“It is too early to say whether the Stewardship Code has changed Japanese investors’ approach to engagement. The Code represents a significant change in expectations of Japanese investors and we will need five or six years of focused monitoring and implementation before we can tell whether it has delivered real change in investor practice.”

Tetsuo Kitagawa (Professor of Finance and Corporate Governance, Graduate School of International Management, Aoyama Gakuin University, Japan)

Drivers for Action

Asset owners – specifically public pension funds – have started to pay much more attention to ESG issues since 2014. Interviewees identified a number of factors that have influenced this growth in interest:

  • The increased exposure of asset owners to listed equities as a result of Abenomics encouraging Japanese pension funds to move from Japanese government debt to equities. This has meant that asset owners have had to develop their understanding of ESG issues as part of developing a long-term picture of the companies in which they are invested.
  • The introduction of the Stewardship Code and the fact that the Code has been signed by 191 institutional investors is likely to induce other pension funds to sign the Code.
  • International practices and approaches to responsible investment. Interviewees pointed to different factors as having an influence on the Japanese market: (a) the growth and profile of the PRI in Japan (both in terms of raising the awareness of responsible investment and in terms of building capacity), (b) the Abenomics objective of increasing foreign investment in the Japanese equities market through strengthening shareholder rights and Japanese corporate governance, (c) the desire to align the Stewardship Code with international best practices, with the UK Stewardship Code being of particular interest, and (d) the fact that a number of international investment managers signed and strongly supported the Stewardship Code.

Barriers to Progress

Interviewees identified a number of distinct barriers to progress:

  • Many Japanese investors continue to have concerns about whether ESG analysis is the same as screening.
  • Japanese investors are concerned that implementing responsible investment may be a breach of their fiduciary duties.
  • There is a lack of robust evidence on the relationship between environmental and social issues and investment performance. Interviewees commented that this contrasts with corporate governance where the relationship between corporate governance and investment returns has been clearly established.
  • The relatively limited expertise in Japan in areas such as ESG integration and active ownership.
  • The relatively limited attention being paid by corporate pension funds to ESG integration and responsible investment.
  • The weaknesses in the disclosures being provided by companies on their social, environmental and governance performance. This limits investors’ ability to integrate consideration of these issues into their investment practices and processes. Interviewees commented that the Corporate Governance Code will encourage better corporate disclosures on environmental and social as well as governance issues. This should make it easier to investors to take account of these issues in their investment processes.

While it is too early to make a definitive assessment, some interviewees questioned whether the progress that has been seen to date on stewardship (active ownership) will be maintained. They commented that the comply-or-explain approach that underpins the Code is new for Japan and it remains to be seen whether Japanese investors will work within the spirit of comply-or-explain or whether they will end up defaulting to boilerplate activities and reporting. They acknowledged that the FSA has encouraged industry organisations to work with these principles, rather than simply creating standard templates and checklists, but suggested that the FSA needs to look closely at the quality of engagement being conducted and the outcomes being achieved.


In addition to the global recommendations, we recommend that:

Financial Services Agency (FSA)

The Financial Services Agency (FSA) should continue to monitor the implementation of the Japanese Stewardship Code, analysing asset owner oversight of their investment managers’ implementation and analysing the investment and other outcomes that result from the code.

Ministry of Health, Labour and Welfare (MHLW)

The Ministry of Health, Labour and Welfare (MHLW) should require public and corporate pension funds to state how they integrate ESG issues into their investment decisions. As part of these requirements, MHLW should commit to:

  • review progress annually;
  • explain how asset owners integrate ESG issues into their investment processes;
  • analyse how these commitments have affected the actions taken and the outcomes achieved (where the outcomes relate to both investment performance and to the ESG performance of the entities in which they are invested).

Corporate pension funds

Corporate pension funds should sign the stewardship code and publicly commit to responsible investment.

Investment banks

Investment banks should produce more research on the drivers of long-term investment value (including ESG factors).

Read Fiduciary duty in the 21st century: Japan roadmap