For qualified institutional investors only

Japan Value Insights:
Spotlight on sustainable
companies addressing
social issues
Identifying companies that offer goods and services needed by society and contribute to well-being
4 April 2022

We share our thoughts on sustainable companies that address social issues and contribute to
the physical and mental well-being of individuals.
By Shigeru Aoyagi, Japan Value Chief Portfolio Manager

Introduction: Good health and well-being
One of the aims of the Nikko AM Japan Value Equity team is to seek companies that have business continuity, offer
downside protection, and are likely to possess a turnaround catalyst, even if they are undervalued temporarily. Suchenterprises also tend to offer goods and services needed by society. In this article we discuss our thoughts on social
issues being addressed by sustainable companies and their contribution towards improving the physical and mental
well-being of individuals. The article focuses on “good health and well-being”, which is one of the 17 Sustainable
Development Goals set up by the United Nations in 2015 and a concept which is expected to take on added
significance in a post-COVID-19 world.

Cattle responsible for a significant amount of GHG emissions
Understanding how cattle emit methane
Cattle are classified as ruminants due to their unique four-compartment stomach. The ruminant stomach of cattle
consists of rumen, reticulum, omasum and abomasum.

Source: Mizuho Securities Equity Research

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It is the ruminant stomach that makes cattle one of the major emitters of greenhouse gas (GHG). Cattle digest what
they eat by breaking the feed down into soluble parts through repeated regurgitation and re-chewing in the ruminantstomach. In a process known as enteric fermentation, microbes in the digestive systems of the livestock generate asignificant amount of methane as a byproduct of digestion, and the cattle expel the gas by belching.
Reducing methane from cattle critical to slow global warming
The US Department of Agriculture estimated the global population of cattle at one billion in 2021 and their collective
belching has a substantial environmental impact. As Chart 1 shows, agriculture is responsible for a significant portionof global GHG emissions, of which cattle are a major contributor.
Chart 1: Global GHG emissions by economic sector

Agriculture / Forestry /Other land Use(AFOLU)
24%

Architecture
6%

Electricity and heatproduction
25%

49 Gt Co2
conversion(2010)

Other energy
sources 10%

Transportation 14%
Industries
21%

Note: Gt = billion metric tons
Source: Mizuho Securities Equity Research, based on IPCC AR5 Working Group 3 Report

Methane’s lifetime in the atmosphere is shorter than that of CO2, but methane is said to be 25-30 times more efficientthan CO2 in trapping heat within the atmosphere. As such, reducing methane emissions from cattle is critical to slow
global warming and presents an immediate opportunity to tackle climate change.
In addition to cutting meat and dairy production, other options for reducing methane emissions include inhibiting
methane emitted by cattle. Recent studies have focused on adding agents to cattle feed in an attempt to reduce theamount of methane produced during enteric fermentation. The aim is to target microorganisms called archaea which
are found in the ruminant stomach of livestock. These microorganisms use hydrogen, another by-product of thefermentation process caused by bacteria within a ruminant stomach, to produce methane. Recent experiments havefocused on using feed additives such as seaweed to limit the amount of hydrogen available to archaea or curbing thenumber of archaea themselves. Studies related to enteric fermentation, including gaining a deeper understanding of
microorganisms like archaea, are expected to become a key area of R&D worth focusing on from an ESG perspective.

Improving physical well-being: A richer eating experience, better nutrition with plantbased foods
Providing plant-based proteins to consumers
Reducing the overall number of livestock may appear to offer a straightforward solution to the methane problem.
However, simply reducing cattle populations would also cause a shortage in the supply of protein, one of the threeessential food groups along with carbohydrates and dietary fats. Increasing awareness towards sustainability and theenvironment is one reason why focus has turned to plant-based proteins, which offer both an alternative to meat anda way to reduce methane emissions.
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The Ajinomoto Group has played a significant role in providing plant-based protein to consumers around the world.
The company’s food seasonings introduced to consumers “umami”, which can be translated as “savoury” anddescribed as the fifth taste along with sour, sweet, bitter and salty. Seasonings with umami add a meaty richness toplant-based protein dishes and have helped improve the eating experience and nutritional balance of many
consumers for whom meat is a luxury. Due to such contributions to society, the company, in our view, represents the“S” (social) aspect of ESG principles.
The company was founded in 1909 and has traditionally focused on developing its business in agriculture-producing
countries. Being at the source of raw materials is an obvious advantage, but the company’s global stance also reflects
its key philosophy, established at the time of its founding, of contributing to society by providing the underprivileged
with not only nourishment but an enjoyable eating experience. The food producer, which jostles globally with rivals
such as Nestle and Unilever, is a leading player in developing regions such as Africa, where it has become an extensive
local presence and has won over the trust of the markets.
A sustainable production system
The company produces amino acids in 18 factories spread out across nine countries. It has used locally available
produce such as sugar cane, sugar beet, cassava and corn to produce amino acids through fermentation. The
fermentation process produces a nutrition-rich by-product, labelled “co-product” by the company. It utilises nearly
100% of co-products as either fertiliser or feed for livestock. For over 40 years it has used this sustainable, locallyestablished “bio-cycle” system globally for amino acid production. Co-products already are fertilisers rich in nutrition,
but it is conducting research to make the substance even more effective as organic fertilisers. Such attempts reflect
the company’s drive to improve the productivity and quality of agricultural output and thereby add value. The biocycle system (Chart 2) represents a virtuous cycle involving local agricultural producers, processors of the agricultural
produce and the company itself.
Chart 2: The sustainable bio-cycle

Source: The Ajinomoto GroupUse of “umami” not just limited to seasoning
The corporation is also a leading presence in the study of identifying and solving health issues associated with dietary
practices. It is widely known that excessive salt consumption leads to a number of health problems such as stroke,heart disease, osteoporosis and cancer, and the practice is estimated to have become a serious health issue in more
Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in the strategy’s portfolio, nor constitute a
recommendation to buy or sell.

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Japan Value Insights

than 95% of countries around the world. Studies have shown that the utilisation of umami seasoning can reduce
sodium intake; furthermore, there are hopes that amino acids found in umami could help prevent some of thenegative effects of aging and thereby aid the elderly in aging societies maintain or improve their health. As a leading
producer of umami, it is positioned to address such societal issues in addition to its traditional role, through which it
has helped make high quality protein available to consumers.
The knowledge and skill gained through the production of amino acids can be put to other use as well, notablyammonia production. Ammonia is considered an important source of next generation energy as the world looks tomove away from fossil fuels to reduce CO2 emissions. The corporation, also known as a biotechnology entity, is trying
to develop a method to produce ammonia in its amino acid production facilities. This would enable the company tomake “green” ammonia as production will be small in scale and for local consumption, meaning it would leave a muchsmaller carbon footprint compared to current ammonia production methods which are capital intensive and large inscale.

Improving mental well-being: Creating new “life values”
Mental well-being amid lifestyle changes
In addition to physical health (body), another important aspect of well-being is mental health (mind), which has comeinto the spotlight as the coronavirus outbreak disrupted lifestyles and workstyles across societies. Many of thechanges ushered in or hastened during the pandemic, such as digitalisation and remote work, are likely here to stay.
As societies adapt to such changes and as improving the mental well-being of individuals becomes a key issue, someenterprises are rising to the challenge by offering new lifestyles for a post-pandemic world. One such company iscamping gear maker Snow Peak. Already an established outdoor brand with a core global following, it is trying toevolve from a camping-focused enterprise into a business providing "nature-oriented life values” to a wide variety of
individuals through many aspects of life. The company sees social values being challenged by rapid digitalisation andadvances in technology and its stated social mission is “reviving humanity that has diminished in modern society”.

Source: Snow Peak

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in the strategy’s portfolio, nor constitute a
recommendation to buy or sell.

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Japan Value Insights

Promoting “nature-oriented life values”
Snow Peak promotes its “nature-oriented life values” in the following aspects of life.






“Playing” (camping, recreation): Promoting camping as part of everyday life; camping as a way to introduce andpromote local communities, camping as a tool to strengthen connections within the family and the workplace“Clothing”: Development of clothing suited, in function and design, for both outdoor and everyday use;
promotion and preservation of traditional craftsmanship; connecting consumers with local producers throughinitiatives such as its “local wear” brand; promotion of sustainable clothing production and textile recycling“Eating” (food): Enriching the outdoor cooking experience; enjoying “off the grid” cooking at home; focusing on
locally available, organic produce and traditional farming methods“Living” (housing): Promotion of nature-oriented lifestyle tips in urban settings (e.g. back yard camping); urban
planning (designing nature-oriented housing blocs to foster community ties)“Working”: Improving the working experience by introducing elements of nature (remote working in the garden
utilising camping gear etc.); reinforcing workplace connections (holding orientations and off-site meetings in a
camping environment, promotion of “camping offices” that utilise outdoor gear and tents within offices)

Helping individuals recover their humanity through contact with nature, according to Snow Peak, is a step towards
achieving a sustainable environment as it helps raise awareness that nature needs to be protected and nurtured.
Specifically, the company has built a business model that it claims to have transcended mass production and massconsumption by producing products that are very high-spec and designed to be repaired repeatedly instead of being
discarded. The outdoor products therefore all come with a lifetime warranty, with the company aiming to have its
gear, in addition to its philosophy regarding sustainability, passed on from one generation to the next. The company
is also engaged in sustaining traditions. The aforementioned “local wear” clothing brands are made using traditional
Japanese craftsmanship, which in many parts of the country are in danger of disappearing.
Creating high brand value by resonating with users
The employees at Snow Peak lead by example in their promotion of nature-oriented values. Many at the company
headquarters in Niigata, Japan, go camping after work and return to the office the next day, and their CEO spends
roughly a third of the year camping. The company’s philosophy strongly resonates with users around the world,
giving it a very high brand value. Snow Peak’s share price has multiplied since 2019, and the company is a good
example of brand resonance leading to a larger market cap.

Conclusion
The companies discussed in this paper are a good example of what the Nikko AM Japan Value Equity team seeks
through research: enterprises that offer goods and services needed by society and contribute to the well-being ofindividuals. The Japan Value Equity team strives to identify such companies before the market recognises their fullpotential value.

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in the strategy’s portfolio, nor constitute a
recommendation to buy or sell.

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