Hidden Treasure

Can women overcome obstacles to fill Japan’s tech gap?

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The Japanese government calls it a “digital cliff”—a projected shortfall of 450,000 engineers, programmers, and other tech workers needed by 2030 to undertake the country’s digital transformation.

Harnessing the largely untapped potential of Japanese women—who are drastically underrepresented in science, engineering, and computer programming jobs and college degrees—could help narrow that gap.

“Authorities realize they face a big labor shortage, and some people talk about opening up immigration. But, already, we have a huge resource: Japan’s hidden treasure is the power of women,” said Annie Chang, vice-chair of the ACCJ Independent Business Committee and head of IT recruiting company AC Global Solutions Ltd. In 2013, Chang co-founded Women in Technology Japan, a group dedicated to boosting female participation in the tech industry through workshops and mentorships.

And yet women face a host of obstacles—cultural, educational, corporate, and familial—that keep them from playing bigger roles in technology. As a result, Japan has a large digital gender gap, with some of the lowest shares globally of women in tech jobs and college programs, even compared with many developing Asian nations.

According to UNESCO data, just 14 percent of university graduates with engineering degrees in Japan are women. Compare this with 20.4 percent in the United States, 24.5 percent in the Philippines, and 30.8 percent in India. Among engineering researchers, Japanese women account for just 5.6 percent. That’s left a dearth of female role models to inspire girls about their futures.

“It’s embarrassing,” said Asumi Saito, 30, who co-founded Waffle, a non-profit in Japan that works to support teenage girls interested in science and technology at a critical juncture in their lives, when they must choose between pursuing science or humanities tracks in high school.

“I’m hopeful about the younger generation,” said Saito, who believes that bringing more women into technology will benefit the broader economy and society. “It will lead to greater diversity in innovations and, likely, more humane applications of technology in areas such as health and childcare.”

Allowing women to play a bigger role in the tech industry would “lead to so many more business opportunities,” said Yan Fan, a software programmer who previously worked in Silicon Valley and, in 2017, co-founded coding academy Code Chrysalis, which runs intensive 12-week programming boot camps in Japan. About a quarter of its students are women. Fan and her academy were featured in the April 2019 issue of The ACCJ Journal.

“The message I want Japanese women to have is: ‘You are 50 percent of one of the most powerful economies in the world. You are a significant part of the workplace,’” Fan explained.

And that could lift Japan on the IMD World Digital Competitiveness Ranking, where the country languishes at 28th globally and seventh in Asia, behind Hong Kong, Singapore, China, and South Korea.

Systemic Change

But Japan’s digital transformation could leave many of its women behind. Those at home with children, or who are middle-aged, have little chance to learn new in-demand skills, such as programming, machine learning engineering, and data science.

That’s a global concern: as automation takes over low-skilled jobs around the world, women stand to lose more than men, the 2021 UNESCO Science Report warns.

Fan isn’t confident that Japanese society can shed the constraints and cultural assumptions that impede women. She points to the oft-heard microaggression, “Even a housewife can do this,” as an example of the mindset that grips Japan. “When you hear those kinds of things day after day, it becomes ingrained in you.”

Systemic change is needed, Fan said. “The onus seems to fall mostly on women. There’s little talk about all the other changes that need to happen for women to actually make the space in their lives to learn new skills. So, I think women will fall further behind as the country digitizes.”

Still, Fan is optimistic about Japan’s potential—and the wider impact it can have. “If we can elevate women in this society, we can create reverberations throughout the world just due to the sheer size and power of Japan’s culture and its economy.”

Mindset Change

There are signs of modest progress. Compared with 20 years ago, there’s greater awareness of diversity, and companies are taking steps to hire and promote more women. That’s thanks partly to former Prime Minister Shinzo Abe’s promotion of Womenomics, a term he apparently borrowed from Kathy Matsui, the former Goldman Sachs Japan vice-chair who, earlier this year, co-founded MPower Partners, Japan’s first venture capital fund focused on environmental, social, and corporate governance (ESG). “Just the fact that diversity is part of the vernacular is a huge step forward,” Matsui said.

But, more importantly, there’s been a mindset change at some corporations. Leaders have realized that giving women bigger roles in projects and leadership isn’t just a human rights and equality issue, but a driver of economic growth, she added.

“If you don’t think diversity is a competitive and growth imperative, it really isn’t going to get any traction,” she said. “But if you think it is a weapon for growth and a competitive advantage, and you filter that down through your organization, you can get buy-in. Then you can start to change how you recruit, how you evaluate, how you promote. That’s the only way you’re going to get women into those leadership positions.”

One step in this direction is the appointment of Yoko Ishikura, professor emeritus of Hitotsubashi University, to be the No. 2 official in charge of Japan’s new Digital Agency.

The number of women seeking and finding jobs in the tech industry is slowly growing. Of the 27,300 candidates placed by tech recruiting company Wahl + Case since 2014, the portion who are women has risen from 27 percent to 38 percent, explained founder Casey Wahl. However, women make up 14 percent in highly technical positions such as software coding, he said; more go into marketing and product design.

Women who do land tech jobs find they pay better than work in many other industries. The average annual salary for candidates recently placed by Wahl + Case has been about ¥9 million ($80,000).

Compared with 20 years ago, Wahl said he sees major changes in the role of women in the workplace. “There’s a big trend going on, a generational time shift,” he noted. “The people in their thirties and forties—when they get into power, then things will change even more.”

The combination of soaring demand for tech jobs and greater commitment to diversity presents women with an opening—provided they have the right skills. “Women have a great opportunity now,” Chang said. “But the pipeline is so small. How do you increase this from the grassroots level?”

Home Front

Parents and teachers have the biggest responsibility in nurturing—or discouraging—girls’ interest in science, math, and computers, Chang, Matsui, and others said.

When Chang asks Japanese female engineers who had the biggest influence on their career choice, the frequent response is their fathers. Ironically, it is more often their mothers who tried to dissuade them, she explained. “The moms are generally stuck at home, so they don’t have much exposure to technology. They’re not very encouraging of daughters who are interested in science and don’t think the image is very good.” Some even worry about their daughter’s marriage prospects if they pursue an engineering career.

Even today, there is a persistent bias in Japan that girls aren’t particularly good at science and math. Parents and teachers may express such views, and girls pick up cues from anime and TV shows that tend to portray boys tinkering with robots or computers, but not usually girls.

Those images can influence girls’ self-image and confidence, said Miki Ito, 38, an aerospace engineer and general manager at Astroscale, which is engaged in removing space debris circling Earth. “There’s the idea that if you go study science at university, it’s full of men, or it’s really difficult,” she said.

Ito’s parents were surprised but supportive when, as a teen, she expressed a desire to study space. Her only model was Chiaki Mukai, Japan’s first female astronaut. In college and graduate school, most of her college classmates and all her teachers were men, but Ito said she didn’t encounter any discrimination.

“I actually think women are well-suited to programming. It involves setting up steps to carry out a plan, like going on a trip. Women are good at that kind of planning for their families,” Ito said. “As more women take these IT jobs, they will become role models for the younger girls, who will realize they can do those jobs.”

Digital Future

To prepare Japan’s youth for the digital future, the government now requires computer programming to be taught in elementary schools. At that age, boys and girls are equally enthused about technology, said Haruka Fujiwara, 34, who has been teaching and coordinating programming classes at her school in Tsukuba, located north of Tokyo in Ibaraki Prefecture.

“The kids love it. They naturally engage with each other and talk about projects together. Children who were kind of quiet or not very confident now brag about their projects,” Fujiwara said. “I haven’t seen any gender difference in enthusiasm or ability.”

To create projects, fifth and sixth graders use software and tools such as Microsoft Excel and Scratch, a coding language and community developed for children by the US-based non-profit Scratch Foundation. One of their projects measured the amount of carbon dioxide in the air, Fujiwara explained. Seventh graders at her school start learning the JavaScript programming language. “In the upcoming generation,” she said, “I think girls will be using computers just as confidently as boys.”

Until age 15, Japanese boys and girls perform equally well on international standardized math and science tests. But a gap develops once they enter high school and are required to choose between science and humanities tracks. More girls choose the latter, perhaps because science seems daunting or because they are encouraged to do so by their teachers or parents.

The gender gap widens further in college and graduate school, where engineering and tech programs are dominated by male students and teachers. In many countries, this leaky pipeline phenomenon is common: the higher the education level, the fewer the women. But in Japan’s case, the flow narrows to a trickle.

And working women are generally expected to quit once they bear children, removing their ideas and contributions from the marketplace. When women are at home, they have few opportunities to gain tech skills, and tend to settle for part-time, low-paying jobs such as supermarket cashiers—a position that is dwindling as checkout kiosks take over.

While more young mothers are returning to work after maternity leave, finding daycare can be difficult—especially if they have to work late. And working women are still generally expected to do most of the housework and child-rearing, as well as care for elderly parents or in-laws.

To flourish and advance in the workplace, women may need to think more about how to brand themselves—how they can use their unique gifts and strengths to be successful, said Nancy Ngou, an ACCJ governor and co-chair of the Human Resource Management Committee, who is also head of organizational change and diversity at accounting firm EY.

“They shouldn’t have to emulate the male personality,” Ngou said. “Maybe they’re better at networking or building trusting relationships with people. As a leader, those are very important qualities.”

Reframing the Narrative

At Waffle, Saito and her co-founder, Sayaka Tanaka, are trying to change the narrative about technology and gender.

They run one-day camps for girls in middle and high school that cover programming basics and offer career talks, as well as hands-on experiences that emphasize the problem-solving, community-building, and entrepreneurial aspects of technology. “We want to create a safe space where girls can talk about these things freely,” said Saito, 30, who holds a master’s degree in data analytics from the University of Arizona.

Earlier this year, Waffle supported 75 young women who participated in a Technovation Girls contest, in which teams developed and pitched apps to a panel of judges. Many of the apps were intensely practical. One provided advice on where to find vegan food, and another divvied up household chores among family members. Recently, they received a grant from Google to support their work.

Saito said she receives text messages from girls about the opposition they face at home. One said her father refused to pay for her university tuition if she was going to major in data science and told her instead to study medicine—considered a scientific field more suited to women. Another girl said her parents didn’t want her to study physics because they were afraid that she would never get married.

“A lot of these girls don’t have adults around them to listen to them seriously,” said Saito. “That’s a huge problem in Japan.”

Creative and Flexible

Coding academies have popped up across Japan, but enrollment is heavily weighted toward men. Most women simply don’t have the time, money, or inclination to attend.

Trying to make programming attractive to women, Hitomi Yamazaki in April co-founded Ms. Engineer, Japan’s first coding academy expressly for women. With female models and muted purple tones, the website emphasizes the flexibility that programming offers, including working from home. Even the startup’s name is meant to convey the idea that being a female engineer is cool.

“We wanted to avoid the geeky image and stress the creative monozukuri aspects of programming,” Yamazaki said, using a Japanese term meaning craftsmanship or making things. “We also emphasize that programming is well-suited to a woman’s work style—the freedom of working hours and location.”

Applicants to the first class want to change careers or achieve more in their jobs, Yamazaki said, and 70 percent of inquiries have come from women with children. The pandemic has helped both working women and stay-at-home moms realize that working from home is a realistic option, she said.

Ms. Engineer aims to produce graduates who can do full-stack programming, meaning they can design web applications as well as manage databases and servers. The course costs ¥1.42 million, or about $13,000.

Yamazaki has worked to promote her new business among social media influencers, including Yuri Sasagawa, a model, TV announcer, and new mother who recently attended Ms. Engineer’s kickoff event and tweeted enthusiastically about the future opportunities for female engineers.

Elevating Women

Companies embracing diversity have taken various approaches to narrow the digital gender gap. Some have set numerical targets and implemented steps to reach them, while others have focused on changing hiring and promotional practices.

ACCJ member company Hitachi Ltd. recognizes that the input of women is essential to address consumers’ needs, said Tomoko Soma, a manager at the company’s diversity and inclusion development center. “Our entire business is changing, and we are not trying to sell products as much as services that provide solutions to everyday problems,” she explained. “To do that, we need a variety of employees coming up with ideas.”

Hitachi, which has been implementing initiatives to support and elevate women for more than 20 years, recently reached two goals: the employment of 800 female managers, who account for 6.3 percent of all the company’s managers, and raising the portion of female senior executives to 10 percent.

By 2030, the company aims to raise the ratio of female senior executives to 30 percent through its long-term plans to identify and develop promising young employees and by absorbing talent through global acquisitions, Soma said.

In keeping with government guidelines, female Hitachi employees can take up to two years of maternity and childcare leave, then come back to the same job. If the women have a hard time finding daycare for their child, Hitachi will help them and can extend the leave for a third year. “In situations where there are no nursery vacancies, we don’t want women to quit their jobs just for that reason,” Soma said.

Changing Hiring Practices

Online marketplace Mercari, launched in 2013 and one of Japan’s most successful startups, decided not to set numerical targets for women because doing so might lead to mistaken notions that some women were hired just to meet a quota, said D&I Strategy Team Manager Hirona Hono. “People may feel that they have to reach the goal for the sake of reaching the goal, instead of addressing the fundamental problem behind why this is happening,” she said.

Instead, the company has changed its hiring practices by expanding the pool of candidates to include as many qualified women as possible through recruiting events, women’s coding groups, and other methods. It also has installed checks in the hiring process that might detect bias. Human resources staffers check the pass-through ratios of male and female candidates after each interview to see if there’s any significant disparity and discuss the results with division leaders, she said.

Hono also added a series of diversity questions to the company’s internal promotion recommendation forms, including asking the person filling it out if other candidates from different backgrounds had been considered. If they hadn’t been, she wants to know why. “These questions keep people accountable,” she said.

At EY, while female employees are out for maternity leave, the company offers them a tablet so that they can stay connected to their peers and do e-learning if they want to stay up to speed, Ngou said. The company also provides women returning after maternity leave with an independent coaching service to help them work out daycare, their schedule, and the career they want when they return.

For real change to occur, Ngou said, there must be genuine commitment by the top of the organization—usually a man—displayed in public and behind closed doors. “If the leader doesn’t take it seriously, isn’t active in it, and doesn’t hold his other male leaders accountable for advancing women, nothing’s going to happen.”

Once the top adopts a change, the middle managers can confidently carry out the policies throughout the company, Ngou explained. “The top is so important. Change happens middle-out in Japan. But without the top leader voicing it, nothing will happen.”

Not a Sense of Crisis

The Japanese government has come under fire for doing little to address the shortage of women studying and training for jobs in technology—especially since doing so would help the country meet its digital transformation goals. One suggestion mentioned by several people interviewed for this story was to offer scholarships for female students interested in studying engineering.

“There’s still not a sense of crisis,” said Dr. Jackie Steele, a Canadian political scientist who has lived in Japan for more than 20 years. “I think Japan is going to have to hit an even bigger wall economically before the political and economic elite will admit that there are systemic hierarchies rewarding masculinity, senior age, and ethnocultural purity. These biases must be consciously eliminated. This undermines Japan’s ability to attract diverse talent in a global market.”

To give middle and high school girls exposure to tech workplaces, the government’s Gender Equality Bureau Cabinet Office set up a program in 2015 that promotes events where students can interact with female engineers, including those at ACCJ member company Amazon Web Services Japan G.K., and visit computer labs or university campuses. In 2019, some 36,000 people participated.

To help boost the number of workers with digital skills, the Japanese government offers subsidies that cover 70 percent of the cost of pre-approved training courses in artificial intelligence, data science, and other topics that are offered by private cram schools, explained Takefumi Tanabe, a director at the Ministry of Economy, Trade and Industry. While these don’t target women in particular, Tanabe sees Japan’s digital transformation as an opportunity for women to join the IT workforce.

Husband of the Year

The growth of ESG investing, or funding companies that meet certain environmental, social, and governance standards, can bring investor or market pressure for change, said Matsui, whose MPower Partners runs such a fund. For example, these funds will focus on ESG considerations, such as board diversity, which remains a big challenge in Japan.

“Japan is one of the fastest-growing markets globally for ESG investing. Every asset owner is increasingly focused on how to ‘ESG-ify’ their assets,” Matsui said. So, in addition to examining company fundamentals, fund managers are asking questions about the company’s carbon footprint, as well as its supply chain resilience, child labor policies, employee well-being, and the diversity of the workforce. “To me, the ESG movement is going to be a huge force for change,” she added.

A critical, but almost entirely overlooked, step is to educate and support Japanese men about their changing roles in society—and to celebrate those who are supportive husbands, said Wahl. There are plenty of seminars on what it means to be a working mother, but virtually none on what it means to be a working father. Many men assume that their main role is to work hard and provide for their families financially, although that view is changing among younger men.

“There should be a Husband of the Year award,” said Wahl. “He should get a prize and all kinds of recognition as his wife gives the speech about how she is successful because of what he did. And this has to be seen as cool.”

And if the government is going to offer women scholarships in technology, then it should also offer scholarships for men in caregiving, said Steele. “We need to work on both sides of the equation,” she added. “Men also face gender-based harassment if they stray from the corporate-warrior masculinity model.”

Matsui is encouraged by the differences she sees among the young men with whom she interacts. “They don’t necessarily want to work like their fathers and grandfathers, they don’t want to be slaves to their employers. They want to spend more time with their families. So, their values are more aligned with what many women have been striving for.”

That bodes well for the future. “The younger generation wants a world that is more equal. They want their spouses or partners to maximize their own potential,” Matsui added. “They’re still young, so they’re not necessarily in decision-making roles. But it’s only a matter of time before we see this generation leading Japan, and that makes me optimistic.”

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MPower Partners

Japan's first ESG venture capital fund

Japan has incredible potential to support innovative startups and for strong economic growth. Yet it continues to fall short compared with the United States and many other countries. Why is this? What can be done to turn the tide, energize business, and bring greater diversity and opportunity to the country?

These questions and more were addressed on July 19, when the American Chamber of Commerce in Japan welcomed Kathy Matsui, Yumiko Murakami, and Miwa Seki, the co-founders of MPower Partners, Japan’s first global venture capital (VC) fund focused on environmental, social, and governance (ESG) criteria. Managing Director Eriko Suzuki joined the three general partners for the virtual event co-hosted by the Women in Business, Alternative Investment, Sustainability, and Kansai Diversity and Inclusion Committees.

Launched in June, MPower is on a mission to empower startups that are providing tech-enabled solutions to societal challenges and to drive sustainable growth through ESG integration.

During the enlightening panel discussion, moderated by Association of Women in Finance President Yuki Hasegawa, the general partners and managing director covered a wide range of topics, including the challenges facing women founders, the importance of diversity on boards, why Japan is falling short of its potential, and why MPower has chosen to focus on startups rather than larger established companies.

Idiosyncrasies

The session began with Hasegawa asking how Japan differs from other countries when it comes to economic potential and ESG.

Murakami explained that, during her eight years with the Organisation for Economic Co-operation and Development (OECD), where she was head of the OECD Tokyo Centre, she worked with a number of interesting data sets which helped her see common elements in different scenarios that lead to economic growth.

“You need to have people who are well educated, you need to have money to invest, and you need to have very good social infrastructure as well as general stability in the society,” she noted, adding that a high level of technology is key.

“When you look at a lot of the data points around those metrics, Japan does extremely well. It is one of the best countries, which has all the elements necessary [in order] to have very strong economic conditions.

“Yet, Japan has not done all that well—especially over the past 20–30 years—relative to the United States and countries in Europe or even Asia,” she said.

This left Murakami wondering what is missing in Japan.

“You’ve got all of these great things—people, technology, money, a very stable social and political environment—and realizing this was actually one of the triggers where I started to think, what can I do? What can we do to change that?”

Matsui expanded on this.

“At least for me, I felt the sense of urgency. There was so much potential, but the situation, or the conditions, in this country didn’t feel urgent enough,’’ said the former vice-chair and chief Japan equity strategist at Goldman Sachs Japan. She retired from the company at the end of 2020 to start MPower.

“We know that Japan needs innovation. We know that Japan needs to leverage its human capital. We know that there’s ¥2,000 trillion in cash sitting under futons. So, who’s going to make that change? Who’s going to start that progress?” she asked. “We are, perhaps, one small grain of salt in this vast landscape, but what is it that we can bring to this dialogue from our own experiences and, frankly, what do we want to do with the next chapter of our lives? That’s what prompted this whole idea generation.”

Diversity also played a key role in the genesis of MPower, added Seki, an associate professor at Kyorin University who spent more than 20 years at Morgan Stanley and Clay Finlay. This is something that she, Matsui, and Murakami felt was lacking in Japan which they could bring to the table to help address the lack of global perspective that sometimes hampers Japan’s growth.

Personal Stories

While the struggle of women founders to find equal footing with men remains a serious issue in 2021, Murakami shared the inspiring story of her mother’s entrepreneurial spirit and success three decades ago.

A housewife until age 47, she opened her first “tiny little drugstore” as she neared 50. The shop did very well, so she opened another, and another. Soon she was running the largest drugstore chain in western Japan.

“She was the only woman in this business, and no one else was like her, which really helped her in terms of understanding the marketplace and where opportunities were,” Murakami explained. “This is going back to the 1990s. Japan was starting to have this demographic crisis, but no one knew about it—except for housewives, who were taking care of their in-laws. In my hometown, [aging] was already starting to occur, but it was really not visible to anyone else—especially not to those big companies based in Tokyo. So she was able to identify this incredible opportunity basically to cater to the silver economy.”

Today, the silver economy—products and services designed to meet the needs of people aged 60 and over—is very lucrative, but at the time that Murakami’s mother was building her drugstore business no one yet knew this was going to be the case. It was a different perspective that allowed her to see things from outside. “My mother, because she was a minority in this business, was able to identify that,” Murakami said.

The story also highlights something that remains an obstacle 30 years later, something MPower hopes to change.

“It was really hard for her to obtain capital. Because she was a woman, because she was a housewife, she had to use my father’s name to take out loans. It was the only way for her to raise funds for her business expansion,” Murakami continued. “So, the moral of the story is, I think, opportunities like that are actually abundant. You just have to be able to look at the same opportunity or situation from a different angle and realize, oh, that is not yet addressed in terms of potential demand or needs. And I think that’s really exciting for us, because there are so many opportunities that have not been discovered. I think we can unlock some of these really interesting opportunities in the Japanese business setting.”

Focus on ESG

Moving to the foundation of MPower, Hasegawa asked about the areas on which the group would like to focus.

Suzuki, a former general partner of global VC fund Fresco Capital and former director of Mistletoe, a social impact-focused VC fund founded by Taizo Son, noted that while most people are familiar with the concept of ESG, they may not realize that it is still early days for ESG in the VC space. MPower sees this as an opportunity and is working on solutions to help startups.

“What we mean by early is there aren’t many frameworks or agreed-upon metrics to measure ESG progress within the startups and private-company space,” she explained. “We are assembling a lot of tools on our end and customizing them for each company. It differs by industry, so startups in a healthcare sector would have different metrics from a startup in a pure software and digital transformation sector. It is customized by the industry of the startup, and also slightly by stage.”

Given that startups in the early stage of development will have a different environment and probably fewer resources compared with those in later stages, MPower is focusing on mid- to late-stage companies, Suzuki said. This is because, she explained, they have a more established foundation on which to incorporate ESG principles.

Globally, ESG is becoming more important to venture capitalists, according to Suzuki. This is especially true in Europe. In the United States, while ESG is important, there has been more focus on diversity, equity, and inclusion given the social dialogue around gender and racial diversity that has been taking place there in recent years. When it comes to ESG, which parts of the acronym are most important differs by company, and some organizations may choose to focus on just one.

“Our stance, and I think this is the overall trend, is that they are all important,” Suzuki said. “But what we are seeing is that startups may not realize this. They might think, oh, we are doing something in [a particular] sector—perhaps it’s an edtech company focusing on social, the S—and we’re contributing to progress in society, so we are okay. However, investors are looking at all aspects and, once these companies go public, they will be looked up on the E and the G as well. So, we are tailoring a lot of these materiality concepts.”

Case Study

Suzuki gave as an example of MPower’s approach its investment in Japanese startup UniFa Inc., which uses the latest technologies to support safe and secure childcare environments by reducing the workload on childcare workers. The company is in the mid to late stages of its launch.

“They are growing and are on their way to becoming a public company quite soon. We have invested in them because we think they are a growing business with all the types of innovation needed in Japan. This is a childtech company that, in Japan, is selling into childcare centers—public and private—and they start out by selling sensors to prevent sudden infant death syndrome. These are high-margin, high-technology solutions. With that, they build relationships with these childcare centers and provide other forms of digital transformation tools for the back end, to enable the service providers to focus on actually taking care of the children rather than doing a lot of paperwork.”

Suzuki explained that, before MPower invests in a company, they want to make certain that the founders are interested in making ESG part of their core business. “We truly believe that incorporating ESG will grow the business and contribute to the bottom line and enterprise value.” They identified such a desire in the leaders of UniFa prior to investment, and the company is very willing to work with stakeholders on all aspects of ESG.

“In terms of next steps, we will be identifying together with the company—and the company itself will be setting—the most relevant ESG metrics that they want to follow, and we will be working with them very periodically, at least quarterly, to achieve some of these,” she said. “We understand the challenges, because startups are resource constrained but, at the same time, they need to grow two or threefold per year. So, they need to balance what types of initiatives they can take on. But we really tried to align with the company that this is not a cost but is really an investment in their growth.”

Why VC?

Given that Murakami, Seki, and Matsui have a collective background that is much more in the public equity market rather than VC, they are often asked why MPower is focusing on unlisted companies as a VC fund rather than as a public market investor. Matsui explained that it is a matter of finding the right companies with which there is a better chance of achieving ESG goals.

Noting fast-moving global trends toward more diversity on boards, she gave as an example Nasdaq, which has a woman president. A change to the requirements being proposed would mandate that a company have at least two diverse board directors to be listed on the exchange.

And such moves are not limited to the United States.

“We’ve already seen here in Japan, over the past few years, institutional investors—be it State Street Global or Goldman Sachs [in] asset management, or proxy advisors like Glass Lewis—demanding in their voting guidelines that at least one diverse board member be present—or at least be worked on—otherwise, they will cast an automatic no vote against management,” Matsui said.

She also noted that many Japanese startups with which MPower speaks say that they have a strong desire to diversify their boards and are desperately looking for candidates. So, if you are interested in becoming a board member, MPower would like to know, as they are starting to help match companies and candidates. “It’s quite different, of course, serving on the board of a startup versus that of a large publicly traded company, but we think there are a lot of amazing learning opportunities that could be had,” Matsui added.

Returning to the reason MPower is focusing on startups, she explained: “We felt that trying to change larger, established companies is quite difficult for a whole host of obvious reasons. It’s important here to recognize that we know there’s a lot of what we call greenwash risk. It’s very easy to tick boxes but much more difficult to actually implement ESG in your core business strategies.”

For MPower to achieve its goals, the founders feel that it is better to work with startups and younger companies, “maybe in their teenage phase,” as Matsui put it, to integrate ESG.

“Perhaps it’s not easy, of course, but it’s easier to integrate ESG values and principles at that younger stage of a company’s development, before they go public, before they are acquired,” she explained. “And we’ve been very positively surprised. We look at domestic Japanese startups as well as overseas startups. Maybe its selection bias, but most of the entrepreneurs we’re meeting are very keen to fix the ESG areas that they deem weak. So, we’re really positively surprised by the direction thus far.”

Fostering Change

Matsui recalled with a laugh something said to her by a foreign investor when she began researching Japanese corporate governance more than 20 years ago: “Kathy, you’re trying to convince vegetarians to become carnivores.” But eventually Japan adopted a stewardship code, in 2014, and a corporate governance code, in 2015. Despite these requirements, the management of many companies is seen as reluctantly going along with something they know they must do but which they “do not really have in the bottom of their hearts and do not really get,” Matsui said. Many do not want to spend money on initiatives around gender diversity, for example. They don’t see the benefit.

“I think the biggest roadblock is that of mindset, [understanding] that this is not a cost, but an investment in their future,” she continued. “And I think that a lot of the governance-related challenges that Japanese companies—at least the large ones—have faced, if you look at the root cause of these problems, stem from an echo-chamber decision-making process. Their past presidents or chairmen—even though they don’t have an official vote—are all hanging around. We call it ghosts in the boardroom.”

Once a company does see the need and benefit, the next step is helping them understand that the process is a marathon, not a sprint, Matsui explained. It must be understood that all the training and education involved in the transition is being done because it makes business and economic sense, not because it is being mandated by regulations.

“If you don’t start with that argument, I think it’s very, very difficult to convince the naysayers or the skeptics why this is important,” she said. “So, to me, having a different perspective and a different point of view to challenge the status quo is one of the most important things that diversity of thought brings to the discussion.”

Social Solutions

What is it that attracts MPower to the ESG space, and what do the partners see as Japan’s competitive advantages and weaknesses?

Seki began her answer by highlighting Japan’s position as a kadai senshin koku, a country with many emerging social issues to tackle. Aging is at the forefront, but the lack of diversity in corporate management and low productivity are problems as well.

“Identifying startups to provide the best solutions to those social issues will be a huge opportunity for us,” she said. “Putting ESG aside, there is a huge funding gap in the VC field, especially in the growth to later-stage funding. That provides us with a huge opportunity to support those startups that are willing to—or are trying to—go global. And the lack of diversity and the aging of society are also great opportunities for companies—and for us as well—to bring diversity to the table.”

Matsui noted that Japanese companies tend to score relatively high for the E in global sustainability studies, but are weaker when it comes to the S and the G. And in terms of the E, meeting the government’s ambitious target of being carbon neutral by 2050 will bring serious challenges to corporations in Japan.

“What some companies are complaining about is that this effectively is a tax on them, if they have to go in that direction,” Matsui said. “So, even though on the surface Japanese companies look like they’re really stronger in the E, just given how rapidly the world is changing they are going to have to double down on their efforts on the E. But also on the S and the G there is a lot of work to be to be done. That is an absolute opportunity for a fund like ours and investors like ourselves to help companies who want to provide those solutions in those spaces.”

Frameworks and Urgency

One need only turn on the news to see how climate change is impacting our lives on a daily basis. Murakami said there has been a lot of discussion about climate risk, but people are beginning to realize that the problem isn’t going away. Efforts must be accelerated, and more agreement on how to measure and report the effectiveness of actions is needed.

Among the initiatives underway this year are the United Nations Climate Change Conference (COP26), to be held November 1–12 in Glasgow, Scotland, and a working group announced on March 22 by the International Financial Reporting Standards (IFRS) Foundation, “to accelerate convergence in global sustainability reporting standards focused on enterprise value, and to undertake technical preparation for a potential international sustainability reporting standards board under the governance of the IFRS Foundation.”

Murakami said these are very exciting moves that everyone should be watching, because one of the problems is that, with so many frameworks in use around the world, it is difficult to really measure what is driving the climate change we are seeing. “Yes, it is hotter, it rains more, and we feel climate change impacting us … but it’s difficult to move the needle when you don’t know where the needle stands.”

MPower has been developing its own framework for measuring and reporting, one better suited to VCs than to large companies, and they have looked at various existing frameworks in the process. But Murakami is looking forward to a consolidation of the hundreds that are currently out there down to just two or three globally accepted standards that can be used as guidelines for companies to measure where they stand on ESG. “I think that’s a very exciting development that we’re actually watching this year.”

Shifting Needs

The aging of society, expanding role of technology, and efforts to mitigate the impact of climate change are all remaking the job-market landscape. Hasegawa asked if the Japanese government is doing enough to address the need for skills in emerging areas and the potential displacement of workers as industries change as a result of the country’s pursuit of carbon neutrality.

Murakami said one of the greatest challenges for Japan is to address the very rigid employment system that makes it difficult for people to reskill themselves and find jobs.

“One thing the government really needs to do is to encourage companies to become a lot more flexible and understand the changing demands of the labor market—and of their customers as well—so that they can adjust the skill sets of their employees by not only reskilling or upskilling them, but also making sure that they can provide opportunities for people who may be joining a company at the age of 25 or 35 instead of 22,” she said.

In addition, there must also be a merit-based compensation system and promotion scheme. That is an area where Murakami feels many companies are trying to change, but have not fully done so yet—in part due to policies and regulations that are preventing them from moving to more merit-based systems.

Empowering Women

While MPower is not focused exclusively on female founders, encouraging more women to pursue entrepreneurial paths and working to close the gender gap in financing is one of their goals. And as Murakami’s story about her mother shows, women often bring a perspective and insight that reveals a solution which men may not see.

But traveling the road to that solution requires money, and one challenge for women looking to raise capital is that most investors are male. Suzuki pointed out that fewer than 10 percent of decision-making investors in the VC space are female, and just four to five percent of VC is invested in woman founders.

A common belief among investors, Suzuki said, is that women are unable to take risks. But studies have found that female founders actually return capital at a greater rate than their male counterparts. They may also be more conservative in terms of the projections they share with investors compared with their male peers, who tend to be more aggressive. But whereas the men don’t necessarily hit their targets, the women tend to be very stable.

“So, there’s a lot of great potential there, and we’d love to see entrepreneurialism in various areas solving some of the issues that women are facing,” Suzuki added, pointing out how the caretaking burden disproportionately falls on women. “That is something we hope to see in the next generation.”

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