June 15, 2021
Akari Odagiri and Nao Kazuma
ESG investment is an investment activity that takes the factors related to the environment, society, and corporate governance into consideration. This activity has been expanding worldwide in recent years, but it is not widely known in Japan. Especially, it is unfamiliar to young people. How will the ESG investment have an impact on our future? Mr. Toshikazu Hayashi, a chief analyst of the ESG investment promotion department at the Nissay Asset Management Co., answered such questions.
Palette: We would like to know the difference of pervasiveness in the ESG investment between Japan and overseas. Tell us about the global and Japan’s scales of ESG investment?
Hayashi: Global ESG investment is expanding. It was $ 30.7 trillion as of 2018. Japan’s total ESG investment is lagging behind but expanding too with $2.2 trillion. You may be curious about the reason why Japan has fallen behind, but it is difficult to give you a simple answer. The term "ESG" has been in common use since the Principles for Responsible Investment (PRI) were formulated in 2006. It has led the emergence of supporting investors of PRI, which counts over 4,000 financial institutions. Investors in Europe who support PRI increased rapidly, but in Japan there were not so many supporting institutions at the beginning. That made the first difference. However, interests in PRI among Japanese investors has been steadily increasing in recent years.
The primary cause for untenable PRI in Japan was that asset owners did not realize the importance of investment with considerations of environmental, social, and governance (ESG) issues. In other words, there was an awareness gap of investors in Europe and in Japan.
Note: Asset values are expressed in billions of US dollars.
Palette: We have the impression that not only Japan but also the United States was left behind.
Hayashi: It was true in the early days, but the ESG investment in the United States has expanded recently. European investors are the most advanced, followed by Canadians and Australians. Asian investors still have large room to grow.
Palette: We feel current state of investments in Japan is not active. In Japan no less than 80% of financial assets are owned by seniors in their 50s and above. We think rather than targeting these elderly people, focusing on encouraging younger investors may lead the brighter future. How do you feel about this situation?
Hayashi: The younger generation is more interested in social and environmental issues and is more willing to be involved. It’s a global trend. However, there aren’t enough ESG-related products available for individual investors. It should be important to provide ESG investment products that would attract young people in an easy-to-understand manner.
Reference: Financial Services Agency,”Expected changes in the ratio of financial assets by age group (2019).”
Palette: The SDGs is well-known to young people in Japan. Even though, many of them do not really know about the ESG investment. We think the ESG investment is closely related to the process of SDGs. What are your thoughts on the gap of recognitions between SDGs and ESG?
Hayashi: I also feel that the general public is more familiar with SDGs than the ESG, but I don’t think that is a problem. The concept of ESG is merely a framework for investors to analyze companies. Therefore, it is not necessary for the general public to be aware of ESG when thinking about SDGs initiatives.
Palette: What do you want young people to know about ESG investment?
Hayashi: I have some points to tell. The first one is the ESG investment is closely connected to the management of pension funds that you will receive in the future. The Government Pension Investment Fund, the world's largest fund, became a signatory to the PRI in 2015 and started ESG investment. Recently, we came to pay attention to the news how global environmental issue is serious or how fast the climate change is progressing. These issues are also becoming relevant to the investment management of pensions that young people will receive in the future. So, I would like young people to consider the ESG investment as something that affects them as well.
Another point is the lack of human resources. In the ESG world, people with various knowledge and background come in and out. In foreign countries, many people who used to work for environmental NGOs have moved to financial institutions and are now involved in ESG investment. Contrary to that, there is a shortage of such experts and the mobility of employment is lagging in Japan. In order for ESG investment to develop further in Japan, diverse human resources are needed.
Lastly, I would like people to know more about the fact that Japanese private companies and investors are working hard to incorporate the ESG issues into their businesses. I would also like to encourage young people who are interested in ESG issues and have various experiences to jump into the world of ESG investment.
Palette: As a financial analyst, how do you see the change of Japan regarding to SDGs management?
Hayashi: More and more companies are now aware that the management will not be sustained unless they fully incorporate the notion of SDGs and sustainability into their businesses. Management is not just about making a profit, but also about contributing to sustainability, which is the foundation of business. Consciousness like that is getting stronger and stronger.
In addition to that, new businesses are being created beyond the boundary of sectors. For instance, a company that is not an automobile manufacturer is actually producing electric vehicles. In the future, I believe that there will be an active movement to bring about innovation beyond industries to solve environmental and social issues.
Toshikazu Hayashi is Chief Analyst of the ESG investment promotion department at the Nissay Asset Management Corporation. After graduating from university, he worked as a pubic officer or about 5 years in Japan and studied (and earned master’s degree in 2011) in the UK. During that time, he had more opportunities to learn about sustainability. When he did a joint research project with an overseas asset management company, he was inspired by financial analysts looking at chemical companies from the perspective of sustainability issues.