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sustainable japan

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ESG is a ‘mega-trend’ we can’t put off: fund manager
ESG Talk
HIROKO NAKATACONTRIBUTING WRITER

Climate change is an issue that urgently
needs to be addressed, even though many
countries are facing challenges to theirenergy security after Russia’s invasion of
Ukraine, according to a top investment
manager.
“Some people say it’s not the time to careabout an ESG [environmental, social andgovernance] approach. But ESG is such anurgent issue that we can’t put it off anymore.
It is a mega-trend that we can’t turn around,”said Noriaki Kurose, president and representative director for Schroder Investment
Management (Japan) Ltd.
Kurose compared opposition to global
climate actions amid the war in Ukraine topeople arguing on a ship going down. “Whena ship sinks, it is meaningless for the people
on board to criticize each other,” he said. “Wehave to save the ship first.”
Calls to reduce greenhouse gases and stop
climate change are growing louder as natural
disasters threaten more people almost every
year. Recent clear signs of global warming
shocked the world this summer.
Extreme heat waves set records in many
parts of Europe, with the temperature rising above 40 degrees Celsius in London for
the first time in history. Wildfires raged in
France, Spain, Portugal, Greece and Italy. AFP
reported in August that data from the European Forest Fire Information System showedthat 659,541 hectares had been destroyed, arecord for that point of the year since datacollection began in 2006. Heat waves also
scorched Japan, with Tokyo marking the hottest day for late June in 147 years.
Torrential rain and floods hit many cities in Japan, as well as South Africa, Brazil,
India and many other parts of Asia. Morethan one-third of Pakistan was underwaterat one point, reported CNN, after torrential
monsoon rains — 10 times heavier thanusual — caused the Indus River to overflow,
and it said more than 1,100 people died fromthe flooding over 2½ months starting in the
middle of June.
Actions to mitigate global climate change
have been led by Europe over the past
decade, putting pressure on the UnitedStates and Japan to follow suit. In Japan, thenPrime Minister Yoshihide Suga declared in2020 that the country will become a carbonneutral society by 2050. “In the short term,
the demand for fossil fuel is rising and shareprices for oil companies are surging” after the
war started in Ukraine in February, Kurose
said. “But in the long run, they will have tochange their business models to those supporting decarbonization. If they don’t, theirearnings and share prices will eventually get
hit by the negative impact.”
The war in Ukraine and declining importsof liquefied natural gas — cleaner thancoal or oil — from Russia strengthened thedemand for renewable energy in European
nations, which had already been active intaking steps to stop climate change. Earlier this year, Germany passed renewableenergy laws that set higher targets for windand solar energy. Britain aims to reach netThe Japan Times’
chairperson andpublisher, Minako
Suematsu, andKurose talk about the
impacts of climatechange.
HIROMICHI MATONO

Noriaki Kurose, president and representative director for Schroder Investment Management(Japan) Ltd. HIROMICHI MATONO

zero emissions by 2050, which will require
an increase in renewable energy. The government said earlier this year that it will
launch a new independent body, the Future
System Operator, to help the country meet
the target.
Amid this strong demand, Schroders in
April acquired a 75% stake in Greencoat
Capital Holdings Ltd., one of Europe’s largest
companies for investing in renewable infrastructure, aiming to enhance its position in
global sustainability investing.
Kurose said Schroders set up an ESG
investment team in 1998 and has focused
not just on investment returns but also on

social returns. Gauging companies’ social
impacts is seen as a difficult task at manyfinancial institutions. Schroders createdSustainEx, a tool to measure the costs
that companies would face if their negative externalities were priced, or the boost
if benefits were calculated. SustainEx,
based on about 700 academic papers, thus
enables Schroders’ analysts and fund managers to compare companies’ social impacts
and analyze such costs in their overall
portfolios. For example, analysis basedon approximately 40 externalities showsthat firms in the tobacco and defense
industries have high negative externalities,

while sectors such as internet, telephone
and pharmaceuticals have high positive
externalities.
Tighter regulations to support ESGminded investment also have pushed
financial institutions to further focus on sustainable investing. Last year, the EU adopted
the Sustainable Finance Disclosure Regulation (SFDR), which requires more disclosure
to avoid “greenwashing” by organizations
falsely saying they protect the environment.
Asset managers need to classify their funds
into three categories: Article 8 covers funds
that promote a better environment andsociety, Article 9 covers financial products
targeting sustainable investments, and Article 6 covers funds that are nonsustainable.
The new categories have prompted someinvestor money in Europe to shift to strategies classified under Article 8 or 9. EU-based
financial firms feel an urgent need to apply
the new regulations to prevent money fromleaving their funds.
“Japanese firms are aware of this situationin Europe, but they do not yet feel an urgent
need to follow the regulations because they
are not under pressure to take steps,” Kurose
said. If stricter rules were introduced in Japan
as well, however, that would change thewhole situation, he added.
Kurose said now is the time to further
encourage overseas investors to invest inJapan. There are signs that they are moreinterested in Japanese stocks amid higher
geopolitical risks, triggered by Russia’s
invasion of Ukraine. “Investors have been
re-focusing on Japanese stocks recently. It
strikes me that they are more inclined toJapan from abroad,” Kurose said.
Earlier this year, Schroders set up a property investment team in Japan to launchfunds to invest in Asian real estate, including Japan. The property team also observed
the change in investors’ capital flow shifting to the Japanese market from China andHong Kong due to geopolitical tensions in
China and Taiwan.
“We find the same signs in the Japanese“When a ship sinks, it is meaningless for thepeople on board to criticize each other. We
have to save the ship first.” HIROMICHIMATONO

stock market. It is true that we are receiving more inquiries about Japanese equities
than before,” Kurose said. “I can say that it’sa good chance for the Japanese market.”Asked how Japanese companies canattract overseas investors, Kurose said
one of the key factors in inviting funds
from abroad is whether the firms can differentiate themselves from others, as thehigh level of Japanese firms’ technology isalready well known. “One of the focuses
is whether they can expand into overseas
markets. If they run business only at home,they should let investors know how theirbusiness is unique, profitable and different
from others,” Kurose said. “Meanwhile, ifthey want to attract them with ESG or sustainable business strategies, it would be better to refer to the EU’s SFDR.”
Schroders’ Japan equity team has 20
members and deals in funds worth a totalof ¥1.4 trillion ($12.6 billion), out of which¥800 billion is from overseas. Globally, theinvestment firm handles assets worth a
total of ¥100 trillion, of which ¥2.4
trillion is from Japanese clients’ assets.
The ESG Talk series are interviews with business leaders
who are active proponents of
ESG investing and practices
in Japan.

Local trading companies develop Investing in science, humanity:
circular economies in two areas Lessons from Okinawa instituteSatoyama~Authentic
Japan
EMI MAEDA
CONTRIBUTING WRITER

Minamioguni is a small town with a population of less than 4,000 located in the
middle of Kyushu on the border between
Oita and Kumamoto prefectures in theso-called semi-mountainous area. The
town, nestled in the beautiful grasslandsof the Aso Outer Rim and the headwatersof the Chikugo River, is famous for its clear
waters and hot springs, including Kurokawa Hot Springs, which attracts morethan 1 million visitors annually.
Playing the role of a regional trading company is SMO Minamioguni Co. Ltd., a public-private third-sector organization that is
99% owned by the town. The depopulationof Minamioguni over the past decade has
prompted SMO Minamioguni to work todevelop a sustainable community based on
the citizens’ strong desire to preserve a highquality of rural upland satoyama activities,
scenery and lifestyle. The town has established a regional tourism development
corporation to further develop the Minamioguni Town Tourism Association and sales
at the town’s store for traditional products,
Kiyora Casa.
The company has four divisions: theRegional Trading Company Division, theTourism Division, the Information Dissemination Division and the Future Planning Division. Each aims to maximize
value through collaboration with theothers and to “acquire and return capitalfrom outside the region,” said Chihiro Abe,

A concept image shows the tentative design ofthe completed Niseko Mirai housing development. NISEKO MACHI

manager of the Future Planning Division.
The company distributes tourist information through its own media, SMOMO,
and offers initiatives to ensure that visitors can continue to engage with the town
after their visit. Moreover, it provides
not only food products but also productsthat can support the local community,
called “thoughtful return gifts” that it gives
back to taxpayers. The company also has
worked diligently with local businesses
to develop high-value products, and tax
revenues have increased significantly
through such product development.
Despite the coronavirus disaster, sales at
the Kiyora Casa exceeded ¥110 million($770,000) in fiscal 2020.
SMO Minamioguni has invested thecapital accumulated through these activities into new resources. It has also offeredinternships letting young people in their
20s from other areas easily enter the region.
In terms of giving back to the community,
it has launched platforms such as the job
sites Shigoto Convenience Store and Furusato Kengyo to help diverse people realize
their desired ways of working and living.
SMO Minamioguni aims to grow the economic cycle and capital for sustainable
satoyama activities in the town.

Niseko, a sustainable town

Niseko Machi Co. Ltd. is a company thatworks to make the town of Niseko in
Hokkaido a sustainable town with a circular economy rooted in the community.
The Niseko area is an attractive resort
with a concentration of world-class highend hotels. It straddles the three townsof Kutchan, Niseko and Rankoshi. Efforts
to make it an environmental model havebeen ongoing since 2014. In 2018, thetown of Niseko was selected as one ofJapan’s “SDGs future cities,” a municipality that will make efforts and proposals
for achieving SDGs. The town has beenworking on the development of residential areas, centered on the NISEKO Lifestyle Model Project. The project is basedon living in harmony with nature while
effectively utilizing tourism resources andconsidering the environment. In 2020,
Niseko Machi was established throughpublic-private investment due to theneed for an entity to implement this project. “Our main focus is to create a new

ESG/SDGs
TIMOTHY SCHULTZCONTRIBUTING WRITERSMO Minamioguni organizes valley charter
trips as part of tourism measures to promote
the area. SMO MINAMIOGUNI

town from the three axes of a sustainableeconomy, society and environment,” said
Kento Tanaka, director of Niseko Machi.
The company is creating the Niseko
Mirai housing development for a maximum of 500 residents from scratch. This
project works on “evolving community
development” over the next 10 years bylistening to residents’ voices and solving
their problems with daily life. The plancalls for comfortable living even in winter,with low utility costs in energy-efficienthousing complexes without burdens likesnow removal. In addition, Niseko is atown with a gradually growing population
and a low vacancy rate. Therefore, many
people working there commute from outside the town. Resolving these issues is the
background behind developing Niseko
Mirai. Four construction zones in thedevelopment are planned, with the firstbuilding from the first construction zone
to be completed in the next fiscal year.
Life in satoyama areas is about adding new value to things of natural origin,transforming them into sources of enduring economic benefit. It is hoped that
local trading companies — key players incircular economies that are creating sustainable, recycling-oriented regions — willfurther develop the richness of satoyama
areas.
This section, “Sustainable Japan,” features
issues related to the environment and asustainable society while highlighting thesatoyama activities of companies and other organizations.
For more information, see
https://sustainable.japantimes.com/satoyama

Among the hundreds of meetings that takeplace during the busy United Nations General Assembly, which this year began on
Sept. 13, one of the most interesting is theannual Science Summit.This year manyof the sessions were held remotely, whichallowed one of the most interesting leaders inJapan, Peter Gruss, the president and CEO of
the Okinawa Institute of Science and Technology (OIST), to join the session “Investingin Science, Investing in Humanity.”
He was interviewed for this session by
Tomoko Otake, a senior writer for The Japan
Times who often covers science and technology. Their discussion covered a crucial challenge for the advancement of science: How
can Japan’s universities and government use
investment to foster innovation?
This is a challenge well known to Gruss,
who started his career as a renowned scientist before switching tracks to become ascience administrator, eventually leading the
Max Planck Society of Germany for many
years. It was there that Gruss became an
innovator and lifelong proponent of what is
termed “high-trust funding,” through which
promising researchers are given five-year
grants to explore their fields. The results at
Max Planck were striking: multiple Nobelwinning discoveries and a decade of industry-changing patents. Gruss’ mission at OIST
has been to establish the same culture.
Otake’s first line of questioning concerned
the COVID-19 pandemic, which saw scientists developing vaccines faster than everbefore. What had the pandemic revealed
about the nature of scientific research andfunding? Gruss pointed out that messenger
RNA was discovered in the 1960s by a groupof scientists including Sydney Brenner, wholater became one of the founders of OIST, but
only after decades of research were the startups Moderna and BioNTech able to develop
the first mRNA vaccines against COVID-19,
building on all the innovations from publicly
funded university researchers. His point: “Inmodern research, sometimes it can take 60
years until we can finally utilize those six
decades of research.”
Unfortunately, Japan’s methods and levels of research funding have fallen to new

PAGE: 7lows. Otake pointed
out that Japan is
the third-largest
economy in theworld, yet still has
not developed its
own mRNA vaccine. Why? Gruss’
answer was friendly
You can watch this and other UNGA77 seminars at a later date atbut blunt: “It doesn’tsciencesummitunga.com. THE JAPAN TIMES
matter that Japanis the third-largest economy. What matters
experts. Not retired professors!”is the dynamic and innovative skill of that
Gruss also pointed out a simple reason
economy. And sadly, Japan has lost its innowhy 62% of OIST professors are non-Japvative capacity.” He followed this statement
anese, as opposed to only 5% for Japanesewith a shocking figure: Despite the tremenuniversities overall: “We are able to recruit
dous growth rate of venture capital funds
such great scientists because of our high-trustin Japan in recent years, the size is no bigger
funding and competitive salary.”
than 3% of what is available in the U.S.
Finally, he described OIST’s ongoing
This led to a broader question from Otake:efforts to recruit female scientists as a model
If Gruss had a magic wand to change thefor other universities. “The minimum that
institutions in Japan, what would he do?
must be delivered is a salary. You also need
His answer was long, covering the areas
adequate child support at the university. Ifof high-trust research grants to the youngest
you know that your young children are welland best minds in Japan, leadership reformtaken care of, you feel comfortable. At OIST,at universities that focuses on merit andthis child care is on-site. You can look at yourstrategy, and more support for researchers
kids, you can even walk over during a breakstarting families. The hard news: None of theif need be. Life is more than just research. So if
above is common in Japan at all. The good
we want to further this change, we must pronews: It is already happening at OIST, and if itvide the adequate infrastructure.”
can happen there, that proves that it is posThe Science Summit’s session exploredsible in Japan.
how investment in science is actually anFirst, Gruss described high-trust funding:investment in humanity. Gruss and Otake’s“In Japan, we have mostly low-trust fundwide-ranging discussion focused very muching — competitive grant funding. Instead,on the human side of this question. Scienyou must give the money to the best minds
tists are not monks; they are highly trained
and let them roam freely in their fields. This
workers who must be recruited, rewarded
has been shown to be the most efficientand cared for. The government’s support ofway to create breakthroughs and fundathese scientists is not a subsidy; it is a careful
mental research.” He also pointed out thatinvestment, modeled on past successes andthese grants must be given to the younger
hopeful for future discoveries. In the parascientists. “Look at the Nobel Prize windise islands of Okinawa, Gruss is doing justners — most of their great work was donethat … and more. There, foreign students andbefore they were 40. How many of Japan’s
professors work alongside Japan’s brightest
best minds are now all stuck being assistants
minds. Across the hall, venture capital firms
to professors, when they could be doing theare funding startups, while across the camgreatest work of their lives?”
pus a child care center supports careers andSecond, Gruss covered the anemic world
equality. OIST is proving such things are posof Japanese universities. “The Japanese unisible in Japan. It is up to the rest of the counversity system needs to be reformed at thetry to listen.
governance level to have a clear separation
between staff and a board of governors with
Scan the QR code to read thean exclusive role of supervision and strategy,
full article about the UNGA
a senior management team staffed by prosummit, as well as other stofessionals from all kinds of areas — businessries related to the environleaders, technology experts, management
ment and sustainability.