Japan is slowly closing the gap on ESG reform

Japan is slowly closing the gap on ESG reform

SYZ AM has just published the Overview of ESG Matters in Japan report, which evaluates the progress of Japanese companies on ESG metrics. Japan is often said to be lagging the rest of the developed world in ESG practices. However, analysis from Joël Le Saux, portfolio manager of the OYSTER Japan Opportunities fund, and Yoko Otsuka, Japan analyst at SYZ Asset Management, reveals a more nuanced picture.

In their latest publication, the pair undertakes a comprehensive review of how Japanese companies perform on each of the three ESG components, identifying areas where progress has been made, but perhaps remains underappreciated by investors, and where efforts are still too slow and insufficient.

The research reveals Japanese companies rank similarly to those from Europe in terms of social and environmental practices. Where they significantly lag European and American counterparts is on the governance front. However, this is rooted in historical practices and has significantly improved in recent years.

Le Saux and Otsuka delve into the origins of the Japanese stakeholder-oriented governance model, highlighting a historic bank lending model, closed equity market and seniority-based employment system as the reasons behind misalignment of shareholder interest. In recent years, the paper underlines worrisome levels of cross-shareholding and parent-child listings have diminished, while total shareholder returns are increasing. However, with the pace of reforms slowing, Le Saux warns there is still a lot of catching up to do.

On the environment, Japan still relies heavily on fossil fuels, with the report pointing to mixed messages from government on the role of coal energy and the implementation of carbon pricing. Additionally, Le Saux and Otsuka highlight the profitability dilemma of Japanese companies contemplating going greener, as well as the Japanese government's ‘kaizen' approach, which emphasises slow but steady improvement, as delaying change. The report states: "From an investor's standpoint, awareness of policy trends and assessing the risks they involve is vital to weather the carbon transmission."

Looking at social standards, the research reveals Japan's binary labour market, where the proportion of ‘irregular' employees is on the rise, is becoming unsustainable. Meanwhile, the plight of overworked employees has made headlines and gender disparity remains a major issue. However, the findings show efforts are being stepped up to address the infamous work-life balance in Japan: "In a highly competitive labour market, bargaining power shifts to the workers, so improvements in working conditions have become essential in the fight for talent."