Environment tops CSR agenda in Japan

The Tokyo Foundation, an independent, Japanese, not-for-profit think tank that works on policy proposals for both the public and private sectors recently reported on the growing importance of CSR reporting to Japanese companies.

It also rated the CSR performance of Japanese companies against other countries. In these ratings, Japanese companies as a whole fall somewhere between the middle and bottom of the global rankings, and there has been no appreciable change over the years. In the environmental component, Japanese corporations rank near the top.

However, in the social component they rank in the middle or lower, and when it comes to corporate governance, they are near the bottom. These results are consistently seen among all the reports compiled by the rating agencies.

The foundation also highlighted a problem that the increasing volume of CSR reporting worldwide has created.

Only a few foreign institutional investors investing in Japanese equities read individual CSR reports published by Japanese corporations. One reason for this is limited resources. Investment firms with global portfolios hold shares in a huge number of companies: between 1,000 and 2,000 in the case of midsized asset managers, and 5,000+ at big firms.

These days most of the larger asset management firms have departments dedicated to ESG (environmental, social, and governance) risk assessment, but even so, reviewing the CSR report of each and every listed company is physically impossible.

According to the foundation, the most important readers of CSR reports are ESG rating agencies who analyse and rate the ESG performance of stock-issuing companies on behalf of institutional investors. They mainly use data from the companies’ environmental, social, and governance information in CSR reports, along with answers to questionnaires. They may bring their own special research methods to bear, and virtually all global investors depend on them for ESG information.

Japan’s overall ESG ratings, based primarily on individual companies’ CSR reports, are consistently at or below average for advanced industrial countries.

A key reason is that for foreign institutional investors, Japanese equities are usually part of a global or Asian portfolio. This means that they are evaluated by global standards, with no allowances for circumstances peculiar to Japan.

Moreover, the basis for comparison is not Japanese corporations but all corporations in the global portfolio.

Also, when it comes to corporate governance, Japanese companies almost invariably lag their Western counterparts in social responsibility measures such as supply chain management, human rights, labour practices, and diversity.