996:
Implement
Board
ed by
approval
legal
proposedchangeValue of share buybacks and dividends

1998:
Treasurystock banremovalproposed

Aim of buyback
Restrictedby law

2001:
Implemented bylegal
changeValue of sharebuybacks

6

3
Value ofdividends

Source: I-N Information Systems, Ltd.

Note: Treasury stock are shares repurchased or held for any purpose

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

0

LIAJ initiatives to date: Recommendations for equity market reinvigoration

11

Advocating for better shareholder returns and disclosure of targets, and higher
dividends
 Repeated recommendations advocating improvement of shareholder returns (from 1970s onward) and the disclosure of
related targets (from 1990s onward).
 Advocacy has generated results, with more companies consistently increasing dividends and disclosing shareholder returntargets.
1980

1974

1990

2005

2000

2015

2010

2018

[Recommendation] Improve shareholder returns(Trillions of yen)
10

[Total corporate dividends]

8
6
4

Source: Tokyo Stock Exchange(accounts filed by firms with March 31 year-ends)
Note: Data for 1980–2006 cover parent-level dividends for stocks listed on
Sections 1&2 and Mothers; data from 2007 covered consolidated dividends forstocks that include firms listed on JASDAQ; exclude financial stocks.

201980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

[Recommendation] Improve disclosure of shareholder return-related targets[Proportion of firms disclosing shareholder return-related targets]
100%
80%
60%

Undisclosed

40%
20%

Disclosed0%2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: LIAJ (Based on survey of top 1,200 stocks by market capitalization)

LIAJ initiatives to date: Recommendations for equity market reinvigoration

12

Advocating for more external directors, more annual general meeting (AGM) datevariation, and better governance Repeatedly advocating since mid-1990s for better corporate governance by appointing external directors andrunning AGMs in consideration of shareholder interests.
 Advocacy has generated results, with more external directors appointed and progress on spreading dates of AGMs.
1995

2000

2005

2010

2015

2018

[Recommendation] Appoint more external directors[Numbers of external directors]

100%

More than 3 directors

80%

2 directors

60%

1 director

40%
None

20%
0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Japan Association of Corporate Directors (Corporate governance survey of TSE1-listed firms (August 1, 2018))[Recommendation] Run AGMs in consideration of shareholders
100%[Concentration of dates for ordinary AGMs (March 31 year-end)]
80%
60%
40%
20%
0%

Source: Tokyo Stock Exchange (June 2018 AGM dates for TSE1/TSE2-listed firms with March 31 year-ends)
Note: Concentration defined as proportion of firms with March year-ends holding ordinary AGM on most commonly chosen date1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 201813

Contents

1. Social role of asset management by life insurers
2. LIAJ initiatives to date (stewardship activities)• Recommendations for equity market reinvigoration
3. LIAJ initiatives in FY2018 (stewardship activities, ESG investment)(1) Upgraded activities by life insurers(2) Implementation of collective engagement(3) Formulation of ESG investment guidelines(4) Recommendations for companies, investors and government

14

3. LIAJ initiatives in FY2018
 Working groups on stewardship activities and ESG investment were set up to contribute to equity market
reinvigoration and achieving a sustainable society.
 WG progress: Upgraded activities by corporate participants; formulation of ESG Investment Guidelines;
implementation of collective engagement; publication of joint WG report.

Equity market
reinvigoration

2017～

Achievinga sustainable society

New

1974～

Collective engagement

LIAJ recommendations

ESG Investment Guidelines

Improvingshareholder
returns

Based on surveys ofcompanies/investors

Promoted further progress in
ESG investment by the life
insurance industry

Better ESG
disclosures

Upgraded activities by WG participants
New

Stewardship Activities WG(10 life insurers)

Collaborating

ESG Investment WG(11 life insurers)

15

Contents

1. Social role of asset management by life insurers
2. LIAJ initiatives to date (stewardship activities)• Recommendations for equity market reinvigoration
3. LIAJ initiatives in FY2018 (stewardship activities, ESG investment)(1) Upgraded activities by life insurers(2) Implementation of collective engagement(3) Formulation of ESG investment guidelines(4) Recommendations for companies, investors and governmentUpgraded activities by life insurers: Stewardship Activities WG

16

ESG dialogue interviews conducted to improve quality of dialogue
 Stewardship Activities WG participants invited external experts to host seminars with the aim of improving thequality of dialogue for each company.
[Presenters]

Examples of progressive initiatives

Issues related to integrated reporting◆ESG dialogue perspectives• Are ESG initiatives central to management?
• Are ESG initiatives treated as proper investments
aimed at growing corporate value rather than a “cost”
for social contribution?
• Is importance of ESG dialogue achieved from theviewpoint of risks and opportunities (especially thelatter) amid changing business conditions?
◆Process of ESG dialogue• Following up post-dialogue initiatives• Using “Guidance for Collaborative Value Creation*”◆ Perspectives emphasized by investors• Does the integrated report simply collate informationor show an integrated approach?
• Does it contain an outline of the conceptual approachtaken by senior management?
• Does report content include future-oriented initiatives
related to achieving SDGs?
• Is a clear link drawn between ESG metrics and thevalue creation stories?
• Are materiality themes (issues considered important
for the company in terms of society and business)
identified?
• Does report content promote better internal
communications or aid external recruitment?

*Disclosure/dialogue policy guidelines formulated by METI in
2017 to help increase long-term corporate value

Better quality of dialogue by companies participatingin Stewardship Activities WG

Upgraded activities by life insurers: Stewardship Activities WG

17

Initiatives and approaches conducted or considered by WG participants to improve
dialogue content

 Based on interviews with experts and by sharing best practice, each WG participant is studying ways to improve
E/S dialogues and use in investment decisions from FY2019.
# of participants(Total of 10 firms in WG)

Approach

Activity details

Organization• Dedicated dialogue team

Dedicated staff• Dedicated dialogue staff

Expertcommittee

Dialogue
topic
Factoring into
investment
decisions

2

2
3

2

• Expert committee set up including

8

outsiders• Governance (G) dialogue

95• Environment (E)/Social (S) dialogues• Dialogue findings used in investment

1
1

7

4
1

decisions

FY2017
Implemented

FY2018Implementing

FY 2019
Considering
implementation

Upgraded activities by life insurers: ESG Investment WG

18

Interviews on progressive actions to enhance initiatives/approaches WG participants invited external experts to host seminars to foster understanding of ESG investing and enhance
initiatives/approaches[Presenters]

Ministry of theEnvironment

Examples of advanced investment approaches

Issues for Japan to adopt ESG investing◆ Establishing approaches• Higher level of engagement achieved using internal
assessments as a PRI signatory• ESG factors reflected in investment policies• Proactively seeking engagement with equity and credit
analysts◆ Companies• Inadequate ESG disclosures• Unclearly link ESG initiatives with corporate value◆ ESG research• Develop in-house evaluation methods for non-financial
information• Quantitative analysis of impact of ESG factors on
corporate value◆ Promoting widespread adoption• Actively participate in global initiatives• Promote ESG investing via seminars◆ Investors• Difficulties recruiting/retaining people with ESG
investment skills• Lack of established methods for evaluating ESG
information (incl. rating agencies)◆ Issues for government• Slower Japanese response to climate change
issues than other countries• Need for system to promote better ESG disclosures

Better ESG initiatives/approaches by companies participating in ESG Investment WG

Upgraded activities by life insurers: ESG Investment WG

19

Initiatives/approaches conducted or considered by WG participants Alongside interviews with experts and sharing of information on initiatives/approaches, WG participants plan to
upgrade initiatives relating to ESG investment from FY2019, led by formulation of policy# of participants(Total of 11 firms in WG)

Examples of progressive initiatives

Initiatives andApproaches• Become signatory to PRI

6

1

4

Policy• Formulate ESG investment policy

4

11社

Organization• Create cross-divisional meeting structures42

Corporate
training• Institute internal ESG investment training

42• Themed investment (*1)
ESG
investment
methods being
used

1

8

• Negative screening (*3)

2

5

2

1

4

At WG
inception(Jul. 2018)

FY2018Implementing2• Positive screening (*4)

*1: Investment in assets relating to defined ESG theme*2: ESG factors reflected in investment process*3: Defining securities for portfolio exclusion from an ESG perspective*4: Building portfolios with high ESG ratings*5: Investment aimed at creating measurable social and environmental
impacts, as well as generating economic gains

1

11• Integration (*2)

• Impact investment (*5)

6

1

2

2

2

FY2019Implementing

FY2019Considering
implementation

20

Contents

1. Social role of asset management by life insurers
2. LIAJ initiatives to date (stewardship activities)• Recommendations for equity market reinvigoration
3. LIAJ initiatives in FY2018 (stewardship activities, ESG investment)(1) Upgraded activities by life insurers(2) Implementation of collective engagement(3) Formulation of ESG investment guidelines(4) Recommendations for companies, investors and governmentImplementation of collective engagement

21

Themes identified as “improving shareholder returns” and “ESG disclosures”

From FY2017, to help reinvigorate the equity market in mid- to long-term and achieve a sustainable society, thelife insurers in the Stewardship Activities WG jointly initiated a collective engagement campaign to increase
corporate awareness.
In FY2018, the campaign targeted a total of 112 companies on the themes of improving shareholder returns (48companies) and improving ESG disclosures (64companies).

Equity market
reinvigoration

Achieving a sustainable
society

Improving shareholder returns

Improving ESG disclosure

Targeted: 48 listed companies

Targeted: 64 listed companies

Companies with strong finances, lowinvesting CF relative to operating CF,
long-term dividend payout ratio of lessthan 30%

Companies in top 300 by market cap
that could be expected to raise
corporate value based on better
integrated disclosures

Dialogue by letter and meetings

Stewardship Activities WG (10 life insurers)

3.(3) Collective engagement

22

Confirmed a degree of success for both themes via mail/phone campaigns
 For both themes, about 30% of companies that were contacted accepted LIAJ recommendations and promised a
constructive review.
 Future dialogue will continue to focus on increasing payout ratios to at least 30% and improving ESG disclosure.

[Reaction of companies contacted]
Improving shareholder returns

Uncommitted

33%

Aiming forpayoutratio of30%+

Improving ESG disclosure

Uncommitted

Will review
improving
disclosure

47%

47%

33%
Reluctant to raise
dividend level

33%

6%Reluctant to improvedisclosure

Further dialogue aims to raise payout ratios toat least 30% and improve ESG disclosures
Note: Based on replies from 40 companies contacted by Stewardship Activities WG life insurers between Dec. 1, 2018 and Mar. 8, 2019

23

Contents

1. Social role of asset management by life insurers
2. LIAJ initiatives to date (stewardship activities)• Recommendations for equity market reinvigoration
3. LIAJ initiatives in FY2018 (stewardship activities, ESG investment)(1) Upgraded activities by life insurers(2) Implementation of collective engagement(3) Formulation of ESG investment guidelines(4) Recommendations for companies, investors and government

Formulation of ESG investment guidelines

24

Positioning of ESG investment guidelines
 To help life insurers consider ESG factors in AM and move towards achieving a sustainable society, the LIAJ has
formulated guidelines in line with its FY2018 Code of Conduct.

LIAJ Code of Conduct (extracts)
6. Engaging AM tailored to life insurance
business
 Ensure AM takes account of profitability,
safety, liquidity and public utility.
 Consider ESG factors in AM to help inachieving a sustainable society.
 Fulfill stewardship responsibilities.

Note: Summaries of original text
7. Promoting efforts to addressenvironmental issues
 Actively volunteer to addressenvironmental issues such as
promoting energy efficiency.
 Raise environmental awareness of
executives and employees througheducation.

8. Promoting social service
activities

 Proactively engage in social
service activities to develop ahealthy and sustainable society.

ESG investment guidelines for AM by life insurers
 Fundamental concept
Taking various perspectives into consideration, LIAJ member firms will promote ESG investment that
contributes to achieving a sustainable society
 Main initiatives(1) Addressing environmental/social issues(2) Help eradicate inhumane weaponse.g. Invest in companies and businesses that are helping toaddress climate change; supply long-term funding fordevelopment of social infrastructure

As a rule, do not invest in any firms involvedin manufacture of cluster munitions

Formulation of ESG investment guidelines

Reference: ESG Investment Guidelines (original text)
1. Purpose
The guidelines provide a fundamental concept and main initiatives for implementation to ensure environmental, social and governance(ESG) factors are reflected in asset management practices so all the Life Insurance Association of Japan (here in after LIAJ) member firms
can help address social issues as part of achieving a sustainable society, in line with the Code of Conduct.
2. Fundamental concept
The life insurance business is highly public in nature, being closely involved with stability and improvement of national living standards,
economic development and the achievement of a sustainable society. Therefore, in addition to profitability, safety, and liquidity, member
firms must also consider the public aspects of asset management.
The idea of taking account of environmental, social and governance factors in investing (ESG investment) has been promoted since theUN published the Principles for Responsible Investment (PRI) in 2006. ESG investment has assumed greater importance since theadoption of the Sustainable Development Goals in 2015.
In this context, it is vital for LIAJ member firms to promote ESG investment (e.g. incorporating ESG factors into investment processes, orinvesting in ESG-themed assets) based on their respective asset management policies and investment approaches, and SDGs, so thatfirms can help to achieve a sustainable society.
3. Main initiatives(1) Contribution to addressing environmental/social issues
Efforts to address environmental issues and develop social infrastructure are an important part of achieving a sustainable society. LIAJ
member firms are striving to address social issues through asset management practices.
(For example, invest in companies and businesses that are helping to address climate change, or supply long-term funding for thedevelopment of social infrastructure)(2) Help eliminate inhumane weapons
Some weapons, especially cluster munitions have been recognized by Japan and other members of the international community as
being inhumane due to the grave harm they inflict on civilian populations. LIAJ member insurers, in principle, do not invest in any firms
involved in the manufacture of these weapons.

25

26

Contents
1. Social role of asset management by life insurers
2. LIAJ initiatives to date (stewardship activities)• Recommendations for equity market reinvigoration
3. LIAJ initiatives in FY2018 (stewardship activities, ESG investment)(1) Upgraded activities by life insurers(2) Implementation of collective engagement(3) Formulation of ESG investment guidelines(4) Recommendations for companies, investors and government

Recommendations for companies, investors and governments

27

FY2018 policy recommendations
 Improving shareholder returns, improving corporate governance, enhancing dialogue, and promoting ESG
initiatives
 Our recommendations in FY2018 for promoting ESG initiatives towards achieving a sustainable society
Recommendations①
Improvingshareholder
returns

Improvingcorporate
governance②⑧

Raise shareholder returns over long term
(dividend payout ratios of at least 30%)

RevisedIncorporate ESG initiatives in medium-term
New management plans

Comp
anies

Improve disclosures/dialogues relating to
Revised long-term investment strategy⑤

Hold dialogues with top management andshare content with management teams⑥

Provide clearer explanations of the proposed
agenda for AGMs⑦

Greater transparency for shareholder voting
processes

Target

Comp
anies

⑩

Promote dialogue on addressing ESG issues
Revised from medium/long-term perspectives③

Improve disclosures about expectations ofRevised external directors and their performance

Improve disclosure of ESG initiatives via
integrated reporting⑨

Set ROE targets adjusted for cost of capitaland target higher ROE levels④

Enhancing
dialogue

Recommendations

TargetInvestors
Promoting
ESG
initiatives⑪
New

Formulate ESG investment policies⑫

Take steps to promote ESG initiatives acrossNew government agencies/departments⑬

Measures to support promoting issuance ofNew green bonds, etc.
Investors⑭
Set policies to promote understanding of need
New for climate change-related disclosures

Survey on initiatives to enhance corporate value[Purpose] To implement recommendations for equity market reinvigoration and achieving a sustainable society based on results of surveys on
initiatives and awareness of companies/investors[Surveyed/responded]: Listed companies 48% (573/1,206 companies); investors 50% (114/230 companies)

Government

ForCompanies

Improving shareholder returns: Recommendation (1)28Increasing shareholder returns over the long term based on dialogue with investors
 81% of investors are unsatisfied with current levels of shareholder returns and dividends
 Expectations of 65% of investors for payout ratios to exceed 30% over long term at odds with ratios of under 30% at majorityof firms
Increase shareholder returns over long term, setting target for payout ratio of1
at least 30% after gauging investor expectations through dialogue[For investors] Satisfaction level for shareholder returns
and dividends (select one)

Satisfactory at nearly
all firms (80%+)

Satisfactory at little tono firms (under 20%)

1%

Satisfactory at not
many firms(20–40%)2%

Satisfactory at many firms(60–80%)[For investors] Desired long-term level of dividend payout ratios (select one)

Reference: Actual payout ratio distribution
10–20%

Desirablelevel for 1
investors

20–30%

40–50%

30–40%

50–60%

65％

60% or over

Level does
not matter

17%

23%

Satisfactory at about half of firms(40–60%)57%“Satisfactory at lessthan half of firms”
totals 81%

Actual payout
2ratios for TOPIX
constituents *

0%

54％

20%

40%

60%

*Source: Nikkei QUICK Note: Loss-making firms excluded

80%

100%

Investors: 114

For
Companies

Improving shareholder returns: Recommendation (1)29Reference: Disclosure of numerical shareholder return (SR) targets
Proportion of firms with official SR targets

Numbers of firms disclosing SR targets
700

100%

600
Undisclosed

80%

70%

66%

66%

66%

59%

57%

54%

90

500

300

40%

91
40
31

54

51

37

Disclosed
43%

35%

2011

2012

2013

34%

41%

2014

2015

DOE *

91

35

35

93

114

99

95

96

46%

306

49%
100

239

244

336

373

405

250

0

0%
2016

2017

Source: LIAJ (based on survey of top 1,200 stocks by market
capitalization)

2018

Payout ratio(less than
30%)

94

200

34%

43
37

37
400

30%

Total payout
ratio, etc.

80

51%

60%

20%

92

2012 2013 2014 2015 2016 2017 2018
Source: LIAJ (based on survey of top 1,200 stocks by market
capitalization)
Note: Firms with multiple SR targets counted for each target*DOE: dividend-on-equity ratio

Payout ratio(at least 30%)

For
Companies

Improving shareholder returns: Recommendation (2)30

Set ROE targets adjusted for cost of capital and target higher ROE levels
 About 80% of investors expect ROE of 8%+, but ROE under 8% at 45% of listed firms
 Failure by about half of firms to calculate cost of capital (return expected by shareholders) partly explains investor
expectation gap

2

Set ROE targets adjusted for cost of capital for long-term improvement in ROE levels[For companies]
Do you calculate a detailed cost of capital?
(select one)

[For investors] Desired long-term level of ROE (select one)

Reference: ROE distribution for listed firms
6–8%

12–14%

Level
does notmatter83％

Actual ROE
levels for2
listed firms

No assessmentof cost ofcapital

10–12%

8–10%

Desirablelevel for1
investors

14% or over10%

Cost of capital
calculated
Less
than
6%

45％

51%

Cost of capitalassessed but
not calculated

38%
0%

20%

40%

Note: Loss-making and financial firms excluded

60%

80%

100%

For
Companies

Improving corporate governance: Recommendation (3)31

Revised

Improve disclosures about expectations of external directors and their performance●

Many investors see room for improvement in the role of external directors, an area where Boards of Directors could be more effective.

●

With about 50% of companies seeing current external director roles as “adequate,” there is a gap with investor views on the issue.

3

Improve disclosures about expectations of the role and output of external directors,
and explain to investors via respectful dialogue[For companies/investors] Are external directors currently doing the
job that is expected of them? (select one)

[For companies/investors] What do you feel are the key issues in making
the Boards of Directors more effective? (select up to three)
Scope of action for non-executive
directors

Adequate/up to expectations

Companies
Investors

Balance of expertise/experience on
Board

3%
More investor feedback to Board
Companies
企業

50%

47%

Appoint more non-executive directors

Inadequate/needs
improvement

Improved Board discussion via better
agenda management

To some extent
1%

Training for directors
Investors
投資家

64%

24%

11%
Better pre-meeting briefings

Investor cannot
evaluate

0%

20%

40%

60%

80%

Not at all
Organizational design

100%
None
Companies
Other

Investors
0%

20%

40%

60%

80%

For
Companies

Enhancing dialogue: Recommendation(4)32

Revised

Improve disclosures/dialogues relating to long-term investment strategy
 About 70% of companies believe cash balances are appropriate, but roughly 90% of investors see current levels of
cash/deposits (at historic highs for Japanese firms) as excessive.

 With long-term investment/financial strategy, companies see capex as vital, while investors emphasize investment inintangibles such as IT, R&D and human capital.

4

Target appropriate cash levels, and improve disclosure/dialogue relating to long-term investment strategy[For companies/investors] How do you see current levels of
cash holdings? (select one)

Companies
企業

69%

27％
Excessive

Investors
投資家

20%

Appropriate

40%

10%
60%

Human capitalCompanies
Investors

Inade
quate

R&D investment

Companies
Investors

2%

IT investment

4%

88%

0%

[For companies/investors] What are important areas toconsider for long-term investment and financial strategy?
(select up to three)

80%

100%

Companies: 573, Investors: 114

Reference: Corporate cash/deposit balances(Trillions of yen)

200

Companies
Investors

Shareholder returns
Companies

Capital expenditure

Investors

Ｍ＆Ａ
Debt repayment
Other

0

(Companies) Undecided

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

100

Source: Financial Statements Statistics of Corporations by Industry (excluding financial firms and insurers)Companies
Investors
0%

20%

40%

60%

80%

For
Companies

Enhancing dialogue: Recommendation(4)Revised33

Reference: Labor costs, IT investment, capex, and R&D spending in Japan/US*Indexed to 1997 values

2.0
Labor costs (US)IT investment (US)Capex (US)R&D spending (US)

1.5

1.0
R&D spending (Japan)
Capex (Japan)
Labor costs (Japan)
IT investment (Japan)

0.51997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Sources: OECD statistics, “Databook of International Labour Statistics” by Japan Institute for Labour Policy andTraining, “2018 WHITE PAPER Information and Communication in Japan” by MIC

ForCompanies

Enhancing dialogue: Recommendation (5)34Hold dialogues with top management and share content with management teams● After inadequate disclosures, investors list key dialogue-related issues as coordinating dialogue content with management
and lack of engagement among senior managers.
● Many investors think Board effectiveness could be enhanced if directors received more feedback from investors.

5 Actively involve senior managers in investor dialogue; share with management teams[For investors] What are the main dialogue-related issues
for companies? (select up to three)[For companies/investors] What do you feel are the key issues in making
the Boards of Directors more effective? (select up to three)
Scope of action for non-executive
directors

Inadequate disclosures

Balance of expertise/experience
on Board

Dialogue content does not reachmanagement

More investor feedback to Board

Companies
Investors

Appoint more non-executive
directors

Non-participation by senior managers

Improved Board discussion via
better agenda management

Lack of IR personnel to manage
dialogue

Training for directors

Mismatch between IR communications
and corporate intentions

Better pre-meeting briefings
Organizational design

None
None
Companies

Other

Other
0%

20%

40%

60%

80%

Investors
0%

20%

40%

60%

80%

For
Companies

Enhancing dialogue: Recommendation (6)35Provide clearer explanations of the proposed agenda for AGMs (dialogue/AGM notice)

Investors emphasize the need for companies to improve explanations of AGM proposals as part of enhancing shareholder voting.



There is a divergence between companies and many investors in terms of the prior resolutions that had substantial opposition, as
investors expect further explanation in advance through dialogue and in the convocation notice if the resolution is to be
resubmitted.

6

Provide better explanations of proposed agenda via dialogue and AGM notices to enhance voting by shareholders[For companies/investors] What do companies need to do
to enhance shareholder voting? (select multiple)[For companies/investors] How should firms handle priorresolutions that had opposition? (select three)Companies
Investors

Better explanations of agenda

Dissenting vote analysis

Earlier dispatch/disclosure of AGM
noticeInvestor dialogue

Avoid holding AGMs on same day

Explain resubmitted motions
better in AGM notice

Online shareholder voting

Modify/withdraw resolutions

Join electronic shareholder voting
platforms

Analyze opposing
shareholders

Earlier disclosure of securities reports

Companies
Investors

Other
0%

20%

40%

60%

80%

Companies
Investors

Companies
Investors

None
Companies
Other

100%

Investors
0%

20%

40%

60%

80%

100%

For
Investors

Enhancing dialogue: Recommendation (7)36Greater transparency for shareholder voting processesMany companies cite investors being overly susceptible to influence of proxy advisory firms or unclear about voting reasons.

Firms want investors to vote on case-by-case basis, and to provide better explanations for voting decisions plus related criteria.
Improve transparency for shareholder voting processes,
including voting rationale and explaining voting decisions to companies

7[For companies] What are the key issues withexecution of shareholder voting? (select three)[For companies] What do you want from investors on
shareholder votes? (select three)
Voting based on case-by-case basis andmotion-specific dialogue

Susceptible to proxy advisory
firm influence

Provide reasons for voting decision

Reasons for shareholder voteresults unclear

Improve disclosure criteria when
exercising voting rights
Improve disclosure results when
exercising voting rights

Beneficial owners unknown

Improve voting-related dialogue

Motion-related investor
dialogue not feasible

Utilize proxy advisory firms properly
Electronic voting

Many shareholders not voting

Better management of conflicts ofinterest

Other

Other
0%

20%

40%

60%

80%

0%

20%

40%

60%

80%

For
Companies

Promoting ESG initiatives: Recommendation (8)Revised37

Improving disclosure of ESG initiatives via integrated reporting

About 30% of firms think integrated reports provide adequate ESG disclosures, but few investors are of the same opinion

Many firms use their website as the medium for ESG disclosure, whereas investors want publication of an Integrated Report

8

Improve ESG disclosure, using integrated reports as well as websites[For companies/investors] What media are used to disclose ESG
initiatives? / Which would you like companies to use?
(select up to three)[For companies/investors] Is the current disclosure of
ESG initiatives adequate? (select one)

Companies
Investors

Integrated Report

Adequate

7%
CSR/Sustainability ReportCompanies
企業

28%

47%

18%
Not
disclosed

To someextent
投資家
Investors

1%

Inadequate

56%

IR materials
Companies

Website42%

Investors

Corporate Governance Report1%
Annual Securities Report
0%

20%

40%

60%

80%

100%
Earnings ReportCompanies
Investors

Other
0%

20%

40%

60%

80%

For
Companies

Promoting ESG initiatives: Recommendation (9)

New

38

Incorporate ESG initiatives in medium-term management plans

Although 98% of firms believe ESG initiatives are important for business, only about 40% put such initiatives into medium-termbusiness plans, with many incorporating the initiatives into CSR policies.



Only 2% of investors view ESG investment in social contribution terms, while 65% want companies to undertake ESG initiatives
as a way of increasing corporate value to generate higher investment returns.
Make stronger business-level commitment by including ESG initiatives
in medium-term management plans to raise corporate value over longer term

9[For companies] Are ESG initiatives important for business? (select one)

[For investors] What is your stance on ESG investment? (select one)

Not/hardly
important at all

55%
Extremely 57%
importantSomewhat
important

41%

2%

Contributes to society andshould be invested in, even if
returns are sacrificed

Should invest without sacrificing returns

0%
0%

20%

40%

60%

80%

20%

40%

100%

Boosts investment returns

Action guidelines

Risk mitigation

Management Philosophy

Fulfills social needs

41%

Improving brand value

Not incorporated

Other
0%

10%

20%

80%

100%

65%

Response to trustee demands

Internal controls policy

Companies: 573

60%

1%

[For investors] What is the purpose of ESG investment? (select up to two)

CSR policies

Medium-term management plan

13%

84%

Do not invest since returns areoften sacrificed
Investors: 114

Companies: 573[For companies] Which management policies incorporate ESG initiatives?
(select multiple)

Cannot evaluate investment due
to uncertainty for returns

2%

30%

40%

50%

60%

Investors: 67

0%

20%

40%

60%

80%

For
Investors

Promoting ESG initiatives: Recommendation(10)Revised39

Promote dialogue on addressing ESG issues from medium/long-term perspectives
 Roughly half of firms think investors only want dialogue focusing on short-term topics.
 Companies see investor dialogue as an area for improvement when discussing disclosure or business strategy,
but not when discussing ESG-related topics with investors.
10

Promote dialogue on addressing ESG issues from medium/long-term perspectives, not short-term topics[For companies] What actions did you take or improvebased on the dialogue? (select multiple)[For companies] What issues are discussed
during dialogues with investors? (select three)

Information disclosure
Only short-term topics
Management/business strategy
Superficial
analysis/understanding

Shareholder returns

None

Financial strategies
Profitability

Unilateral demands/proposals
towards the company

Environmental/social (E/S)

Mostly formal box-ticking
exercises

Related to external directors(workforce, independence)

Proposals ignoring otherstakeholders

Anti-takeover measures
Malfeasance response

Other
No actions taken
No dialogue

Other

0%

20%

40%

60%

0%

20%

40%

60%

For
Investors

Promoting ESG initiatives: Recommendation (11)

New

40

Formulate ESG investment policies

About 65% of investors are involved in ESG investment, but about 20–38% of those have not formulated those policies andother measures.

This must be addressed as part of promoting ESG investment, since policy formulation is a minimum requirement for PRI
signatories.

11

Promote ESG investment and upgrade on ongoing basis by formulating related policies and other measures[For investors] Are you implementing ESG investment?
(select one)

PolicyNo

33%
3%[For investor] Have you formulated an ESG investment policy or
established a team to promote it?
*Question directed only to investors involved in ESG investment

No policy 38％

Policy exists 62％

Yes
No team64%
Team exists 80%

Team

20％

Under
consideration
0%20%

Reference: PRI signatory minimum requirements

 ESG investment policy in place ESG investment manager appointed
 Clear senior management commitment and responsibility to ESG investment

40%

60%

80%

100%

For
Government

Promoting ESG initiatives: Recommendation (12)

New

41

Take steps to promote ESG initiatives across government agencies/departments
 To promote corporate ESG initiatives and investment, both firms and investors want the government to improve
the system for disclosures and foster cooperation between government bodies on related policy planning.
 Multiple governmental discussions and guidelines on ESG promotion currently exist at each body.
12

Create cross-sectional policies within the government to promote ESG disclosures and investment[For investors and companies] What do you want government
authorities to do to promote ESG initiatives and investment?
(select up to two)

Ministries/Agencies

Companies

Improved systemfor disclosure

Ministry of theEnvironment

Investors
Companies

More cooperation between

Reference: Government bodies and guidelines
in ESG promotion area

Financial Services
AgencyInvestors

Recognize exemplary firms
via awards

Ministry of
Economy, Trade,and Industry

ESG Initiative Promotion Council
High Level Meeting on ESG Finance
ESG Finance High-Level Panel
The Council of Experts Concerning the
Follow-up of Japan’s Stewardship Code andJapan’s Corporate Governance CodeForum for Integrated Corporate Disclosureand ESG Dialogue
SDG Management/ESG Investment StudyGroup
TCFD Study Group

Establish a hotline
Investors
Other

Ministries/Agencies

ESG Initiative Promotion Guidelines

Financial Services
AgencyGuidelines for Dialogue Between Investors
and Companies

Ministry of
Economy, Trade,and Industry

Guidance for Collaborative Value Creation

Companies

0%

20%

40%

60%

80%

100%

TCFD Guidance

For
Government

Promoting ESG initiatives: Recommendation (13)

New

42

Measures to support promoting issuance of green bonds, etc.


Annual investment of ¥1.5 trillion* is needed globally to achieve the Paris Agreement 2030 targets; the Japanese market for green
bonds remains small despite government efforts to promote it. (*UNFCCC estimate)To promote issuance of green bonds, etc.*, many firms and investors believe action is needed to build trust and awareness in thesystem, with financial incentives such as preferential tax treatment or interest subsidies available. (*JSDA uses the term ‘SDG
bonds’ to include green bonds and social bonds)

Prepare tax policies and build market awareness to promote issuance of green bonds, etc.

13

Reference: Total green bond issuance[For companies/investors] What is necessary to promote issuance ofgreen bonds and social bonds? (select up to two)

(Trillions of yen)

20
15Greater market
awareness/trust

Global(except
Japan)
グローバル（日本除く）
Japan
日本

Better related
financial incentives

10
5
0

0.03
2014

Companies
Investors

0.06
2015

0.07
2016

0.22
2017

0.52
2018

Source: The Green Bond Issuance Promotion Platform
Note: Conversion at US$1 = ¥110

Reference: Government actions to promote green bonds

Green Bond Guidelines (Mar. 2017)
Requirements for green bond issuance (how to manage
funds raised, secure external review, etc.)
Support structure for green bond issuanceIssuance subsidies for green bond issuers (for external
review/consulting costs, etc.)

Companies
Investors

Social evaluation framework
for bond issues
Cost subsidies(issuance/administration)
SDG bond issuer database

Not sure
Investors

Other

Companies

0%

10%

20%

30%

40%

50%

For
Government

Promoting ESG initiatives: Recommendation (14)

New

43

Set policies to promote understanding of need for climate change-related disclosures

Climate change is a critical issue requiring a response from all of society, as shown by the Paris Agreement and international debate.

The Taskforce on Climate-related Financial Disclosures (TCFD) recommends disclosure of information related to climate change, andthe Japanese government fully supports the taskforce’s efforts.

Yet about 30% of firms and investors do not know much about the TCFD, and there are still many instances of companies andinvestors making few or no climate-related disclosures.
Share best practice and set policy to promote understanding of climate-related disclosures

14[For investors] Are you considering using TCFD-style
climate-related disclosures in the evaluation of firms
or for dialogue? (select one)

[For companies] Are you considering TCFD-style climaterelated disclosures? (select one)
Studying adoption
Already
disclosing

Planning toconsider disclosure No plans

Not informed enoughon the TCFD

Under
consideration
Plan to consider

for disclosure

4％ 13％

0%

Not informed enoughon the TCFD

33％

20%

17％

40%

60%

33％

80%

22％

100%

0%

31％

20%

40%

Planning not to use

17％

60%

30％

80%

100%

Reference: Paris Agreement

Reference: Taskforce on Climate-related Financial Disclosures(TCFD)

 An international framework adopted in Dec. 2015 for action on
climate change with aim of restricting global warming to no
more than 2˚C relative to pre-industrial levels

 Taskforce set up under Financial Stability Board (FSB) in response torequest from G20 finance ministers and central bank governors
 Issued recommendations in Jun. 2017 on corporate disclosure offinancial risks and opportunities relating to climate change