Engagement
We engage in constructive dialogue with companies to promote their continued value creationand sustainable growth

Basic stance on engagement

1

Engage in dialogue
with a cordialand constructive
attitude2

Work to understand non-financial
information, including companies’
efforts to address ESG issues, andthe strategies and philosophiesbehind them3

Listen to the views of
portfolio companies
on the efficient use ofcapital, and communicate
our thoughts

4

When a serious scandal or
accident has occurred, promotesound management by hearing
the causes and measures toprevent recurrence

Our Idea of Constructive Dialogue with Portfolio Companies
We have established a basic policy for engagement as
part of our responsible investment policy formulatedby the Responsible Investment Committee, the highest
decision-making body for responsible investment.
We believe that engagement, or constructive

59

Responsible Investment Report 2023

dialogue with portfolio companies, starts with athorough understanding of the target company and its
business environment as well as its future. We also view
engagement as one of the most powerful means to fulfill
our stewardship responsibility.

We carry out our engagement activities based on the
Basic Policy for Responsible Investment Management
established by the Responsible Investment Committee
and the priority engagement topics determined basedon this policy.
As shown in the figure to the right, our priority
engagement topics cover a wide range, from ESG
to business strategy and financial strategy. The
Engagement Department Meeting is the body thatconsiders and establishes engagement activity
policies (engagement goals) that contribute toincreasing the corporate value of each portfolio
company, referencing these priority topics. This
meeting is held approximately biweekly, with over 20
participants, mainly from the Engagement Department,
including portfolio managers, analysts, and ESG
specialists, and they work to refine engagement goals.
In July 2021, we selected approximately 300
Japanese companies to be priority companies forengagement. Subsequently, we have establishedengagement goals for each of these companies, andduring 2023 we mostly completed the goal-setting
for all 300 companies. We held approximately 1,000
engagement meetings, so we are confident that ourengagement system is firmly in place in terms ofengagement volume.
On the other hand, we believe that we are enteringa phase in which the quality of engagement, or its
effectiveness, will be put to the test.
After setting engagement goals, we use milestones
to manage progress towards achieving them. If wedetermine that progress will be difficult under thecurrent method, we either revise the method, suchas requesting a meeting with outside directors, or
consider escalation measures, such as reflection
in investment decisions and proxy voting. On thefollowing pages, we introduce several cases where
engagement progressed through dialogue withoutside directors. We believe that contacting multiple

Breakdown of 2023 year-end engagement
goals (by priority topics)
Category

Topic

Ratio

Business

Business Strategy and
1 Integrate
Sustainability

2.7%

2 Climate Change

14.3%

3 Natural Capital

1.2%

4 Human Rights Risks

4.9%

Human Capital Possessing
5 Utilize
Diverse Values

5.3%

Well-Being within
6 Realizing
Society

1.3%

7 Redefine the Board of Directors

11.6%

Head of Engagement Department

Yosuke Uchida

Environment

SocialGovernance

Financial
Otherscommitment to capital
8 Strengthen
13.6%
efficiency
explanation of financial
9 Rational
strategy

11.6%
33.4%

As of December 2023

2023 Engagement Meetings
stakeholders in this way to encourage change in acompany is important.
The roles that companies are expected to play inareas such as human rights due diligence, supply
chain management, and well-being are becoming
increasingly diverse. Following the Tokyo Stock
Exchange’s request in March 2023, companies’
awareness of capital efficiency has changed. In linewith these social changes, we are also graduallyadding to and updating our engagement goals.

Businessstrategy
12%

Proxyvoting-related
8%

Total numberof engagement
meetings

Governance32%

911 meetings
Total number ofengagement topics

Financialstrategy

16%

2,086 topics

Social17%

Environmental
16%*B reakdown of engagement meetings throughout 2023
(number of topics)

60

Measuring the Effects of Engagement Activities
We are currently promoting measures to measure theeffectiveness of our engagement activities.
The chart on the right shows progress towards
the milestones for 2023. We set engagement goals
in advance, such as “growth strategy formulationand disclosure” and “board of directors’ diversity
enhancement,” and then proceed with engagement
activities. Milestone management measures the progressachieved by these activities. As of the end of 2022,
the status was mostly “2. Shared recognition,” but asof the end of 2023, an increasing number of cases haveprogressed to corporate action such as “4. Implementationof countermeasures” and “5. Completed.”
In addition to checking the progress of individual
engagement activities in this way, our Innovation Lab
Department is also measuring the effectiveness of ourengagement activities as a whole.
Specifically, the Innovation Lab Departmentcompared companies we engaged with from 2016 to2022 to companies we did not engage with, and has
assessed the outcome of engagement by comparing
changes in companies’ business performanceand corporate actions (such as strengthening ESG
initiatives and enhancing dialogue with the stock
market, etc.). The figure below shows the findings ofthe analysis. We found statistically significant trends
among the companies with which we engaged,
including, but not limited to, a decrease in the ratioof cross-shareholdings, the elimination of takeover
defense measures, an increase in the percentage ofshares owned by executives, and an increase in theratio of female and outside directors.
Furthermore, starting in FY2023, this analysis not
only includes whether or not we engaged with acompany, but also how many times we engaged aswell as the specific details of the engagement and theassessments of those engagements. This analysis foundthe trends shown below to be statistically significant.

Status of Milestone Management*
As of December 31, 2022
5 Completion

204

Company implements

4 countermeasures

24

Company formulates

3 countermeasures

126

Company shares a
2 recognition of the issues
Communicate issues to
1 portfolio company

314
266

As of December 31, 2023
5 Completion
Company implements
4 countermeasures
Company formulates
3 countermeasures
Company shares a
2 recognition of the issues
Communicate issues to
1 portfolio company

303
42
138
262
189

*Check the progress of milestones regarding engagement goals that have been set as of the end of December 2022.
Completion: C ountermeasures have been announced via press release, etc., and it is certain that the countermeasures will be implemented (For completions, the cumulative figure is until the end of 2023. The number of completions in
2023 alone was 99)
Company implements countermeasures: Countermeasures have been announced via press release, etc., but it is determined that it is necessary to examine that the company completes implementation of the countermeasures
Company formulates countermeasures: It has been confirmed at a meeting that the company is studying measures to address the issues we identified
Company shares a recognition of the issues: The company shares a recognition of the issues that we identified (the company understands the issues and has begun studying them)Communicate issues to portfolio company: We have communicated to the company the areas that we think are issues to be addressed

Outcome of two-period model
Treatment group

Control group

Outcome variable

Engagement effectChange in control
group
Time

We define the engagement effect as the difference in the change in the outcome
variables between the group of companies we engaged with (treatment group) andthe group of companies we did not engage with (control group).

61

Responsible Investment Report 2023

 ompanies that we have engaged with repeatedly tend to have improved capital efficiency the more weCengaged with themCompanies with which we have conducted governance-related engagement tend to have increased executive
officer shareholding ratios and have introduced performance-linked compensation.
We are confident that the results of this analysis confirm the importance of continuous engagement activities, which issomething we value. Meanwhile something we will continue to analyze from last year is the issue of endogeneity, whereby
effects cannot be said to be the result of our engagement activities alone, and that companies with poor governancesystems are more likely to be the subject of engagement. We will continue to accumulate data and measure effectiveness,
including examining this issue of endogeneity, and will utilize these data to improve future engagement activities. This
analysis and verification was supervised by Professor Yumiko Miwa of Meiji University, who provided beneficial comments
during the process.

Engagement on SBT (Science Based Targets)
As part of our climate change engagement, we encourage our portfolio companies to become SBT-certified.
SBTs are GHG emission reduction targets set by companies for the next five to 10 years consistent with the levels required by the Paris Agreement. SBTs
are certified by the SBT Initiative, an international organization established by the CDP, UNGC, WRI, and WWF.
As companies and the overall supply chain are being asked to take steps to reduce GHG emissions, an increasing number of companies are working toobtain SBT certification for a variety of reasons, including boosting their external assessments and complying with demands from business partners.
In 2023, more than 700 Japanese companies had obtained SBT certification, and as of the end of December 2023 the number of Japanese companies thathave obtained SBT certification is the highest in the world.

Engagement with Kyushu Electric Power Co., Ltd. on obtaining
SBT certification
In April 2021, Kyushu Electric Power Co., Inc.
(“Kyuden”) formulated the “Kyuden Group Carbon
Neutral Vision 2050,” and declared that as afrontrunner in carbon-reduction/decarbonization
efforts, it will aspire to become a corporate groupthat will spearhead Japan’s decarbonization initiatives
from Kyushu. Additionally, Kyuden’s zero-emission/FIT
power supply ratio is 58% (FY2019), which is top-classamong electric power companies in Japan.
The ratio of fossil fuel-based electricity generation in
Japan is generally seen as high, but Kyuden is eager torestart nuclear power plants as soon as possible andto introduce renewable energy. Kyuden’s management
team and IR Department have actively promoted these
efforts through IR briefings and facility tours.
We believe that SBT certification is desirable in order
to both educate investors and other stakeholders
about Kyuden’s low-carbon and decarbonization
efforts, and to increase its corporate value, and since2021 we have been encouraging Kyuden to obtain SBT
certification at IR and ESG meetings.
There were not many cases around the world of
SBT certification being obtained by electric powercompanies, and it was initially believed that obtaining
SBT certification would be very challenging, but inMarch 2023, Kyuden’s GHG emissions reduction target
became the first among a major Japanese energy
company to receive SBT certification.
We think that our encouragement was one of thefactors that led to Kyuden receiving its SBT certification.

Number of SBT-certified companies by country(As of December 2023)

0

200

400

600

800

Japan
U.K.
U.S.
Germany
SwedenFranceDenmark
China
India
Netherlands

62

Engagement Activities Targeting Human Rights Risk
Management, Utilization of Human CapitalWith labor shortages becoming a concern worldwide, companies are being asked to utilize a diverse range of human capital. Expanding human capitalpossessing diversity across gender and nationality is expected to contribute not only to an increase in the quantity of human resources, but also to ahigher level of quality of human resources. On the other hand, it is also important to monitor whether human resources are being treated and evaluatedappropriately. As supply chains become globalized and intersect with different regulations and customs, human rights issues can arise. We closely
monitor the human rights risks of portfolio companies and encourage them to conduct human rights due diligence.
yt
iorit opics
Pryt
iorit opics
Pr

5

Utilize Human
CapitalPossessing
DiverseValues4

Target company

Semiconductor company A

Communicate
issues toportfolio
company

Company
shares arecognitionof the issues

Company
Company
implements
formulates
countermeasures countermeasures

Milestone
progress

Period3 year (Most recent interview: June 2023)*

Completion

Engagement
goals

Formulateand executemeasures related
to the active
participation of
women

Overview of engagement
NAM’sconcerns

As competition for human resources intensifies throughout the semiconductor industry, this company has a
low ratio of female employees, so we have begun engagement with the company, believing that promoting
the active participation of women will help resolve the issue of personnel shortages.

targets and enhance its measures.
When we checked on the current status of the measures, we learned that roundtable discussions andcompany introduction materials are being expanded with the aim of strengthening the recruitment of female
engineers. The company now has a policy of expanding its measures based on the opinions of outside
directors who have research findings with respect to promoting the active participation of women, and wewill support this policy.

*The period is the number of months from the start of interviews until December 2023

63

Responsible Investment Report 2023

Retail company B

Communicate
issues toportfolio
company

Company
shares arecognitionof the issues

Company
formulates
countermeasures

Company
implements
countermeasures

Completion

Engagement
goals

Milestone
progress
Performing
human rights
due diligence
Period1 year 8 months (Completed: October 2023)

Overview of engagement
NAM’sconcerns

When we urged the company to set targets for promoting the active participation of women and develop
measures to achieve the targets, the company commented that it wanted to take a proactive approach

Engagement
to doing this. Subsequently, the company announced targets for the ratio of female managers, but these
progresstargets were a bit conservative compared to its industry peers, so we asked the company to revise its

Current
statusTarget company

Human rights
risk

As the retail industry increasingly utilizes foreign workers, issues with the working environment
have been identified. The company in question is a large retailer that operates a chain of
convenience stores both domestically and internationally, but we could not confirm the status of
their consideration of human rights risks in their integrated reports and other disclosures, so webegan engaging with the company.
When we asked the company about the status of its management of human rights risks for foreign
workers, we found that while the company has established a foundation that contributes to supporting

Engagement
the lives of foreign workers in Japan, the company told us that it may not be able to grasp the actual
progresssituation at its overseas franchise stores. We encouraged the company to conduct human rights due
diligence to ascertain human rights risks throughout its supply chain.

Current
statusWe have subsequently had multiple conversations with the company. The company disclosed the results of
its supplier human rights due diligence and risk mitigation policies in its 2023 integrated report.

Engagement Initiatives
We collaborate with numerous international engagement initiatives that address social issues.
One of these engagement initiatives is the Access to Medicine Index (ATMI).
This initiative aims to promote improved access to healthcare in low- and middle-income countries, and we are working as a lead investor in collaborative
engagement with two major Japanese and American pharmaceutical companies, including Daiichi Sankyo Co., Ltd.
Overview of initiative
 esearch findings published by the Access toR
Medicine Foundation.

Status of dialogue
ATMF he Access to Medicine Foundation has beenTworking with the pharmaceutical industry for morethan a decade, with a primary goal of improving
access to health care for the billions of people
in low- and middle-income countries who areunderserved by modern medical advances.

Nomura Asset Management
We have been appointed by ATMI as the lead investor
to conduct engagement activities with your company.
ATMI’s assessment of your company is not high.
We realize that your company is focusing on accessto medicine, and we think that you can improveyour assessment by making improvements to yourexplanations and disclosures.

It is possible that they do not understand thecircumstances unique to our company. For example,
our company outsources some of our overseas sales
to a UK pharmaceutical company, and it seems that
our efforts to improve access to medicine are notbeing evaluated in this respect.

Regarding this issue, we would like to contact ATFM
as well. Meanwhile, there may be other issues that
could be considered, such as formulating a companywide access plan.

Since each region has different characteristics, wehave so far kept cross-regional rules to a minimum andestablished detailed rules for each region. However,there might be room for us to make improvements withrespect to the content and methods of our explanations,and we will look into this.

Participating companies
 42 institutional investors around the world ($22 trillion
1
in assets under management) refer to ATMI.
 omura Asset Management became an investorsNsignatory in 2019. Representing the investors, we
handle collaborative engagement as lead investor for
two large pharmaceutical companies in Japan and the
US (Among Japanese investors, only two companies,
including our company, act as lead investors.)

We want to reconsider
the evaluation of such
pharmaceuticals.

Our activities as a part of the initiativeIn 2021, we co-signed a statement in support of a fairand equitable response to COVID-19.
In 2022, our UK office was a co-lead investor for alarge UK pharmaceutical company.
In 2023, our UK office became the lead investor for
a US pharmaceutical company, and our Japan officebecame the lead investor for Daiichi Sankyo Co., Ltd.

DaiichiSankyo’scomment

Daiichi Sankyo Co., Ltd.

(Target company of engagement)

We held a meeting with Daiichi Sankyo Co., Ltd. The
company also considers ATMI to be an important index,
and it appears that the company wants to improve its
evaluation. On the other hand, the company appears
to have special circumstances, such as outsourcing
the sale of some pharmaceutical products to a UK
pharmaceutical company. It might be better to make anevaluation based on such individual circumstances?

*Periodic assessment revisions by ATMF are scheduled
to be carried out in 2024.

The Group’s strengths lie in our product portfolio and research and development pipeline for advanced cancer treatment drugs,
most notably ADCs.
In order to deliver products to more patients even more quickly, we are leveraging partnerships with major European and US
companies, and in regions with poor medical infrastructure, we are promoting initiatives to expand access to medical care throughpartnerships with NGOs. Through dialogue with your company, we were able to recognize the importance of further disclosure ofindicators related to access to medicine (such as the number of countries medicines are sold in and patient reach), and it also served
as an opportunity for the ATM Foundation to consider the significance of improving access to medicine through collaboration.

64

Engagement Targeting Increased Board Effectiveness
Enhancing the effectiveness of a company’s board of directors contributes significantly to bolstering corporate governance. We believe that the role andresponsibility of a company’s board of directors is to supervise management, and we encourage portfolio companies to transition to monitoring boards. In
our opinion, there are several requirements for a monitoring board, with the most important being the board members themselves. In addition to external
criteria such as independence, we take the skill matrix into consideration, aiming to support the creation of a board of directors capable of supervising thecompany in question.

ytiorit opics
Pryt
iorit opics
Pr

7
Redefining
the board of
directors

7

Target company

Redefining
the board of
directors

Pharmaceutical company D

Communicate
issues toportfolio
company

Company
shares arecognitionof the issues

Company
formulates
countermeasures

Company
implements
countermeasures

Milestone
progress

Period5 years 8 month (Completed: April 2023)

Completion

Engagement
goals

Create effective
Nomination
Committee andCompensation
Committee

Overview of engagement
NAM’sconcerns

The company had an advisory committee that nominated directors and auditors and discussedcompensation, but the committee was chaired by the president, and there were issues with its effectiveness.

Engagement
progress

The role and responsibility of the board of directors of this company is to supervise the senior management
team. When we expressed concern that the company’s president, as the chairman of the board, is leading
the considerations of nominations and compensation, which are the core decisions of the board of directors,
the company’s only comment was that the majority of the board members are outside directors and there
were no problems with the board’s effectiveness.
Subsequently, we held two interviews with outside directors of the company, and expressed concerns
about this structure in which the president self-evaluates nominations and compensation, and we discussed
the importance of the nominating function when formulating a succession plan for the president.

Current
status65

In April 2023, the company established a new Nomination and Compensation Committee. The Committee
comprises the director in charge of general affairs and five outside directors, with an outside director serving
as the Committee chair.

Responsible Investment Report 2023

Target company

Semiconductor company E

Communicate
issues toportfolio
company

Company
shares arecognitionof the issues

Company
formulates
countermeasures

Company
implements
countermeasures

Completion

Engagement
goals

Milestone
progress
Realizing a diverse
and effective
board of directors
Period2 years 1 month (Completed: June 2023)

Overview of engagement
NAM’sconcerns

The company is a semiconductor manufacturer that operates globally, but there were issues with thediversity of its board of directors, including the absence of any female directors and only one outside
director. In addition, as the company expands its overseas business going forward, we believe that it needsa director who has expertise in this business, so we began engaging with the company.
We informed the company that we believe there is an issue with the diversity of the board of directors,

Engagement and that as it expands its overseas business going forward, it may need people suited for overseeing thebusiness, such as non-Japanese directors, and the company commented positively that it wants to consider
progress
personnel selection in order to improve diversity and effectiveness.

Current
statusIn 2022, the company appointed a female director and a non-Japanese director with management
experience at a foreign-capital semiconductor manufacturer. The following year, in 2023, the number offemale directors was increased to two, and the diversity and effectiveness of the board of directors has
greatly improved.

Fixed Income Engagement
Chief Credit Analyst

Shuichi Goto

Characteristics of fixed income
engagement

Dialogue extending beyond
conflicts of interest

In our domestic credit investment engagement
activities, we are focusing our efforts not only
on engagement by credit analysts alone, but on
engagement in collaboration with our equities division.
We hold joint meetings approximately 100 to 150 times
a year, in which equity analysts participate in debt IR
events hosted by the fixed income division, or credit
analysts participate in meetings hosted by the equity
division, and equity analysts and credit analysts work
together to engage in dialogue with portfolio companies.

The interests of fixed income investors and equity
investors are generally thought to be in conflict with
one another, but by having a common value standardof increasing the portfolio company’s corporate value
during engagement, we are able to have constructive
discussions that go beyond the bounds of the conflictof interest between fixed income and equity.
Specifically, in domestic fixed income engagement,
instead of simply asking for a company to maintain or
improve its finances and ratings, there are times when
we ask the company to explain its philosophy on optimal
capital structure if the company has surplus capital.
In addition, we support policies that increase financial
leverage if it is appropriate from the perspective of
increasing corporate value. Even if financial leverageincreases and the spreads widen in the process of
pursuing an optimal capital structure, we believe that
this will be a positive for investment performance from along-term perspective based on higher bond yields.
In domestic fixed income investment, we invest inissues that are resistant to downside risks from a longterm perspective, as we look to “discover trees thatcan withstand storms,” and our engagement is basedon this concept.

Conflicts of interest between equity
and fixed income are decreasing overthe long-term
Equity Analyst

MakotoImamuraShareholder
value

fixed income
value

short term

Corporate
value

long term

Comment from equity analyst Makoto Imamura
Equity analysts and credit analysts have different approaches whenit comes to corporate analysis, investment periods, and financial
leverage. Therefore, if equity analysts and credit analysts engage
separately with portfolio companies, the engagement goals we seek
from them tend to become vague and unclear. We recognize thathaving equity analysts and credit analysts communicate with portfolio
companies based on the common goals of increasing corporate value
and achieving sustainable growth is critical to enabling lively andconstructive discussions.

Examples ofEngagement

Financial institution F

Although the company had achieved its announced shareholders’ equity ratio target, our credit analysts believed that the company was not
yet sufficiently prepared for downside risks. On the other hand, our equity analysts believed that the company was reluctant to return profits toshareholders even though the company had achieved its capital targets.
Under these circumstances, our credit analysts participated in a meeting with the company’s CFO organized by our equity analysts, anda three-way discussion was held regarding the company’s optimal capital structure. Although no conclusion was reached, we believe thathaving this discussion based on different perspectives led to meaningful dialogue for both parties.

66

Aiming to Improve the Capital Efficiency ofJapanese Companies
In March 2023, the Tokyo Stock Exchange requested
that listed companies take “Action to implement
management that is conscious of cost of capital andstock price.” Following this request, companies havebecome much more cognizant of capital efficiency.
According to an announcement by the Tokyo Stock
Exchange in January 2024, approximately 49% ofcompanies listed on the Prime Market had announced
measures to improve capital efficiency by December 2023.
To improve capital efficiency, one of the most common
measures being taken by Japanese companies thesedays is to bolster their shareholder return policies. ManyJapanese companies still hold more cash and deposits
than is appropriate, and reducing surplus cash anddeposits through enhanced shareholder returns is thefirst step toward improving capital efficiency. However,improvements in capital efficiency that rely solely on
balance sheet reforms will eventually reach a limit.

We believe that in order to improve capital efficiency
over the medium to long term, and in turn increase
corporate value, it is necessary for companies to fosterand strengthen growth businesses, reform their businessportfolios, and have a strong commitment to capitalefficiency from senior management. In our dialogue
with portfolio companies, we not only encourage

Average ROE for Japanese companies*

consideration of shareholder return policies, but also
urge a commitment to enhancing capital efficiency overthe medium to long term, including growth investmentsthat utilize surplus cash and deposits and non-businessassets, reviews of low-profit businesses, setting capitalefficiency targets, and utilizing performance-linked
compensation for directors.

*Aggregate value for companies in TOPIXROE (%)

12
9
6
3
0
1980

1990

2000

2010

2020

2024

yt
iorit opics
Pr

8

Target company

Bolstering thecommitment
to capitalefficiency

Heavy machinery company G
Overview of engagement

Communicate
issues toportfolio
company

Company
shares arecognitionof the issues

Company
formulates
countermeasures

Company
implements
countermeasures

Milestone
progress

Period67

2 years 11months (Completed: February 2024)

Responsible Investment Report 2023

Completion

Engagement
goals

Announcement ofbusiness portfolio
restructuring andstrategy to improve
capital efficiency
based on ROIC

NAM’sconcerns

The company is a conglomerate with multiple small businesses. After examining the profitability of thecompany by business line over the past 20 years, we found that capital efficiency has been declining in
multiple businesses, so we began engaging with the company to check on the company’s future plans for
low-profit businesses.

Engagement
progress

When we asked the company about its plans for its low-profit businesses, the company replied that it was also
aware of this problem. After that, we met with outside directors to confirm the current state of ROIC managementthat the company is advancing, and they shared the problem that although ROIC is being utilized internally by theboard of directors and elsewhere, the external disclosure regarding this is insufficient.

Current
status

The company announced its medium-term management plan until FY2026 at its full-year financial results
briefing for FY2023, and as a part of that, it announced its ROIC target values for each business. At thesame time, it announced that it would be suspending new orders and withdrawing from problematic
businesses, thereby making significant progress in reforming its business portfolio.

Engagement Activities Targeting theAutomobile Industry
The automobile industry has been one of the industries
that has attracted attention since March 2023, when
the Tokyo Stock Exchange requested that listedcompanies take “Action to implement management thatis conscious of cost of capital and stock price.” There
are many companies in the automobile industry that
hold large amounts of cash and deposits, and as shownin the lower left chart, there are a number of companies
whose net cash (which is calculated by subtracting
interest-bearing debt from cash and deposits andsecurities held), account for more than 50% of theirmarket capitalization. There are concerns about adecline in capital efficiency due to holding such surplus
funds on the balance sheet, and when we checkedvaluations, which indicate how the stock market
assesses companies, we found many companies witha PBR of less than 1.0x, which is a market evaluation
lower than a company’s dissolution value.
The sale of cross-shareholdings is attracting
particular attention. In the automobile industry,
relationships between affiliates remain strong,
and there are many cross-shareholdings between
companies that are business partners. As shown in the
diagram on the lower right, not only is there concernthat the interests of minority shareholders will be
neglected due to large cross-shareholdings between
corporate groups, but also that this is causing adecline in capital efficiency in the automobile industry.
As the industry as a whole undergoes major changes
such as the shift to EVs, it is important to consider
how these kinds of non-business assets can be used
to fund promising growth businesses.

Situation for Japanese automakers and parts suppliers

In addition, the automobile industry, which
includes the manufacturing of approximately 30,000
components, covers a wide base and includes global
operations, and thus automakers’ social initiatives
are drawing increasing attention. In particular, asawareness regarding compliance and human rights
increases, automakers must now manage compliancewith respect to working environments and humanrights, not only within their own companies, but also
for their business partners. Additionally, with regards
to diversity and inclusion, the low ratio of women in
management positions is an issue. We believe thatcompanies’ efforts to address these social issues
will have a significant impact on brand value, and weare encouraging improvements through proactive
engagement activities.

Status of cross-shareholdings by main companies in large
automobile groups

2.0

Company holding shares
Automaker
A

1.5

Company whose shares arebeing held

PBR

1.0

0.5

0.0
-100%

-50%

0%
Net cash/market capitalization

50%

100%

Automaker
A

Parts supplier Parts supplier Parts supplier Parts supplier Parts supplier
B
C
D
E
F

8.8%

3.3%

1.3%

0.0%

0.1%

9.5%

2.1%

0.0%

0.0%

1.7%

0.0%

0.0%

0.0%

0.0%

Parts supplier
B

24.7%

Parts supplier
C

24.2%

9.3%

Parts supplier
D

24.8%

7.7%

4.8%

Parts supplier
E

31.1%

4.2%

5.5%

0.4%

Parts supplier
F

42.8%

0.1%

0.8%

0.5%

0.4%
0.0%

68

Engagement activities targeting the automobile industry
Analyst engagement Automobile industry
Based on our concern that cross-shareholdings arecontributing to a decline in capital efficiency in theautomobile industry, we have been talking to companies
in the automobile industry about the need to reducecross-shareholdings, which are non-business assets,
and making growth investments based on this.
Companies took a cautious stance initially, perhaps
because they were concerned about a deteriorationin relationships with business partners that might
result from the sale of cross-shareholdings, but basedon our position as a third party, we have persistently
pushed forward with discussions, including seeking
opinions from companies and their business partners.
Our engagement efforts are beginning to pay off.

We have been discussing cross-shareholdings with
Company H, shown below, as well as the growthpotential and strategies for the OHT (off-highway
tire*) business, which is becoming a strength forthe company. We pointed out that the appeal of the
OHT business, which we gained an understanding ofthrough the discussions with the company, had notbeen sufficiently conveyed to the capital markets.
Subsequently, the company became more proactive inits disclosures, so we are confident that our dialogue
with the company has been constructive.
The elimination of cross-shareholdings is taking
place not only by Company H, but throughout the
automobile industry. In the second half of 2023, there

were a series of announcements from Toyota Groupaffiliates of plans to eliminate cross-shareholdings.
While we are pleased with this development, in
addition to selling cross-shareholdings, we willcontinue to talk with companies about how they can
use the proceeds from share sales to invest in growthand enhance corporate value.
*OHT... OHT (off-highway tire) refers to tires used for agricultural
machinery, industrial vehicles, and the like. In the tire industry,tire manufacturers from emerging countries are increasing theirpresence with low price strategies, but OHT products, which
require a higher level of durability than passenger car tires, areexpected to have solid profitability. Company H entered the OHTbusiness in 2016, completed the acquisition of a major company inthe industry in 2023, and is expanding the scale of this business.

Engagement with Tire Manufacturer H

Senior Equity Analyst

Yoshinori Eguchi

Overview ofengagement
We asked for an explanation
about the future policy forholding cross-shareholdings aswell as the growth prospects
and strategy for the OHTbusiness, which is a
growth business.

Comment from tire
manufacturer H

69

Responsible Investment Report 2023

Response from company

Engagement outcomesWe recognize that cross-shareholdings
are an issue to address. While it will taketime to sell shares, we will continue toconsider this. With respect to the OHTbusiness, we will work on proactive
disclosure that will help people
understand the appeal of this business.

In addition to announcing the sale of a large
cross-shareholding, the company also announced thatthe proceeds from the sale will be used to fund strategic
investments aimed at growth in the OHT business andother areas. Regarding the OHT business, the company
is disclosing senior management’s views on the
profitability and growth potential of the business, aswell as holding briefings on this business.

Our stock price has been sluggish for the past few years, and in 2020, our PBR had fallen to 0.4x. At a meeting with NAM
during this period, you pointed out that the stock market may not be fully aware of how attractive the OHT business is orunderstand our thoughts on allocating assets for growth. Following this dialogue, we held OHT business briefings andenhanced our disclosure of financial results briefing materials. At the same time, our top management did interviews andproactively promoted our company’s growth potential and strategies. As a result, our PBR is approaching 1x. We willcontinue to actively carry out IR activities going forward.

Review of Priority Topics
In July 2023, we reorganized our priority engagement
topics. In response to the growing interest of operatingcompanies in capital cost and capital efficiency, we
will bolster our efforts to improve medium- to long-term
return on capital.
First of all, we have established a new priority
topic, “Rational explanation of growth strategy.” We
will ask portfolio companies to formulate strategies
to achieve medium- to long-term growth, including
business portfolio restructuring, and provide rational
explanations of these. We believe this is central to“management that is conscious of cost of capitaland stock price” as requested by the Tokyo Stock
Exchange. Second, we have integrated “Rational
explanation of financial strategy” with the new priority
Category

Topic

topic of “Strengthen commitment to capital efficiency.”
In addition to financial initiatives such as shareholder
returns and effective use of cash, it is aimed atstrengthening senior management’s commitment
centered on reducing cross-shareholdings andbolstering compensation governance. In addition,
we believe that “natural capital,” which relates tobiodiversity and renewable resources, and “humancapital with diverse values,” which links human capitalmanagement to enhancing corporate value, are topics
that will become pursued in earnest from this fiscal
year onward.
We will engage with companies targeting
improvements in corporate value, centered on the ninepriority topics below.

Topic overview

1

Rational explanation of growthstrategy

Encourage rational explanations regarding strategies to achieve growth(including building the business portfolio)

2

Integrate Business Strategy andSustainability

Demand explanations of business strategies that integrate sustainability.
Including disclosure regarding materiality and risks.

3

Climate Change

Companies are expected to set GHG reduction targets aiming for net-zero,
obtain SBT certification, disclose Scope 3 emissions and amount of GHG
absorption, etc.

4Natural Capital

Demand efforts to address biodiversity and water risk.

5

Human Rights Risks

Ask companies to formulate human rights policies and perform human rights
due diligence as demanded by the public both in Japan and overseas.

6

Utilize Human Capital Possessing
Diverse Values

Demand that companies utilize human capital in line with a growth strategy,
including gender diversity and employee well-being.

7

Realizing Well-Being within Society

Encourage efforts to link solutions for realizing well-being within society withbusiness opportunities.

Governance

8

Highly-effective Monitoring Board

Encourage the transition to an effective monitoring board

Governance,
Financial

9

Strengthen commitment to capitalefficiency

Commitment = incentives through compensation + accountability.
Aims to achieve capital efficiency that exceeds capital costs, including
reductions of cross-shareholdings.

Business

Environment

SocialOthersEngagement activities related to overall business strategy, disclosure,
dialogue, etc.

CEO Engagement
Since 2022, our NAM President and CEO Hiroyasu Koike has
been encouraging Japanese companies to improve their corporate
value through dialogue with companies and outside experts.
By December 2023, he had the opportunity to engage indialogue with the leaders 21 companies, and as a new initiative
starting in 2023, he has also exchanged information with outsideacademic experts and institutional investors who are engaged insimilar engagement activities as we are, as we work to improveand advance the level of our engagement activities.
The content of these dialogue sessions are posted on our
website.
Referencehttps://global.nomura-am.co.jp/responsibility-investment/investors/ex-engagement.html

DentsuGroup

Pursuing Transformation to
Go Beyond Advertising

Representative Executive Officer,
President & CEO of Dentsu
Group Inc.

President and CEO of
Nomura Asset Management
Co., Ltd.

Hiroshi Igarashi

Hiroyasu Koike

We are engaged in in-depth discussions on the background, aims,
challenges, and potential for the growth strategy of Dentsu Group,
which is working to evolve from being a traditional advertising agency toa corporate group that combines marketing, consulting, and technology.

70Global Equity Engagement
We continue to enhance our engagement activities for
global equities as well. Companies are facing many
global ESG issues, and collaboration with overseas
investment teams is essential not only for engagementwith overseas companies but also for engagementwith Japanese companies. Because global equities
encompass a large number of target countries andcompanies, we are leveraging the expertise of ourinvestment teams around the globe, as well as utilizing
outside resources, to optimize our engagement activities.
In 2023 our overseas offices conducted engagement on
a total of 661 topics (the total number of engagements
was 299). We divide engagement topics into a totalof six topics: Business strategy; Financial strategy;
Environmental; Social, Corporate governance; andDisclosure/Dialogue. The investment managers andanalysts in each office decide the engagement topics
and carry out engagement with companies.
Our engagement partner overseas is Sustainalytics,
and we either conduct collaborative engagementwith Sustainalytics or fully outsource engagement to
Sustainalytics (Refer to Page 74). In addition, we also
make use of collaborative initiatives such as the Accessto Medicine Foundation to carry out engagement
alongside other asset management firms on specifictopics (For details, please refer to Pages 75-76).

Example of Engagement at
Overseas Offices
During 1H23, our UK office began a new ESG projectfocused on reducing obesity within the US workforce.
We believe that cutting obesity in the workforce
can lead to tangible financial benefits to employers
from lower absenteeism due to sickness and lower
healthcare insurance costs. Most importantly,

71

Responsible Investment Report 2023

though, we think this is a way for employers to
improve the quality of life for their employees. We
focused on the US because employers are large
stakeholders in the healthcare system. Around 50%of Americans are covered by health insurance cosponsored by their employer.
We contacted 27 of our holdings in our Global
Sustainable Equity (GSE) strategy that have a sizeable
US presence, of which over 80% responded. We
asked them what measures they were taking tocombat obesity in the workforce through a survey.
Our areas of focus included the coverage of antiobesity medicines (AOMs), weight-loss programs,
bariatric surgery, and other initiatives intended topromote fitness and wellbeing. The results indicated awillingness from employers to help tackle obesity. Outof our survey, 100% of respondents indicated that they
cover bariatric surgery for employees. In addition, 85%of respondents at least partially covered weight loss
programs either through their health insurance scheme
or directly by offering discounts to gym classes.
A novel pathway for targeting obesity is throughhighly efficacious drugs. Novo Nordisk (NOVO), a
holding in GSE, has been an early leader in the field.
Now, several other companies are trying to moveinto the space. The high cost of these medicines(US$1,349 per month list price for NOVO’s Wegovy)
and a large addressable population can create costpressure for employers. Despite this, we found that
70% of respondents currently cover anti-obesity
medicines, and we were quite encouraged by this
rapid take up. Out of the 30% who did not offer
coverage, one cited the upcoming cardiovascular
trials as important evidence on whether these
medicines improved health outcomes as well as
weight loss. These trials, if successful, could spur
greater take-up amongst employers.

Engagements with Global Equities
Total number of engagement
topics by overseas offices

2023

661
topics(299 meetings)

Engagements by Sustainalytics*

2023

441 topics

Engagement
region mix

EuropeNorth
America
Asia and
Emerging

Engagement
topic mix

Ratio

Numberof topics

13%

85

28%

184

59%

392

Total number of topics

661

Ratio

Numberof topics

Businessstrategy

7%

47

Financialstrategy

4%27

Environmental

36%

236

Social22%

144

Governance

15%

102

Disclosure/
dialogue

16%

105

Total number of topics

661*Target universe: MSCI ACWI ex Japan

From 2H23 onwards we would like to: i) engage
with companies that either did not respond initiallyor ranked poorly compared to peers on this topic; ii)
explore the idea of inter-company collaborations todrive change; and iii) engage with the drug companies(Novo Nordisk and Eli Lilly) on how they view accessstrategies to their anti-obesity medicines, in order toimprove the impact of our portfolio companies.

Global Equity Milestone Management
In our global equity engagement as well, we share ourawareness of ESG issues with companies, set specificgoals, and carry out milestone management until thegoals are achieved. In addition to the engagement
and milestone management that we conduct on ourown, we also perform milestone management forcollaborative engagement with Sustainalytics. As
with milestone management for Japanese companies,
milestones are divided into five stages with an
engagement period of three years. By establishingclear goals and having a set timeline, and thenevaluating the engagement process, we are able toeffectively implement PDCA (Plan, Do, Check, Act).
The ESG issues focused on during engagement andthe goals established vary greatly depending on thecompany.

Milestone management(Keep records/progress evaluation)k

Performance review
Policy review

A

Status of Global Equity Milestone Management(as of December 31, 2023)

A

C

ec

ct

Ch

Target of Global Equity Milestone Management

Conclusion

26

Nomura Asset Management’s Global Equity Engagement

Examples of Milestone
Management*

Engagement by
Nomura AssetManagement offices(Refer to Page 73)
Switzerland consumer
staple company

Collaborative
engagement by
Nomura AssetManagement andSustainalytics
China energy
company

Company
implements
countermeasures

Engagement
outsourced to
Sustainalytics

Company
formulates
countermeasures

Brazil consumer staple
company

70

issues to
1 Communicate
portfolio company
shares a
2 Company
recognition of the issues

3

Company formulates
countermeasure

4

Company implements
countermeasure

Discoveryof subsequent
topics andissues5 Conclusion
Number of interviews

5First interview

9Period28 months-

41 months

Company shares arecognition of the issues

116

an

D

Recognition of topics and issues
Selection of target companies

157

P

D

Engagement
ESG evaluation

Status ofMilestone
Management(number of
topics)In 2023, we carried out engagement across 661
topics. As of the end of 2023, we are managing
milestones for a total of 393 topics (284companies).
Of these, 26 topics are already at “Step 5:
Conclusion.”*1
 : Communicate issues; 2: Share recognition; 3: Formulate countermeasures;
4: Implement countermeasures; 5: ConclusionoCommunicate issues
to portfolio company

24

Pl

72

Examples of Global Equity Engagement (Milestone Management)
ority Topics
Pri

ority Topics
Pri

Protection ofnatural capital,
elimination of
deforestationin the supply
chain

Target company

Treating
unions fairly

Switzerland consumer staple
company A

Communicationof issues tocompany

Company sharesa recognition ofissuesCompany
Company
implements
formulates
countermeasurescountermeasures

Milestone
Progress

Period2 years and 4 months

Conclusion

Engagement
Goal

Respond to
instances ofdeforestation
occurring in the
supply chain,and curb future
deforestation

Target company

Taiwan Semiconductor company B

Communicationof issues tocompany

NAM’s Concerns

Engagement
progress

Current situation

Monitoring system and traceability in the supply chain, initiatives toprevent deforestation

Confirmed response to incidents of deforestation reported throughsatellite imagery reports. The company explained that they havereviewed the four events flagged by the investor group and haveremoved one company from their supplier list as the company could not
be verified. We have confirmed that they are upgrading their supplier
traceability systems and their complaints handling system. We also
discussed progress towards sustainable procurement of coffee beans
and regenerative agriculture initiatives.

By upgrading in-house supplier traceability systems and grievance
management systems, we hope they will strengthen traceability andrespond in a timely manner to corporate deforestation events in the
supply chain.
They are also working to promote regenerative agriculture with the goalof sourcing 50% of coffee beans through regenerative agriculture by
2030.

*The period is the number of months from the start of interviews until December 2023

73

Responsible Investment Report 2023

Company
formulates
countermeasures

Company
implements
countermeasures

Conclusion

Engagement
Goal

Milestone
Progress
Fewer disputes
over fair treatmentof trade unions

PeriodMost recent interview/ September 2023*

Overview of engagement

Company sharesa recognition ofissues4 months

Completed : December 2023

Overview of engagement

NAM’s Concerns

When the company set up a factory in the U.S., it received backlashfrom local construction unions who accused it of sending construction
experts from Asia to the U.S. and taking jobs away from Americans.
Since stagnation in negotiations between the two sides would lead todelays in factory construction, we discussed ways to resolve the issue.

Engagement
progress

We engaged with the company to demand fair treatment of the labor
union. The company believes that advanced semiconductor fabrications(fab) require special skill sets but due to a skills shortage in the U.S. thecompany is sending construction experts with experience in state-ofthe-art fab construction to train U.S. workers. These experts will be in
the U.S. temporarily and local employees would be responsible for theoperation of the factory over the long term.

Current situation

In December 2023, the company and union issued a joint statement
pledging that a committee made up of representatives from both sides
would meet quarterly to develop employee training programs, maintaintransparency on safety issues and announced that both sides had
agreed to resolve the dispute.

Engagement by Sustainalytics
In global equity engagement, Nomura AssetManagement’s overseas offices also actively engage
portfolio companies, but due to the broad scopeof coverage for global equities, we partner with
Sustainalytics to carry out collaborative engagement

and outsource engagement to Sustainalytics.
Sustainalytics provides Global Standards
Engagement, in which companies are selected forengagement based on violations of international
norms such as the United Nations’ Global Compact,

Material Risk Engagement covering companies withcritical ESG risks, and Thematic Engagement, which
focuses on solutions to specific topics, such as
biodiversity and natural capital, responsible cleantech
from a global perspective.

Global Standards Engagement

Material Risk Engagement

E S G

E S G

Engagement Policy

Engagement Policy

Encourage companies to resolve severe incidents as well as build astrategy aimed at preventing future recurrences and improving ESG
practices

Encourages companies with financiallymaterial ESG issues toconstruct strategies to handle ESG risks and opportunities with theaim of increasing long-term corporate value

Target companies

Target companies

Companies that severely or systematically violate the United Nations’Global Compact or other international norms

Companies with particularly high ESG risk in their industry

Thematic Engagement
E

E

E

E

E S

Engagement
related to
Biodiversity andNatural Capital

Engagement
related to Feeding
the future

Engagement
related to
Climate Change Sustainable Forests
and FinanceEngagement
related to Net Zero
Transition

Engagement
related to
Responsible
CleantechS
Engagement
related to Human
Rights Accelerator

S
Engagement
related to Human
Capital and the
Future of WorkG

GEngagement
related to Taxation

Engagement
related toTomorrow’s Board

S
Engagement
related to Modern
SlaveryG
Engagement
related to The
Governance of
SDGs

74

Cooperation with Global ESG Initiatives
Bioacoustic research
efforts for natural
capital protection

1
In the second half of 2022, an investor groupconsisting of Nomura Asset Management, Cardano
and Fidelity International sponsored Green Praxis,
a vegetation management solutions provider, toconduct a study and work on the developmentof biodiversity measurement tools and indices tomeasure the impact of human activities on natural
ecosystems. The project leveraged the use of artificial
intelligence (AI) and machine learning to process
bioacoustics data collected on the ground.
The goal of the study was to lay the initialfoundations for building an affordable, speedy,
reliable and non-invasive (minimal disturbance) tool
for measuring biodiversity richness and abundance ina certain area. The work is important and innovative
as at present, there is no universally accepted tool75

Responsible Investment Report 2023

or metric to do this. Although, we acknowledge that
there is a need for further studies with larger sample
sizes and conducted at different geographies and atdifferent times of the year (to check for seasonality),
the investor group was pleased with the initial setof results received in 2Q23 and believe they arepromising and in-line with previous scientific findings.
Key findings of the study showed a clear difference
between production and conservation areas,
displaying strictly different acoustics landscapes.
Production areas’ acoustic space was dominatedby intense monotonous activity of one particular
type of insect, while to a different degree in bothconservation and control areas a variety of species
were observed, such as birds, frogs and evenprimates (e.g. gibbons). Another interesting finding
was that while both conservation and control plots
clearly demonstrated higher species richness, theconservation areas were lacking in terms of species
abundance compared to the control group.
Overall, the conclusion of the study is thatconservation efforts of corporations can bequite productive in restoring at least partially thebiodiversity richness and abundance in a specificarea, but cannot, of course, replace the protection ofnatural forests.

Reference

One of the limitations experienced was the inability
to find a true primary, or otherwise called, pristine
forest adjacent to the plantation to serve as a control
group for the study. To our disappointment, theinvestor group learned that all of those forests in thearea had been cleared in the 1980s. Despite this, we
believe this represents another key finding of thisstudy on its own and will be a continued focus for
future phases of this project to find and test a true
pristine forest. We believe that finding and testing
truly pristine forests will be a continued focus for
future phases of this project.
Next steps: the investor group, along with Green
Praxis, is already in talks with another palm oil
producer for a potential second study to continuebuilding the database and to develop the AI modeland overlay. Furthermore, once sufficient data isgathered and initial findings are confirmed, the results
can be used in our engagements with companies. We
have seen and demonstrated in the past the powerof evidence-based engagement work through ourparticipation in the collaborative engagement towards
zero deforestation and we can potentially in the future
be equipped with proprietary evidence and researchon effects of conservation efforts and impacts on
local biodiversity.

More information on this project at:https://www.nomura-asset.co.uk/download/news/GreenPraxis_research_study_press_release.pdf

Access to Medicine
Foundation/ Accessto Medicine Index

2

The UK office Equity team co-hosted the launch of
the Access to Medicine (ATM) Foundation’s reporton generics and biosimilar medicine manufacturers.
The Foundation has previously focused primarilyon the developers of the drugs and treatments,
which are ranked in the annual Access to Medicine
Index, however it has expanded to cover the genericmanufactures who also play a very important rolein supporting access and NAM UK was delighted to
be able to support this in some small way throughco-hosting the launch event and participating in
the investor discussion. Generic manufacturers
play a very important role further downstream thanthe R&D focused pharmaceuticals and will often
be the companies that manufacture the treatments
themselves in low and middle income-countries(LMICs) – either off patent treatments or throughagreements wherein a treatment patent has been
donated such that drugs can be manufactured acrossa range of lower income countries by generics.
Benjamin Lacaille, Healthcare Analyst, contributed
to a fascinating panel discussion, which identified
specific opportunities and six key takeaways:

Reference

6 key takeaways:

1

There are meaningful opportunities for investors in thegenerics industry to have a positive impact on accessin low and middle-income countries (LMICs).

2

The analytical framework and company profiles areuseful tools for investors.

3

Investors care about ESG therefore generics will benefit
from stepping up access to medicine in the long term.

4

Investors play a critical role in ensuring theFoundation’s findings can lead to change.

5

There are specific conditions concerning biosimilar
medicine

6

For those investors concerned about antimicrobial
resistance engaging with generic manufacturers is
key given that the vast majority of antibiotics are
manufactured by generics.

From left: Nomura
Asset Management UK
Lead Portfolio Manager
Alex Rowe, Access to
Medicine Foundation
Engagement Manager
Suzi van Es, Nomura
Asset Management UK
ESG Specialist Yoko
Beesley

For further details on the event and the report published by Access to Medicine please visit
https://accesstomedicinefoundation.org/resource/investor-launch-event-for-new-analysis-of-major-generics-companies-meeting-report

Report publishedevery two years

At our Tokyo office, we play the role of a lead investor in engaging with DAIICHI SANKYO COMPANY, LIMITED, which is one of the companies evaluated in
the Access to Medicine Index, and discuss the company’s evaluation in the Access to Medicine Index and drug access plans. Please refer to page 64 fordetails.

76