By Holly Testa, Director, Shareowner Engagement, First Affirmative Financial Network
Originally published by First Affirmative Financial Network.
Discussing environmental, social and governance issues with companies can be a challenge even when you share a common language and culture. How does one navigate this complex conversation when these commonalities are absent?
Lauren Compere, Director of Shareholder Engagement at Boston Common Asset Management, recently returned from her third trip to Japan. She represented First Affirmative in several conversations with major Japanese companies that are held in First Affirmative client portfolios. Lauren shared her thoughts about the trip in a December interview.
Holly Testa: What was on the agenda for your trip to Japan?
Lauren Compere: This trip included meetings with four companies that are First Affirmative client holdings: Astellas Pharma, Panasonic, Orix and Mitsubishi Group (MUFG). Climate change, water stewardship, and gender diversity/advancement of women in the workplace were key themes addressed with all companies. Supply chain management and producer responsibility was also a key focus with Astellas and Panasonic. As financial companies, MUFG and Orix were both analyzed in our 2015 “Are Banks Prepared for Climate Change“ impact report where we discussed how they are embedding environmental and social risk management including climate change across financing activities. We addressed their due diligence procedures linked to human rights and stakeholder engagement for controversial projects such as the Dakota Access Pipeline. I also had the opportunity to attend a number of unique briefings including an investor-auditor roundtable to get a better sense of what is happening more broadly in Japan and elsewhere in Asia on the governance and sustainability front.nytimes.com/…/dakota-access-pipeline-protest-map
HT: Share with us some of the highlights from your trip.
LC: I first traveled to Asia in 2007 and Japan in 2010. Over time, the people I have met there have come to see Boston Common as a model for understanding the expectations of global institutional investors regarding a wide range of sustainability issues. This was very apparent from two presentations I was asked to be a part of during my time there. I moderated a panel at a conference hosted by the Asian Corporate Governance Association, of which Boston Common is a member. It was attended by over 300 people, primarily domestic Japanese investors and businesses. As “governance of sustainability” is a core theme of our engagement with companies, this was an excellent opportunity to make the link between good corporate governance and sustainability practices. I was asked to moderate the only panel with an ESG theme called Moving from “Doing Stuff” to Being More Strategic on Sustainability. This was a new topic of focus for the organization, and the panel was so well received that there’s now a plan to make sustainable governance a recurring theme. I also spoke at the CDP Japan Club. Representatives from twenty companies that do extensive reporting on their environmental footprint to the CDP (formally the Carbon Disclosure Project) were in attendance. I talked about how Boston Common uses CDP data and where we are looking for improvements in disclosure and practice.
HT: Speaking of CDP, virtually all of the companies you talked to had improved their CDP disclosure scores substantially. Is this an emerging trend?
LC: Overall, there are more companies on the CDP “A” list than ever before, indicating that companies across the board are improving their carbon disclosures. I think that Japan is finally “getting it” and this is reflected in their improving scores. When you look at CDP reports, they can generally be considered as a litmus test for where companies are on sustainability.
HT: What other trends do you see that are influencing ESG practices in Japan?
LC: I should cite three regulatory changes that are helping to move many Japanese companies from a compliance-based approach to sustainability to one that is more principles-based:
- Japan adopted a stewardship code similar to others around the world. It is pushing investors to engage companies on sustainability issues. Companies are more carefully scrutinized and they are being asked to be more proactive in their approach.
- A new Japanese corporate governance code is pushing companies to disclose more about their corporate social responsibility management and to provide details about board structure and operations.
- Regulations have been established to increase gender diversity. The translation for the law is literally “Propelling Females Activity Law.” It requires companies with more than 300 employees to have 30% female managers and 5 to 10% female directors by 2020. This is a very aggressive goal given the current levels of 9.2% female managers and 2.8% female directors. While there is no enforcement mechanism, this quota allows for frank discussions on a sensitive issue and forces companies to essentially “comply or explain.”
HT: Obviously diversity is an area where Japan lags far behind their US and European counterparts. Where else do you see gaps in Japan’s overall ESG performance?
LC: Boston Common places a lot of emphasis on the “G” in ESG, as we believe that without good governance being in place it can be very difficult to talk about the other issues. A recent report by Jeffries analyzing Japanese board structure, “Board Structure: Reality Versus Best Practice,” indicates that less than ten percent of TOPIX 500 index company corporate boards have an acceptable board structure. And so, corporate governance issues are necessarily a top priority for us in Japan. The good news is, three of the companies we met with, Astellas, MUSG, and ORIX were among the top ten percent.
HT: How do you approach your discussions with Japanese companies? How is it different than your conversations with US companies?
LC: My approach has evolved over time. When I first started, I was more hesitant, or should I say more polite, as it was important that the doors remain open to us. I was more conservative about the questions that I would ask as we built a relationship of trust with the companies.
This has changed as more companies have come to visit us in Boston and we have been more involved with these companies at the C-Suite level. Some companies already have to be in compliance with other countries’ regulatory guidelines such as EU Reach on chemical safety or Dodd-Frank’s Section 1502 on conflict minerals disclosure. Panasonic, for example, has been involved in global collaborative engagements dealing with extremely sensitive issues like addressing child labor in cobalt sourcing and has taken a leadership role in moving Japanese company action on conflict minerals.
When it comes to core expectations around environmental and social issues, our expectations and conversations are now fairly well aligned with the conversations we have with U.S. and European companies.
HT: How do you approach sensitive issue areas, such as diversity?
LC: The flow of the agenda is actually very important. We usually start with issues where the company has demonstrated good practice. We work our way down to issues where we see need for improvement and provide a strong business case for why these issues are important to global investors. We offer them assistance and tools that can help work them up the ladder to better practice.
The issues of diversity and women’s empowerment are on the agenda, but we have a different kind of conversation that meets them where they are at in terms of current practice. During this trip, I pointed out to several companies that we have implemented proxy voting policies that lead us to vote against their boards if they do not have at least one woman on the board after this year. I also shared where some of their Japanese peers might be ahead such as issuing a public goal on increasing women in management and encouraged them to follow suit.
HT: We note that you visited one bank that has credit exposure to the Dakota Access Pipeline. This is a very high profile issue among investors in the United States. How did the discussion go with MUFG?
LC: On this issue, we did not have a very interactive conversation. Instead, they listened to our investor perspective and concerns. I conveyed that there was a lot of active protest happening and a lot of investor discussion around the risks.
I think that it was important that company management – including Investor Relations personnel – heard from a global investor on the front lines that this is an important issue and that it is not going to go away. Scrutiny on human rights issues will continue in situations like the Dakota Access Pipeline and it is important to have policies and procedures in place. It is harder for a company to simply ignore or dismiss the issue when you are there in Tokyo, sitting across the table from them!
We have since followed up with MUFG and shared additional steps we think it is important to take. We have encouraged them to issue a public statement such as their peers including Citi, and TD Bank of their risk assessment, engagement with stakeholders, and potential next steps.
HT: For a small investment management firm, Boston Common seems to have substantial access to company personnel and many ongoing productive relationships. What is the key to your success?
LC: The key is our model for dialogue. We do our research and go into the conversation informed. We customize the questions to what we consider to be the key risks and opportunities for each company aligned to their business model. We send our questions ahead of time so that we can ensure that the right people are in the room. It is important that we understand where the company is on a continuum of practice and meet them where they are with a viable next step.
Over the years we have been traveling to Japan, we have developed a reputation as an informed stakeholder that is a known quantity, one that can serve as a “focus” or proxy for the global investment community.
HT: How does the information that you glean from your trips influence your firm’s investment decision-making process?
LC: As we are typically invested in advanced players with good ESG practices to start with, we are encouraging our portfolio companies to take the next step, to focus on long-term sustainability. I consult with our financial analysts to help develop the agenda and provide a post trip debrief. Two areas of particular interest to them are the direct bottom line impact of eco-efficiency initiatives and chemical safety. Both of these areas present tangible risks and opportunities for investors and companies alike.
HT: What can you tell us about the evolution of your conversations with Japanese companies over the last decade?
LC: Overall, we have seen a marked change in the open and direct nature of the discussion and a willingness to showcase their “corporate culture” around managing sustainability issues. Each meeting even included a discussion on how CSR/ESG issues are brought to and discussed at the board level.
Generally, we are seeing clear progress by global Japanese companies on advancing ESG/CSR issues, moving from a regional approach to a global approach, and a more robust shareholder engagement model.
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