As part of our dedicated 15-year sustained dialogue program in Japan, I visited the country again in May. I spoke at several events, participated in industry conferences like RI Japan, and met with management representatives from eight portfolio companies, including Ajinomoto, Daikin, Eisai, Hoya, Keyence, MUFG, Orix, and TDK. In addition to covering core business model concerns with each company, I discussed progress related to the governance of sustainability (board education, ESG KPIs), advancing women in the workplace (DEI workplace programs, employee pipeline), climate (assessment and target-setting), and biodiversity (policy and assessment).  

We will explore these topics and more this September in a forthcoming webinar where I will speak to my findings in detail. For now, I will share key takeaways and report on recent progress resulting from our Japanese company engagement efforts.  

Company and Regulatory Status 

I had a unique opportunity to speak to an esteemed group of Japanese women board directors about how boards should grapple with AI governance and ethics in an event hosted by the Japan Board Diversity Network (JBDN). I also helped convene a discussion with Japanese investors on engaging companies on Ethical AI. These events and company dialogues were abundant sources of insights on material sustainability topics. Here is a summary of what I learned:

  • Regulators and industry groups are supporting global best practices on governance, sustainability disclosure, exchange listing requirements, and increasing women on boards and in management. 
  • Focused efforts by regulators will be needed to accelerate the unraveling of cross-shareholdings and increase capital investment to keep Japan attractive to global investors 
  • Companies are making progress across sustainability issues but need to expand English language disclosure and align it with Japanese disclosure, establish systematic collection of sustainability data, support women in management at every stage, and advance sustainability governance with mandatory board training and performance- and compensation-linked ESG-KPIs.  
  • Investors must advocate for global best practices on corporate governance and sustainability while supporting the substantial progress of the past few years. They should support regulatory efforts like increasing women in management to at least 30% by 2030.  
  • Boston Common’s sustained dialogue approach has generated results; the tone of dialogues is collaborative, and companies want feedback on sustainability practices and disclosure.  

As these insights indicate, regulators and industry groups like the Asian Corporate Governance Alliance (ACGA) will continue to focus on core governance issues, namely cross-shareholdings, aligning sustainability disclosure with global best practices, and requiring material disclosure in English. This past April, Boston Common joined the ACGA in an open letter to the FSA and the TSA to advocate for a stronger corporate and regulatory focus on unraveling cross-shareholdings in Japan to unlock new capital and investment potential for Japanese companies. This letter provides key recommendations on the divestment of strategic shareholdings in a manner that would advance governance practices and help companies achieve sustainable long-term growth

Women’s Empowerment 

Japan remains well behind most developed countries, with just under 15% of women in management positions. However, two notable signs of progress since 2022 include a formal call from the Prime Minister for all companies to fill at least 30% of management positions with women by 2030 and for the Tokyo Stock Exchange to amend its listing requirements, compelling Prime listers to abide by the 30% rule.  

Some companies are using the 30% threshold as their north star for 2030; others are struggling to build a pipeline of women candidates. We have engaged all companies on this topic with varying results:  

  • Advancing: Orix has 30% of women in management at the group level and is nearing 30% in Japan. Our request: Establish a more ambitious target for 2030.  
  • 30% by 2030 Target Met: Ajinomoto, Eisai, MUFG, & OrixOur request: disclose Workplace DEI Roadmap (1-3 years), describe challenges and progress.  
  • No 2030 Target: Daikin, TDK, Keyence. Our request: set a 2030 target and disclose relevant policies and steps.   

Governance of Sustainability/ESG KPIs  

If companies did not have ESG KPIs linked to performance or compensation, we asked them to adopt them in the next 12 to 24 months (Daikin, Keyence, TDK). If ESG KPIs were in place, we asked for detailed reporting and coverage information (Ajinomoto, Eisai, Hoya, MUFG, Orix).  

Sustainability Disclosure 

Aligning English-language with Japanese sustainability disclosure was a focal point, and with regulatory support for TCFD disclosure, more companies are disclosing at some level. For companies with European operations, we discussed preparing for the EU Corporate Sustainability Reporting Directive (EU CSRD) and other sustainability disclosure requirements across various markets—a challenge for many Japanese companies.  

All companies follow the Japanese guidance on ISSB, which will soon become a soft law in Japan. Regulators also support the Taskforce on Nature-related Financial Disclosure (TNFD) with a domestic consortium. Advanced players like MUFG will issue their first TNFD report; others, like Ajinomoto and Orix, are reviewing TNFD and biodiversity impacts.  

Most of the topics above were integrated into every engagement. Others were company-specific, including climate finance/biodiversity (MUFG and Orix), chemicals management (Daikin), human rights due diligence and supply chain (Hoya, Keyence, TDK), nutrition performance (Ajinomoto), and access to health (Eisai).  

A critical gap identified by Japan’s Ministry of Economy, Trade, and Industry (METI) is how most Japanese companies lack a systematic way of collecting sustainability data. We will support this area in our follow-up with companies. Most companies we engage in disclose a fair amount of sustainability data, with typical disclosure gaps related to appropriate supplier data, traceability of raw materials, human rights due diligence, and impact assessment.  

Decades of Steady Progress 

It is an exciting time to invest and engage in Japan. There is a whole-government approach to unlocking investment and capital and widespread corporate willingness to accelerate action to attract additional investment. We have engaged Japanese portfolio companies for over twenty years to advance core sustainability practices and disclosure. We are excited to continue our work with many longtime holdings, establish dialogues with newer holdings, tapping into fresh investment and engagement opportunities. 

Published On: July 10, 2024Categories: From the Commons