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Environmental, social, and governance (ESG) issues are making their way into corporate discourse, but understanding the importance of, and the various frameworks surrounding, ESG are still unclear territory. New concepts, reporting standards, and indices are constantly being created.

On April 27, at an event hosted by the American Chamber of Commerce in Japan (ACCJ) Alternative Investment Subcommittee at Tokyo American Club, Heather McLeish, senior manager for Climate Change & Sustainability Services at EY Japan, spoke about the benefits of investing in ESG as part of a long-term business strategy, and the value of this to key stakeholders, including investors.

“It’s actually a massive topic, and there is a lot of confusion,” McLeish began. ESG’s significance in company strategy is becoming increasingly valuable, and it is no longer enough just to look at a company’s financial disclosures to assess its value, she added.

According to McLeish, one reason companies should care about ESG in their investment portfolio is money. “That’s it, plain and simple.” The amount of capital invested in responsible investing strategies between 2012 and 2016 was nearly $23 trillion. But there is room for more, and the United Nations-supported Principles for Responsible Investment (PRI) has $60 trillion committed to this.

Addressing ESG considerations is crucial to maintaining a good reputation. Not addressing these issues can leave a company open to attacks from NGOs, resulting in bad press or reviews, and can “significantly impact the company’s reputation and therefore profit and loss,” she explained. Issues of labor and how something as broad as climate change can impact a business were highlighted.

McLeish also outlined studies that have shown that Millennials (those born between the early 1980s and early 2000s) want to work for companies that support and share their values, another reason that companies need to be investing in ESG.

There are various frameworks and standardizations that companies can use to help with their ESG disclosures, and help create an environment in which investors can compare their performance in these areas to their own values and investment strategy.

The sustainable development goals—comprising 17 written goals, 169 targets, and 23 indicators—are one avenue where McLeish says companies can use a common dialogue.

Along with this, the COP21 commitments from the Sustainable Innovation Forum 2016 in Paris have had global support.

“Without good governance, you are not going to have a company worth investing in,” she explained. Japan’s first corporate governance code, introduced in March 2015, looks to encourage more transparency and better management; but there is room for further efforts when it comes to ESG.

“Japan actually does very well if you look broadly at sustainable development goals—with the exception of diversity and supporting women,” McLeish said.

Globally and in Japan, McLeish says there is a shift toward active ownership. However, “In the past, Japanese companies haven’t been comfortable with activist investors coming and trying to change the companies,” she explained. Although this is changing and stakeholder dialogues are happening more often with investors as well as other stakeholders along the value chain, companies and investors alike need a strategy to best deal with the issues that arise, she stressed.

“You need your C-suite and your board to explicitly say, ‘We believe in this. This is what we are going to do: We’re going to mitigate those risks and we’re going to take advantage of those opportunities’.”

In addition, it’s important for Japanese companies to find out how their return on equity is impacted by ESG. To do this, they need to disclose any ESG issues.

“People are interested in ESG, but they are not exactly sure how it impacts [them],” she concluded. Using the available disclosure standards, companies can begin to make the shift towards becoming truly sustainable.

Maxine Cheyney is a staff writer at The Journal.
You need your C-suite and your board to explicitly say, 'We believe in this. This is what we are going to do.'