Trends in Performance of Japanese Companies under the Global ESG Rating Models

Tomohiro MatsuokaHead of Research, SIRIS, Australia

Global SRI Research

Traditionally, large caps in “developed” markets included in major benchmark indices

Developed in the “original” SRI markets, reflecting what have been commonly perceived as sustainability/ESG issues and what are relevant to investors in such regions.

Rating Methodology/Models

i.e., Europe and North America.

The same methodology and models are applied to other markets, namely, Asia.

General Observation

(Based on the outcome of past research for four separate global SRI research databases)

Overall, Japanese companies performed well among Global Developed Markets.

Some variance in relative performance between research theme/domains.

A question is; how appropriate is it to define and measure sustainability and ESG performance from one market to another?

<E> generally strong

<G> weak

<S> depends on sub-topic/theme but about average

Employees: depends on rating criteria but average to above average

Philanthropy/Communities: average to above average

Customer/Product stewardship: strong but some weak area

Supply Chain Management: below average

Common feedback (criticism) from Japanese companies

biased toward good reporters

Observed performance is inevitably influenced by quantification methods.

biased toward companies responding to questionnaire (i.e., companies that have resources to do so – larger companies)

biased toward companies in the regions where issues included in data items are relevant

What are characteristics of the popular/traditional global SRI research models?

How do they compare with Japanese companies' performance?

Two General Characteristics

- Emphasis on Transparency/Disclosure

- Emphasis on Formality/Norm

Criteria for assessment of policy and programs often require reference to specific external standards.

Theme Specific Characteristics

Environment(in addition to general characteristics)

No universal measure for environmental performance

Assumptions and requirements within the regulatory framework of countries/regions

carbon intensity, per revenue/unit, different reporting/measurement standards, etcdifficulty in evaluating companies with diversified businesses

Strength of Japanese companies are observed in

- Higher level of disclosure

- Full integration of EMS into business process

Quality/Customer

Industry/sector specific issues

Japanese companies are generally strong in quality management

Regional differences (e.g., GMO in food sector – European standards are stricter than Japanese ones.)

e.g., alcohol, drug promotion, advertising ethics, GMO & editorial policy of media companies

Employees

Emphasis on policy with focus on human rights issue

e.g., employee training/development programs, employee entitlements/welfare packages

Quantification of performance (other than OHS) does not take into account region specific practices

Japanese companies show marked weakness in diversity

Particularly, gender diversity (no excuse)

But differences in demographic backgrounds are not taken into account (companies with global operations vs companies operating in Japan only)

Supply Chain Management

Similar to employees, emphasis on human rights issue

Many Japanese companies still tend to look at this issue primarily as quality/risk management with no or less attention to human rights issues

Philanthropy/Communities

Integration with business processFocus and expertiseEngagement (with communities, NGOs)Not just about charity

While Japanese companies do make some financial commitments, they often lack these aspects.

Governance

Focus on board structure based on the notion of separation of supervision and execution

Traditional Japanese board structure does not quite fit.

(already covered in TBLI Asia in 2006...)

Focus on board structure based on the notion of separation of supervision and execution

Often assesses disclosure only, not actual figures (e.g. remuneration)

Solutions?

However, it is impossible to eliminate the influence of methodology

Incorporation of region specific/sector specific data items and criteria can reduce regional biases.

Given diversity of region/sector specific corporate practices and diversity of business operations (even within the same sector), no perfect model/solution for ESG rating.

The way forward...

Full integration into investment process - not a simple portfolio screening/ranking at entry/exit level

How to integrate such ESG rating into investment process with awareness of limitation of methodology and statistical value of ESG rating

Not simply quantitative but qualitative approach – expertise of research analysts and fund managers on specific company and sector in terms of ESG issues

Convergence of ESG research provider's role and fund manager's role

Trends in Performance of Japanese Companies under the Global ESG Rating Models

Tomohiro MatsuokaHead of Research, SIRIS, Australia