Stewardship responsibilities and ESG investment
Initiatives at Asset Management One
At the same time that Asset Management One, which is the Mizuho group company responsible for asset management, began operations in October 2016, we newly established our Responsible Investing Department (currently Responsible Investment Group) and proceeded with initiatives for active engagement in discussions with our investee companies regarding environmental, social, and corporate governance (ESG) issues and exercise of proxy voting rights.
Moreover, with the aim of strengthening our capabilities for engaging in productive dialogue that will lead to sustained growth in corporate value, Asset Management One expanded our staff of ESG analysts who are responsible for engagement with passive investments both in and outside Japan. In April 2017, we also concluded an alliance with Hermes EOS, which is a leading engagement company with established processes in this area, and began a program of engaging with overseas companies. Further, in April 2020, we established the Sustainability Investment Team in the Equity Investment Group to strengthen our ESG investment in our active asset management.
Approach to engagement activity
At Asset Management One, we select companies for developing close relationships with and then conduct engagement activities.
In our passive asset management activities, which account for the majority of our equity investing, after taking into account the level of impact on the market, we select companies for ongoing dialogue regarding their initiatives to address their ESG issues and other matters.
In our active portfolio management, after considering the corporate issues and effect on corporate value of these issues at the time when they are solved, we then conduct our engagement activities.
Actual engagement activities
Breakdown of engagement activity issues (fiscal 2020)
|Environmental issues||Responses to environmental issues, including climate change, biodiversity, pollution, and waste||10.9%|
|Social issues||Responses to social issues, including diversity, labor standards, industrial safety and health, and product liability||5.9%|
|Governance issues||Responses to governance issues, including the structure of the Board of Directors and risk management||29.9%|
|ESG issues||Responses to comprehensive ESG issues, such as CSR/ESG information disclosure and supply chain management||26.8%|
|Corporate strategy||Management strategy, business planning, etc. that contributes to medium– to long–term corporate value||22.2%|
|Capital structure / Financial strategy||Financial strategy, capital policy, etc. for improving capital efficiency and enabling sustainable growth||2.3%|
|Performance||Changes in performance and their causes, etc.||1.8%|
For equity within Japan
Note: The percentage of the number of company engagement activities related to climate change in FY2020 was 7.8%.
Examples of engagement on various topics
Our analysts met with steel manufacturers who are facing urgent issues related to addressing climate change. We provided scenario analysis in line with TCFD recommendations and GHG emission reduction targets for 2050. We encouraged the steel manufacturers to augment their existing activities by declaring their own individual environmental targets by the end of the current fiscal year.
|Analysts' view||The impact of global warming on corporate activities is steadily increasing, and a slow response of corporate countermeasures will directly damage corporate value. Conversely, advanced climate change measures would very likely reduce that risk and strengthen the competitiveness of the core business.|
|Dialogue with company's management||We shared examples of companies that introduced their actual measures and issue recognition in disclosure content related to the TCFD recommendations and exchanged views on innovative technology trends and changes in investor responses to climate change. Regarding announcing specific company goals and scenarios by the end of the fiscal year, we conveyed that the reports would be expected to be advanced, to take into account trends of other companies in Japan and overseas, and to highlight a variety of efforts related to climate change issues.|
|Response from Company A||The company told us that its Board of Directors are holding deeper discussions about climate change, they have begun using climate change impact as a criterion to consider when revising their group structure and their business portfolio. The company also plans to announce its own environmental targets at the end of the fiscal year, and that it considers the 1.5° Celsius target to be important even without a clearly defined scenario.|
We engaged with a construction company on the topics of creating a comfortable workplace and the active participation of women. We confirmed that the active participation of women has had a positive impact on branch management, and that the results of diversity initiatives have begun to appear.
|Analysts' view||In Japan where global competition is intensifying, industrial structures are changing at an accelerating pace, values are diversifying, and the demographic is rapidly changing to a low birthrate and aging population, many companies are facing issues related to utilizing women and foreigners in the workforce, and the slow progress in this area is causing direct damage to corporate value. Advanced initiatives to promote diversity and inclusion will help companies attract superior talent and spur innovation, which will very likely increase company and employee productivity and support and boost ongoing improvement in corporate value.|
|Dialogue with company's management||We promised our employees that we will create "a vibrant work environment where employees feel motivated and challenged" and stated our objective to create a work environment where all employees can work with enthusiasm. We are also stepping up efforts to promote the active participation of women (employee ratio, hiring ratio, managerial position ratio). We are looking forward to verifying management awareness and the effectiveness and progress of our efforts.|
|Response from Company B||The company told us that it reports on its efforts to promote the active participation of women in the workforce to its Board of Directors, and management awareness is high. The benefits of female managers, such as an increase in active communication, is appearing in the results of our branch sites, including in the performance figures. The percentage of female managers is above 4%, and our target is 6% in 2024. Women hold several general manager positions, but none are executive officers, and we recognize that there is also a psychological barrier related to senior positions. We understand the need to create a training program and a structure for women to advance to positions in management and higher.|
We determinedly discussed the importance of management reforms with a conglomerate corporation that was chronically slow in making management decisions. The company ultimately switched from its long–established system of a single chairman and president to a new governance system with a distinct division of roles between the chairman and the president. We also talked with outside directors who have experience in corporate management and were highly aware of the urgency of the situation, and we encouraged further strengthening of governance to establish a sustainable transformation.
|Analysts' view||For the Board of Directors to be able to respond flexibly to changes in the business environment and to fully exercise its functions for ongoing improvement of corporate value, companies need to appoint outside directors and guarantee them sufficient independence, including by ensuring the length of their term. The outside directors must be chosen to represent a diversity of knowledge, experience, and abilities. At the same time, mechanisms to ensure transparency and highly rational decision–making will very likely reduce risk and increase the competitiveness of the main business.|
|Dialogue with company's management||We have been in dialogue with management for many years, but this year we sought to help speed up various initiatives by also meeting with outside directors who are actively pressing for the importance of management reform. The revisions to the governance system were positive steps forward, and we encouraged the Board of Directors to make more active efforts to improve corporate value, such as strengthening portfolio management to improve capital efficiency.|
|Response from Company C||An outside director who has been with the company for five years told us that the company has a history of structural reform but it is still in shock from the changes and therefore reluctant to implement selection and concentration of its businesses. I agree that drastic reforms are needed, even to the point of changing the name of the company.|
Development of products with a view to ESG
In recent years, institutional investors have been showing greater interest in ESG investment, which considers environmental, social, and corporate governance (ESG) issues, as a type of non–financial information. To continue to be an asset management institution that contributes to the development of our customers and society as a whole, Asset Management One recognizes the importance of ESG information as a foundation for financial information in the medium to long term, and we are working to integrate ESG into our investment strategies.
Japanese ESG Bond Fund
As part of our investment strategy integrating ESG evaluations, we established the Japanese ESG Bond Fund in August 2017 and began to offer it to institutional investors. This fund combines our research capabilities, our ESG investment knowledge, our proxy voting database (covering about 2,000 companies each year), and Mizuho–DL Financial Technology's ESG data analysis model. Using these integrated capabilities, we eliminate stocks that are high risk from an ESG perspective, aiming to reduce downside risk and secure stable returns.
"Sustainability Research Strategy Fund" concentrating on CSV* issues
Asset Management One carefully selects companies that are able to generate growth in income through initiatives to address social issues and offers institutional investors our Sustainability Research Strategy Fund, which concentrates on securing income. In selecting companies, this fund not only takes account of ESG assessments, but also gives more emphasis to return and carefully selects companies that are expected to report growth in income through initiatives to address and solve social issues. When establishing this fund, we considered the Sustainable Development Goals (SDGs) and other sources, including research on trends in social issues, corporate assessments from an ESG perspective, and works in collaboration with Mizuho Research & Technologies, which has abundant CSR consulting experience for corporations. For companies to practice CSV management in the long term, we think it is important for their management philosophies to be in accordance with CSV and for their management to insist on CSV ideals. We identify the stances of potential investee companies toward CSV management through constructive dialogue.
* CSV stands for Creating Shared Value, and it was developed by Harvard University professor Michael Porter in 2011 as a management model to enable companies to create both economic value and social value simultaneously.