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What Does ESG Mean for Investors in Japan?

by Yokaze Ito

  • 04 Jul 2019
  • PE
  • VC
  • HF
  • PD
  • RE
  • INF
  • NR

Preqin’s very first Japan-focused report, the recently released Preqin Investor Outlook: Alternatives in Japan, dives into the past, present and future of the alternative investment landscape in the country. Among the issues and trends discussed in the report, which also features insights from local industry professionals, concerns related to environmental, social and governance (ESG) stand out as a common theme.

The pivotal moment for ESG in Japan came in September 2015, when Tokyo-based Government Pension Investment Fund (GPIF), the world’s largest public pension fund with JPY 150tn in assets under management, announced its commitment to ESG investments after becoming a signatory to the United Nations Principles of Responsible Investment (UN PRI). This paved the way for other domestic investors to follow suit.

Preqin Pro tracks 303 Japan-based investors that are actively or considering investing in at least one alternative asset class. To better understand investor sentiment, Preqin conducted a survey in Q1 of this year of a variety of Japan-based institutional investors.

The UN PRI Umbrella
Recognizing the increasing relevance of ESG practices among Japan-based investors, the survey explores the adoption and integration of sustainable investments. Almost one-third of respondents (29%) have an ESG policy in place for their alternative investments, and another third plan to implement an ESG policy over the next five years.

The most common reason why survey respondents are considering ESG investments is due to their status as UN PRI signatories. The increasing emphasis placed on ESG can be seen in the steady growth of UN PRI signatories among Japan-based investors. Back in September 2015, there were only 34 UN PRI signatories located in Japan. By March 2019, this figure had doubled and Japan emerged as the only country in Asia to make it into the top 10 UN PRI signatories, as seen in the table below. Being part of a unified body such as UN PRI serves as motivation for Japan-based investors to continue their responsible investing efforts, and offers them the opportunity to collaborate across the UN PRI network.

Source: PRI

Putting the ‘S’ in Sustainable
Between environmental, social and governance factors, the majority (52%) of survey respondents told us that socially responsible investing was their highest priority when making ESG investments. This could well be linked to Japan’s longstanding social issues of low fertility rates and an ageing population; since Japan’s economy is highly correlated to its social issues, the country devotes more attention to such matters. While Japan-based investors focus on maximizing their financial returns, they also seek to make a positive social impact through their investments.

More than a Fad
Alternative investments typically have longer investment horizons than traditional asset classes, which is in line with ESG objectives which aim to provide long-term benefits. As institutional investors in Japan look to start or resume investments in alternatives, incorporating ESG factors into their investment mandates seems a natural course of action over the long haul. Sustainable investing is therefore likely to thrive as investors become more active in alternatives.

To explore Japan-based investors’ preferences and investment sentiment in greater detail, download our newly published Preqin Investor Outlook: Alternatives in Japan report.

 

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