Promoting Constructive Dialogue
between Companies and Investors

September 15, 2020

Keidanren (Japan Business Federation)

Note: The Japanese version is the original and this English version is for reference purposes. If
there is any conflict or inconsistency between the two versions, the Japanese version shall prevail.

Table of Contents

I. Introduction ............................................................................................................... 1
II. Progress in dialogue between companies and investors ............................................... 4
III. Actions required to foster constructive dialogue ........................................................ 9
1. Full disclosure supporting constructive dialogue ...................................................... 9
2. Pursuing a virtuous cycle of qualitatively advanced dialogue .................................. 11
3. Appropriate utilization of proxy voting adviser functions ....................................... 13
4. The utilization of digital technology ....................................................................... 15
5. Dialogue based on longer-term perspectives........................................................... 19(1) Presenting long-term visions and value-creation stories.......................................... 19(2) International frameworks for disclosure and assessment methods ............................ 22
IV. Concluding remarks............................................................................................... 25

I. Introduction
COVID-19 has had a devastating impact on the global economy and its markets.
Although efforts had been under way in Japan to implement “Society 5.0 for SDGs,” avision aimed at solving social challenges and creating new value through a digitaltransformation in various fields, the clash with the coronavirus pandemic has exposed
the fragility of Japanese society and highlighted the necessity of quickly developing amore resilient socioeconomic system. To that end, building financial and capital markets
that ensure access to a stable supply of capital from a medium and long-term
perspective and support the creation of a sustainable society will be a must.
Furthermore, it will be necessary to generate a virtuous cycle for investors’ investments
in Society 5.0-related fields and the corporate creation of new value.

For some years now, participants in the financial and capital markets have been
criticized for, and compelled to reflect on, “short-termist” investment styles driven
solely by the quest for short-term profits. That pressure has helped shift importancetoward enhancing medium- to long-term value such as future corporate potential andbusiness sustainability and fueled a rapid proliferation of opportunities for active
investments in projects with a focus on sustainability and ESG—namely, environmental,social, and corporate governance-related criteria. From the standpoint of preserving
business sustainability, the coronavirus pandemic has not only reaffirmed theimportance of corporate capabilities in the arena of crisis response, but also set the stage
for a renewed awareness of the importance of making investments from a long-range
perspective as well as investing in companies that create value for a sustainable society.
Signs of this are arguably evident as many institutional investors worldwide have calledon the companies in their portfolios to focus on maintaining their levels of employment
rather than pursuing short-term profits and they have also demonstrated a more flexible
response to falling returns on equity (ROE) and reduced or canceled dividends in theexercise of their voting rights.

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Additionally, corporate considerations for their diverse stakeholders and actions
aimed at achieving sustained growth are trends that are becoming more widespreadworldwide. The Business Roundtable, an association of chief executive officers fromleading US companies, issued a statement in August 2019 underscoring a commitment
to business policies and actions that place new emphasis on benefits for employees andlocal communities, complementing the shareholder-centric policies it has traditionally
supported. Further, the January 2020 meeting of the World Economic Forum announced
its commitment to “stakeholder capitalism,” the principles of which call on companies
to work together with diverse stakeholders in the interest of sustained value creation. In
keeping with the traditional view that it is “good for everyone,” many Japanesecompanies have long sought medium- to long-term gains in their own corporate value
and solutions to social issues through those improvements. Moving forward, they willfind it imperative to join with their diverse stakeholders in dealing with the coronavirus
pandemic and the societal changes it brings.

In the near term, many companies will face the task of formulating business strategies
that foresee a new sense of values and a business environment shaped by the transition
from the current to post-coronavirus era, along with a heightened need to explain their
new strategies from a long-term perspective through dialogue with their investors.
Disclosure is the primary channel through which companies share information withinvestors. However, there is a limit to how well the provision of data alone caneffectively explain business strategies from a medium- and longer-term perspective. It isprecisely through dialogue with investors that companies will be able to overcome thechallenges they face and foster awareness that helps boost their corporate value over the
medium and longer term, and through which investors will be able to reap the benefitsof corporate growth. Therein lies the value of constructive dialogue (engagement)
between companies and investors.

2

Achieving gains in corporate value over the medium and longer term will demandthat companies in Japan constantly strive to improve the effectiveness of theirconstructive dialogue with investors. Although companies and investors have shown
continued progress in their dialogue, they may still face challenges. This policy paper
organizes information on the current status of efforts in dialogue and related challenges,
and discusses the actions that each party is expected to take to promote constructive
dialogue going forward.

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II. Progress in dialogue between companies and investors
The Japan Revitalization Strategy approved by Japan’s Cabinet in June 2013
integrated the enhancement of corporate governance as an important element of thenation's growth strategy. Subsequently, measures have been taken for further
development of the business environment including the formulation and revision of the
Corporate Governance Code and the Stewardship Code. These steps set the stage forsignificant progress by Japanese corporate undertakings aimed at strengthening
governance and by institutional investor-led activities aimed at fostering better
stewardship, and also encouraged steady improvements in mutual dialogue.

A recent Japan Investor Relations Association (JIRA) survey of corporate
frameworks for dialogue with investors found that approximately 80 percent of publicly
listed companies have dedicated investor relations departments and/or full-time IR
personnel (Fig. 1). Additionally, it found that members of top management (company
chairpersons, presidents, CEOs, and other executives with representation rights) wereinvolved in the IR activities of over 90 percent of publicly listed firms (Fig. 2).
Fig. 1 Share of publicly listed companies withindependent IR departments and/or IR
personnel

Fig. 2 Share of publicly listed companies with
top management involvement in IR
activities

Source: Chart prepared by Keidanren Secretariat with summary offindings from JIRA Fact-finding Survey on IR Activities (May 2020).

Source: Chart prepared by Keidanren Secretariat with summary offindings from JIRA Fact-finding Survey on IR Activities (April2019).

Further, steps were being taken to share information on investor views and resulting
corporate responses to those views with all levels of management through internal4

reports and reports presented at meetings of boards of directors or management
conferences (Figs. 3 and 4).
Fig. 3 Existence of mechanisms toshare investor dialogue
content across management
hierarchy

Fig. 4 Mechanisms to share investor dialogue content acrossmanagement hierarchy

Source: Charts prepared by Keidanren Secretariat using data in list of aggregate results from Life Insurance Association of Japanquestionnaire survey on measures to improve corporate value (fiscal 2019, for companies).

In response to corporate actions of this nature, many institutional investors now
perceive that companies in their portfolios have shifted their views regarding outside
directors (e.g., the number of outside directors, their independence, and attendance
rates) as well as their policies on returns for shareholders and disclosure, and also feelthe effectiveness of constructive dialogue with these companies (Fig. 5).

5

Fig. 5 Issues at portfolio companies perceived to have changed or benefited from effective
dialogue as an outcome of stewardship activities

Source: Chart prepared by Keidanren Secretariat using data in list of aggregate results from Life Insurance Association of Japanquestionnaire survey on measures to improve corporate value (fiscal 2019, for investors).

However, institutional investors have also been engaged in efforts aimed at
improving the effectiveness of dialogue with their portfolio companies. Many havepursued measures not only to increase the frequency of dialogue but also to expand its
scope and gauge actual conditions at the companies in their portfolios (Fig. 6).
Fig. 6 Prioritized measures to improve the quality of dialogue, and future measuresconsidered necessary to address recognized issues
60.7%

Steps to assess counterparts and deepen understanding
Creative selection of dialogue agenda including ESG themes, with a focus
on medium- and longer-term issues

39.3%

Increases in resources and personnel for dialogue

39.3%
34.8%

Clarification of policies and views on engagement
More extensive explanations regarding scope and objectives of dialogue
and other matters when engaging with portfolio firms (Note)

31.5%
27.0%

Steps to improve skills of personnel engaged in dialogue

6.7%

None

4.5%

Other measures

Source: Chart prepared by Keidanren Secretariat using data in list of aggregate results from Life Insurance Association of Japanquestionnaire survey on measures to improve corporate value (fiscal 2019, for investors).

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In many instances, the outcomes of dialogue are reflected in the exercise of voting
rights and other actions taken by institutional investors. According to surveys by theJapan Investment Advisers Association, the percentage of institutional investors andinvestment advisers that revise voting decisions on selected proposals after receiving
explanations in advance from portfolio companies has risen year on year, and currently
exceeds 30 percent (Fig. 7). Dialogue leads to the exercise of voting rights based on abetter understanding of the purpose of proposals under consideration.
Fig. 7 Share of institutional investors and investment advisers that change
their voting decisions in response to advance explanations from
portfolio companies as a result of efforts in engagement

Source: Chart prepared by Keidanren Secretariat on the basis of findings from a Japan Investment Advisers
Association questionnaire survey on compliance with Japan's Stewardship Code (sixth survey, conducted in
October 2019).

One idea that has permeated through Japan’s corporate community for some time isthat placing importance on the benefits for diverse stakeholders will translate into social
contributions. 1

Additionally, growing international interest in ESG investments in recent years has
prompted companies and investors alike to move forward with the creation offrameworks to promote ESG-related disclosures and dialogue. For example, a survey by
the Government Pension Investment Fund (GPIF) concerning the stewardship activities
of institutional investors found that over 70 percent of the companies listed on the First
Section of the Tokyo Stock Exchange engaged in the voluntary disclosure of
The view that companies should exist for the benefit of society as a whole has been cited as an importantelement of Keidanren’s Charter of Corporate Behavior since its establishment in 1991.

1

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nonfinancial information including ESG themes, and that over 70 percent of all thecompanies had presented their investors with long-term visions. 2 For comparison,
approximately 60 percent of institutional investors have established specialist positions
for the promotion of ESG investment and financing (Fig. 8).

Fig. 8 Percentage of institutional investors that have created specialist positions for thepromotion of ESG investment and financing

Source: Charts prepared by Keidanren Secretariat using data in list of aggregate results from Life Insurance Association ofJapan questionnaire survey on measures to improve corporate value (fiscal 2019, for investors)

Based on GPIF’s Summary Report of the Fifth Survey of Listed Companies regarding Institutional
Investor’s Stewardship Activities (2020).

2

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III. Actions required to foster constructive dialogue
Although efforts of this kind have shown a certain measure of success toward
improving dialogue between companies and investors, various actions as described
below will also be needed in order to achieve more effective levels of dialogue andenable companies to pursue gains in their value over the intermediate and longer term.

1. Full disclosure supporting constructive dialogue
First of all, corporate disclosure is the starting point for dialogue with investors.
Although many companies in recent years have achieved qualitative and quantitative
improvements in their disclosures of information, many investors still clamor for more
complete disclosures.

To make medium- and long-term investment decisions, it is essential that investors
have information that helps assess the future image of a company or its long-term
vision. For example, in the context of statutory disclosures, the Cabinet Office Order on
Disclosure of Corporate Affairs was revised in 2019 and now calls for corporate
financial statements to include adequate descriptive information including information
on management strategy and risk.

In response to this situation, members of the corporate community have noted that
disclosures including voluntary disclosures through their annual reports will increase
the clerical burdens and redundancy associated with ensuring the integrity of
information that should be disclosed. Due to the broad-ranging nature of ESG-related
information and the lack of established assessment criteria, in particular, some haveraised concerns about the content, scope, and quality of information that should be
disclosed.

In April 2019, Keidanren sent a mission to the US with the objective of promoting
dialogue between corporate executives and foreign investors. Japan earned praise from9

US institutional investors for the large number of Japanese organizations and companies
that had become supporters of the Task Force on Climate-related Financial Disclosures(TCFD) 3 and also for the measure of progress Japanese companies had made with theirdisclosures of ESG information. Meanwhile, the US investors also cited deficiencies
with the disclosure of basic information on matters such as the membership and roles of
nomination and compensation committees, and suggested that disclosures should bemade with a stronger awareness of the materiality and priority of their content. 4

With that realization and in light of the expectations of materiality and priority, more
Japanese companies look past the formalities, are mindful of the importance ofconstructive dialogue with their investors, and voluntarily adopt policies of full
disclosure. That stance can be expected to win deeper levels of investor acceptance andunderstanding. As manifestations of this commitment, an increasing number ofcompanies in recent years have followed the “comply or explain” principle in theircorporate governance-related reports, choosing to explain circumstances that are not incompliance with the Corporate Governance Code. Additionally, others have applied a“comply and explain” policy, including explanatory details in their reports even when
they are code-compliant. Further, some companies have resourcefully integrated chartsand figures into their reports on business performance for their investors, providing
forecasts of future performance under varying coronavirus pandemic scenarios.

Disclosure and dialogue are mutually complementary. The process of utilizing
dialogue to clarify investor expectations regarding matters for disclosure is also
important. Institutional investors and especially those active at the global level holdequity stakes in other companies in the same industry as well as related fields in Japanand abroad, and are engaged in dialogue with each portfolio company on a continuing
A total of 285 organizations and companies in Japan have become supporters of the TCFD, the largest
number from any single nation (based on data posted on the TCFD Consortium website as of June 26,2020).
4
From Keidanren’s report, “Outline of the mission to the US for constructive dialogue with investors(May 2019).”
3

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basis. Through this dialogue with institutional investors, portfolio companies are better
able to determine what information they should disclose.

2. Pursuing a virtuous cycle of qualitatively advanced dialogue
In their dialogues with investors to date, many companies have noted that the process
has had a tendency to devolve into little more than a one-sided response to investor
questions. Investors, on the other hand, have drawn the impression that their corporate
counterparts in such dialogues tend to assume a defensive posture that undermines thedevelopment of more flexible discussions. To achieve more constructive dialogue, it isadvisable that companies and investors reciprocally deepen their understanding of eachother’s concerns and objectives, and accordingly set the stage for a virtuous cycle ofqualitatively improved level of dialogue.

Almost 40 percent of institutional investors have cited a lack of feedback from theirportfolio companies regarding responses to the content of their dialogues. 5 Unlessinvestors are able to discern the actions a company may pursue in response to dialogue,
their discussions may be limited to little more than a transient, one-sided articulation of
investor viewpoints. Companies need to be more forthcoming with the feedback they
provide investors regarding any changes in their policies or actions that are based on the
results of dialogue. To that end, it will be important for companies to step up
management’s direct involvement in dialogues with investors and demonstrate a unified
company stance, provide their boards of directors with reports detailing dialogue
content, and in other ways cultivate an organic framework that facilitates tangible
changes in corporate behavior.

Nevertheless, some companies still question whether the constructive dialogues theyhold with their investors have actually led to investments from a long-term perspective
Based on findings from a Japan Investment Advisers Association questionnaire survey on compliancewith Japan’s Stewardship Code (sixth survey, conducted in October 2019).

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or influenced investor voting decisions.

It is important that investors clearly inform their portfolio companies about the value
they place on dialogue as one of a series of processes that lead to investment decisions
and the exercise of their voting rights, and that they encourage continued dialogue by
actively providing their corporate counterparts with feedback on the decisions they havemade as a result of dialogue. More and more institutional investors have establishedspecialist positions for ESG-related analytical duties. Accordingly, internal collaborationby their departments for active and passive fund allocation, the exercise of voting rights,
ESG assessments, and other operations will be extremely important in terms of assuringthat the exercise of their voting rights is linked with the outcomes of dialogue on
medium and long-term themes.

Many companies now select delegates for IR meetings with attention not only toinvestors’ current shareholdings but also to their investment stance (Fig. 9). However,
because the investment strategies and stances of different institutional investors arevaried, more productive and constructive dialogue can be expected if an investor
clarifies their stance in advance and on that basis selects clear themes and objectives fordiscussion—for example, important business challenges facing the counterpart
company.

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Fig. 9 How companies determine the importance of IR meetings (selection criteria forattendees, etc.)

Source: Chart prepared by Keidanren Secretariat with GPIF’s Summary Report of the Fifth Survey of Listed Companies
regarding Institutional Investor’s Stewardship Activities (2020).

Furthermore, given the strengthened need to identify beneficial shareholders(shareholders not on shareholder lists but who have the right to purchase shares andvote) for the purposes of dialogue, it is advisable to explore the creation of frameworks
or systems that will make that identification process possible. Some companies perform
shareholder determination surveys to identify beneficial shareholders not named inshareholder lists. Portfolio companies could be expected to foster smoother dialogue
with institutional investors if they were able to gain insights into investors’
circumstances (names of beneficial shareholders, the number of shares they own, etc.)
without incurring those survey costs. 6

3. Appropriate utilization of proxy voting adviser functions
With the expansion trend in passive investing in recent years, proxy voting advisers now
exert a heightened influence over the voting activities of institutional investors.
According to a survey by the Japan Investment Advisers Association, over 30 percent ofinvestment managers in Japan currently utilize the services of advisory institutions for
Supplementary Principle 5.1.3 in the revised (June 2018) Corporate Governance Code states:“Companies should endeavor to identify their shareholder ownership structure as necessary, and it isdesirable for shareholders to cooperate as much as possible in this process.”

613

their proxy voting instructions. 7 Such institutions are most commonly utilized as
reference services for proxy voting purposes, or entrusted with the task of preparing
voting proposals in line with investment company guidelines (Fig. 10).
Fig. 10 How institutional investors utilize proxy advisers

Source: Chart prepared by Keidanren Secretariat on the basis of findings from a Japan Investment Advisers Associationquestionnaire survey on compliance with Japan’s Stewardship Code (sixth survey, conducted in October 2019).

Recommendations from proxy voting advisers are to a certain extent prepared in linewith institutional investor needs. If used properly, they can supplement institutional
investor resources. However, portfolio companies have cited a number of issues with
proxy voting adviser services: (1) the formulation process for proxy advisory guidelines
lacks transparency and the study framework is inadequate; (2) proxy advisory
guidelines are applied in a uniform, formalistic manner, sometimes leading to
inappropriate proxy voting recommendations based on views not shared by the portfolio
company; and (3) illogical recommendations are sometimes made regarding specifics
that are not covered by proxy advisory guidelines.

This situation could encourage approaches to corporate governance that only satisfy
proxy advisory guidelines in a formal sense. Furthermore, if a proxy vote is exercised inline with recommendations that are not based on adequate information, it could have an
adverse impact not only on the portfolio company in question, but also on the investors
Based on findings from a Japan Investment Advisers Association questionnaire survey on compliancewith Japan’s Stewardship Code (sixth survey, conducted in October 2019).

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interested in boosting that company’s medium- and long-term value as well as the asset
owners to which the investment manager has fiduciary duties, and also would pose arisk to healthy market functions.

Reflecting this backdrop, the Stewardship Code as revised in March 2020 assigns
importance to proxy voting advisers and other providers of services to institutional
investors as contributors to the improved function of the investment chain as a whole,and on that basis mandates that proxy voting advisers develop their personnel andorganizational frameworks, improve the transparency of their processes for theformulation of recommendations, and actively exchange views and opinions withportfolio companies as necessary. 8 Compliance with this Stewardship Code is required.
Additionally, institutional investors are expected to reflect these perspectives in theirselection and use of proxy voting advisers and pursue dialogue with said advisers as
appropriate with attention to information obtained through their own dialogues withportfolio companies. Efforts to improve the advisory functions of these services willlead to the advancement of the investment chain as a whole. The efforts of asset owners
also will be of value to the task of boosting the effectiveness of dialogue between
portfolio companies and investment managers. For example, if asset owners evaluate
the proxy voting of investment managers on the basis of their “no” vote ratios and otherformalistic guidelines, that may only encourage a formalistic response by investment
managers. As responsible members of the investment chain, asset owners should
encourage investment managers to engage in effective stewardship activities.

4. The utilization of digital technology
Although many Japanese companies have continued with their efforts to spread theirgeneral shareholder meetings across a broader range of calendar dates, the timing for
dialogue on pending proposals still tends to concentrate within a narrower time frame.
Financial Services Agency, Japan’s Stewardship Code (March 2020), Principle 8, Guidances 8-2 and 83.
815This has been cited as a factor that adds to the practical difficulty of studying proposals
in detail, but also as a background factor behind the increasingly rigid utilization ofproxy voting advisers by institutional investors.

In recent years, more and more companies have shifted to web-based postings ofnotices of convocation and related documentation for their shareholder meetings.
However, the revised Companies Act enacted last year mandates that publicly listedcompanies release digital versions of their documentation for general shareholder
meetings no later than three weeks prior to their scheduled dates for those events. 9
Furthermore, after the revised Companies Act goes into effect, regulations for financial
instrument exchanges will be expected to incorporate provisions mandating efforts foreven earlier releases of digital documentation. These regulatory changes will allow
investors more time to study pending proposals than is possible under the current
framework. Also, as a provisional measure effective this year, legal revisions by the
Ministry of Justice recognized web-based disclosures of unconsolidated balance sheets
and statements of profit and loss as meeting mandated submission requirements.
Allowing this treatment to remain effective next year and thereafter in the interim
leading up to the implementation of revised provisions in the Companies Act governing
digital submissions will enable early submissions of unconsolidated financial
documents and other important documentation. Additionally, countermeasures against
the coronavirus pandemic have prompted many companies to move ahead with plans tohold hybrid virtual shareholder meetings. Virtual meetings have merit because they willcomplement pandemic countermeasures and facilitate remote participation in multiple
shareholder meetings. It is anticipated efforts of this nature to boost the effectiveness of
dialogue through efficiency gains provided by the utilization of digital technology will
gain even more traction in the years ahead.

Documentation for general shareholder meetings potentially might not be submitted at least two weeks
prior to a scheduled meeting date, the deadline for issuance of convocation notices under current law.
916

More companies are also moving to adopt electronic proxy voting platforms for
institutional investors. Over 1,000 companies already participate on the electronic proxyvoting platform of Investor Communications Japan (ICJ, Inc.), a joint-venture of
Broadridge Financial Solutions, Inc. of the US and the Tokyo Stock Exchange, Inc. 10
One advantage of this platform is that it allows companies to devote more time to
studying pending proposals in detail.

However, not many institutional investors in Japan utilize these electronic proxyvoting platforms yet. Although over 90 percent of all institutional investors in the US
and UK now utilize electronic proxy voting services, 11 as of October 2019 no more than
12.8 percent of institutional investors (with outstanding investment balances in Japanesestocks) in Japan utilized such online platforms for proxy voting purposes. 12, 13

The utilization of electronic proxy voting platforms allows companies to confirm
proxy voting instructions from institutional investors in a more timely manner, but thatis not the only advantage. One benefit for institutional investors is that they have theopportunity to study information on pending proposals at an earlier date and can engage
in such study for an extended period of time, right up to the date just prior to scheduledshareholder meetings (Fig. 11). Portfolio companies and institutional investors alike canalso utilize this extended period for further dialogue.

Information on ICJ, Inc. website
From Ministry of Economy, Trade and Industry study group reports on promoting digitization ofgeneral shareholder meeting-related processes (2016).
12
Findings from a Japan Investment Advisers Association questionnaire survey on compliance withJapan’s Stewardship Code (sixth survey, conducted in October 2019).
13
Efforts to inter-link the platforms offered by different companies have recently gained momentum. The
systems for the ICJ platform and the ProxyExchange platform run by the proxy voting adviser ISS havebeen linked together (information from ICJ website).
10
11

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Fig. 11 Periods for study of pending proposals extended through use of ICJ’s electronic
proxy voting platform

Source: Excerpted from Ministry of Economy, Trade and Industry study group reports on promoting digitization of generalshareholder meeting-related processes (2016).

Several factors may be cited to explain the lack of progress toward utilization of
online proxy voting platforms. One is the burden of back-office processing involved toprepare paper-based and digitally based documentation due to the fact that such online
platforms are not yet universally utilized by all companies. Additionally, in some cases,
investment managers are obligated to obtain the consent of asset owners when they
intend to utilize such platforms. Yet another factor is the heavy cost burden thatcompanies may incur. In the interest of achieving more effective and productive
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dialogue, cross-sectoral initiatives backed by the sharing of best practices will be
crucial, especially to encourage broader utilization of proxy platforms by institutional
investors.

Recent times have witnessed a surge in modalities available for online dialogue.
These have significantly mitigated the time and space constraints that such dialogue
formerly faced. Efforts should be made to expand the potential for dialogue through theresourceful utilization of online platforms not only to help investors that face constraints
on in-person assembly due to coronavirus-related countermeasures, but also for the
purposes of dialogue with physically distant investors or collaborative engagement
when dialogue with multiple institutional investors is a necessity. Utilizing online
modalities for dialogue not only just prior to general shareholder meetings but on acontinuous basis throughout the year will help improve the effectiveness of dialogue aswell as facilitate proxy voting based on it. It is advisable that all parties take suchopportunities as revisions to proxy voting guidelines for institutional investors and thecorporate releases of integrated financial reports to further expand the opportunities for
dialogue outside the time frames usually set for general shareholder meetings.

5. Dialogue based on longer-term perspectives(1) Presenting long-term visions and value-creation stories
In the IR meetings they have held in recent years, many companies have assumed
their timelines for discussions with institutional investors and particularly discussions
concerned with business strategy were based on medium and longer-term perspectives(Fig. 12).

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Fig. 12 Timelines for discussions of individual topics with institutional investors at IR
meetings

Source: Chart prepared by Keidanren Secretariat with excerpted material from GPIF’s Summary Report of the Fourth Survey ofListed Companies regarding Institutional Investor’s Stewardship Activities (2019).

As noted earlier, over 70 percent of portfolio companies set out long-term visions
during their dialogues with institutional investors. However, many of those companies
have set periods of around three to five years for their long-term visions—a timeline
customarily associated with medium-term business plans. To achieve constructive
engagement with investors on the basis of business strategies that extend over longer
periods of time, it will be advisable for companies to formulate and present long-term
visions of their future business in increments not of years, but of decades. Actually,
rapidly increasing numbers of companies have very recently begun formulating longterm visions that stretch out over longer periods (Fig. 13). It is anticipated this trend will
gain additional momentum in the future.
Fig. 13 Estimated timelines for long-term visions that listed companies present toinstitutional investors

Source: Chart prepared by Keidanren Secretariat on the basis of GPIF’s Summary Report of the Fifth Survey of Listed
Companies regarding Institutional Investor’s Stewardship Activities (2020).

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Meanwhile, as a survey by the Life Insurance Association of Japan discovered, asignificant share of corporate respondents feel that institutional investors still prefer todeal solely with short-term themes during their dialogues (Fig. 14). Althoughinstitutional investors apply varying investment strategies, in the interest of boosting
their own profits by promoting the sustained growth of their portfolio companies, it ishoped they will place more weight on dialogues that are anchored in medium- and longterm perspectives.
Fig. 14 Corporate impressions of investors during dialogues

Source: Chart prepared by Keidanren Secretariat using data in list of aggregate results from Life Insurance Association of Japanquestionnaire survey on measures to improve corporate value (fiscal 2019, for companies).

Additionally, one survey found that over 70 percent of investment managers had notreceived any ESG mandates (for ESG-indexed investments or the development of
portfolios containing issues with favorable ESG elements) from client asset owners. 14
To foster improved dialogue between companies and institutional investors from a
medium- and longer-term perspective, it is hoped that asset owners will evaluate
investment managers from a variety of vantage points including ESG themes. 15

14
Findings from a Japan Investment Advisers Association questionnaire survey on compliance withJapan’s Stewardship Code (sixth survey, conducted in October 2019).
15
In a joint research report released by Keidanren, the University of Tokyo, and the GPIF, the GPIF
presented five action plans including consideration of incorporating Society 5.0 and SDGs into
investment principles and the like and promoting constructive engagement and conducting research on
appropriate evaluation methods to connect ESG with Society 5.0 (from “The Evolution of ESG
Investment, Realization of Society 5.0, and Achievement of SDGs—Promotion of Investment in
Problem-solving Innovation” [March 2020]).

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When explaining their long-term visions to institutional investors, many companies
experience difficulty despite the importance of presenting clear stories oriented toward
value creation as well as connections between the generation of long-term cash-flow
and nonfinancial information, including ESG themes. 16

Keidanren, the University of Tokyo, and the GPIF have released in March 2020 a
joint research report that is aimed at contributing to the achievement of the “Society 5.0
for SDGs” vision through advances in the field of ESG investment. That reportanalyzed elements in long-term visions presented by companies and assessed theireffectiveness in giving an impression of growth potential to investors. Three elements inparticular earned high marks: business development based on “people”; solving global
issues; and the creation of new markets. Drawing from these findings, companies
gained an understanding that they should formulate long-term visions that would appeal
to investors by focusing on those three elements. 17

Another point from the corporate perspective was that many questions raised byinstitutional investors during dialogues on ESG themes were for the purpose of negative
screening. Rather than scrutinizing future corporate images or visions for negative
factors, steps should be taken to explore ways of advancing ESG investments that leadto sustainable growth or otherwise allow companies and institutional investors alike toengage in assessments backed by positive dialogue.

(2) International frameworks for disclosure and assessment methods
Recent years have brought a proliferation of opportunities to assess ESG-related

16
According to JIRA Fact-finding Survey on IR Activities (April 2020), “presenting investors with ESGrelated viewpoints or positions as straightforward information in the context of medium- and long-termbusiness strategies” was the task that the largest share of respondent companies considered difficult in
relation to disclosure and dialogue regarding nonfinancial information (including ESG themes).
17
Using a questionnaire format, the analysis collected data on the types of long-term visions companies
had in mind and subjected that data to natural language processing. For further information, see “TheEvolution of ESG Investment, Realization of Society 5.0, and Achievement of SDGs,” a joint research
report released in March 2020 by Keidanren, the University of Tokyo, and the GPIF.

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undertakings and tie them to new investments. In the process, a diversity of institutions
and organizations at the international level have issued a range of varying guidelines on
methods for the disclosure of nonfinancial information including information on ESG
themes. Moreover, efforts to strategically institutionalize environmental undertakings at
the national and regional levels are gaining momentum.

In Japan, companies have for some time been engaged in independent projects aimed
at showing more consideration for their diverse stakeholders and achieving sustainablegrowth. However, many of those companies feel perplexed by the prospect of having to
explain their projects within the applicable context of a new framework. Against thisbackdrop, several private companies have joined together and launched studies focusedon proper approaches to ESG information disclosure and engagement with attention to
the salient features of the Japanese setting.

Principally, ESG projects and other corporate-led undertakings should be flexibly
defined in terms of the ideals and business operations of the companies. Meanwhile, asdifferent standards and guidelines exist, companies are facing the burden of deciding
which set of standards to meet or satisfying multiple standards. In their dialogues, it isadvisable that companies and investors specify those things that bear materiality and onthat basis strive to organize and consolidate assorted standards and guidelines into aninternational framework.

It would be desirable for members of the corporate sector, under this framework, toengage in disclosures that apply to each company while continuing to demonstrateingenuity of their own. From the standpoint of utilizing information, to investors theidea of having a fixed framework for methods of disclosure would assure thecomparability of disclosed corporate information as well as promote its effective use.
Assessments of that information by investors with diverse values will ultimately
improve the efficiency of undertakings led by society as a whole.
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Japan should actively participate and assume the lead in discussions aimed atdeveloping international frameworks and standards for disclosures and assessment
methodologies that will contribute to the achievement of ESG mandates as well as the
SDGs.

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IV. Concluding remarks
In terms of realizing Society 5.0, a vision aimed at solving social challenges andcreating new value through the digital transformation, efforts in constructive dialogue(engagement) by corporations and investors will be instrumental to the development ofa virtuous cycle for investments in the Society 5.0 domain and the corporate-led
creation of new value. It is imperative that companies look beyond pure compliancewith formal frameworks for disclosure and take the initiative to pursue constructive
dialogue with investors by applying their ingenuity and actively involving their top
management in the process. Investors, too, should adopt medium- and long-term
perspectives and on that basis assume the initiative in dialogues with their corporate
counterparts. Additionally, they should strive to build a virtuous cycle for constructive
dialogue through active feedback explaining the decisions they arrive at as a result of
dialogue. In the near term, there have been signs that meetings between investors andcompanies that had been restricted by the coronavirus pandemic will begin moving
toward a gradual reopening while improvising and integrating measures to avoid the“three Cs” (closed spaces, crowded places, and close-contact settings). Going forward,
it is anticipated they will build even deeper relationships during the engagement processby flexibly adapting to a variety of likely environmental changes.

In response to the expanding coronavirus pandemic, Keidanren itself plans to takeadvantage of the opportunities created by the utilization of online conferencing tools
and the promotion of varied dialogue strategies, collect data on advanced cases, anddisseminate information to its member companies. Additionally, in the interest of
promoting improvements in constructive dialogue, it will continue to actively exchange
views and opinions with investment managers, asset owners, proxy voting advisers, andinvestors in Japan and abroad.

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Keidanren (Japan Business Federation) is a comprehensive economic organization
with a membership comprised of more than 1,500 representative companies,
nationwide industrial associations, and regional economic organizations of Japan.
Contacts:
Keidanren (Japan Business Federation)
1-3-2, Otemachi, Chiyoda-ku, Tokyo 100-8188
Tel: +81-3-6741-0152 (Social Communication Bureau)
URL: https://www.keidanren.co.jp/
Email: shihon-commu@keidanren.or.jp26