Morrow Sodali expanding presence in Japan

Since the introduction of the Corporate Governance Code in Japan in 2015, with revisions in 2018 and 2021 companies in Japan are under mounting pressure to raise their environmental, social, and governance (ESG) standards and disclosure to meet expectations of investors.

Japanese regulators have tightened ESG reporting guidelines, institutional investors increasingly expect corporations worldwide to adopt international norms such as the TCFD reporting framework, and within the wider Japanese society there is a growing acknowledgment that measurements of business performance have moved on from purely financial metrics.

"Japanese companies are today cognisant of ESG principles and their role in creating corporate value, and they recognise that businesses which fail to meet international expectations or standards may disqualify themselves from opportunities in the global economy," says Henderson.

"However many are very much at the start of their ESG journey, and are still crafting their strategies in areas such as sustainability reporting, developing climate transition strategies and calibrating targets for ESG metrics in executive pay.

"Morrow Sodali helps issuers to better understand their existing shareholders and to attract new investors by leveraging our deep knowledge of global investor decision- making and of governance and disclosure regimes in diverse markets around the world, and addressing ESG risks, opportunities and disclosures is a key aspect of our services."

Japan’s authorities have taken a strong leadership role in encouraging their investment markets to align with those of their major trading and investment partners. The government has released a bold roadmap to tackle climate change, including the goal of net zero greenhouse gas emissions by 2050. It has also acknowledged other threats to the sustainability of the Japanese economy such as the nation’s falling birth rate, and recognises the importance of protecting the investment returns of its ageing population.

In 2021, the Financial Services Agency of Japan issued a report entitled Building a Financial System that Supports a Sustainable Society¹, which identifies priorities including better ESG disclosures by asset managers and issuers.

Also in 2021, revisions to Japan’s Corporate Governance Code for companies listed on the Tokyo Stock Exchange (TSE) were published that will apply to corporate reports issued after AGMs held after April 2022 and address areas including board independence, diversity and climate-related disclosures.²

In particular, they require companies listed on the TSE Prime Market to "enhance the quality and quantity of disclosure based on the TCFD recommendations ... or an equivalent framework".

Kentaro Kogi, Director of Morrow Sodali Japan, says while this ‘comply or explain’ part of the Code is still non-mandatory, more companies are recognising growing pressure by investors on adopting climate-related reporting.

"They are realising that a deeper internal understanding of their climate-related risks and opportunities leads executives to better strategic planning and capital allocation decisions," says Kogi. "Complying companies also report improved relationships with stakeholders including customers and financial institutions, many of whom now analyse emissions as part their investment and loan risk assessments."

While Japan’s traditional business culture still differs from that of other industrialised nations in significant ways, it is modernising rapidly, he says. For example, attitudes are changing towards activist investors, who are becoming more vocal and visible in pushing their ESG agendas in Japan.

Andrew Vasey, the Director of Corporate Governance APAC at Morrow Sodali, is a governance specialist familiar with Japanese companies.

"Companies and investors are becoming more receptive to input from proactive shareholders pushing for change," says Vasey. "Activists are no longer dismissed as mere irritations because they are putting forward some very valid proposals, and there is a growing recognition among domestic investors that these campaigns can generate value for all shareholders."

Morrow Sodali’s Japan team has a deep understanding of investor relations, and of how to engage with Japanese issuers. Dominic Henderson has 35 years of financial sector experience, of which 23 were in institutional research sales & trading. He was Head of Macquarie Securities Japan, has served on the board of directors of two Japanese public companies and is a Senior Advisor to Akatsuki Corporation. Henderson lives in Tokyo and speaks Japanese.

Kentaro Kogi is a former Senior Analyst and Director of Allianz Global Investors and of Citi, having worked on both the buy and sell sides. He is experienced in corporate research, company engagement, proxy voting and supporting Japanese companies in building constructive relationships with capital markets, formulating ESG strategy and improving their disclosures.

In Japan, we are actively building bridges within the corporate community through the establishment of our Tokyo office and activities including hosting and participating in webinars, and supporting the activities of the institutions such as the Board Of Directors Training Institute of Japan and the Third Arrow Strategies Japan Board Diversity Network.