Companies which publish ESG integrated report has increased to 341 in Japan as of the end of 2017. Key points of their disclosure are how they recognize risk and how they would prepare countermeasures.

Investors judge the risk

ESG-oriented investments, which place emphasis on information concerning non-financial matters, including environmental (E), social (S) and governance (G) factors, are increasing rapidly in Japan. According to a survey conducted by the Japan Sustainable Investment Forum, ESG-oriented investments in Japan amounted to around 136 trillion yen in 2017, representing a 2.4-fold expansion from the previous year.

Companies are enhancing disclosure of ESG information through integrated reports, which combine financial and non-financial information, environmental and CSR (corporate social responsibility) reports, and websites. Investors using such information for their evaluation of companies regard risk information as particularly important.

Tokushi Yamazaki, a senior official of Daiwa Securities’ equity research department, said: “Unless companies disclose risk information, investors cannot make decisions. After all, they will refrain from investing in companies that fail to make disclosure.” Companies’ failure to provide risk information not only discourages investments, but it could also be seen as evidence of insufficient risk awareness, leading to a decline in enterprise value.

For example, the evaluation organization that develops an ESG-oriented stock price index adopted by the Government Pension Investment Fund (GPIF) of Japan evaluates companies based on publicly available information alone, so companies which fail to disclose necessary information may be held in low regard.

Disclose risk identification and countermeasures

For companies, the first step toward earning high regard from investors is identifying the risks to which they are exposed and the measures that should be taken to deal with the risks.

ANA Holdings discloses information on the opportunities and risks that it has identified in its integrated report. The company cites tightening of environmental regulation as one of the risks for overall airline business.

As the Paris Agreement, an international framework for the fight against global warming, has been put into force, the airline industry, among other industries, is facing strong calls for curbing carbon dioxide (CO2) emissions. If airlines fail to take sufficient measures to curb emissions, they could be forced to shoulder a higher cost because they have to purchase emission credits. In its integrated report, ANA makes clear that it will keep down fuel expenses and the cost of purchasing emission credits in the future by introducing fuel-efficient aircraft and improving the operation of its fleet.

On the governance front, one risk that attracts particular attention from investors is a change in the top management. The revised Corporate Governance Code, which was published in June, calls on the board of directors to exercise appropriate oversight over the hiring and firing of top managers.

Takashi Miyao, a senior ESG specialist at Nomura Asset Management’s Responsible Investment Department, said: “Regarding governance, what is particularly important for Japanese companies is a succession plan. Above all, the replacement of a long-serving president could pose a significant risk. Companies which have disclosed how they are grooming future leaders can be held in high regard.”

Shionogi & Co., a major pharmaceutical maker, is one of the companies for which a future change in the top management is considered to be a risk. Isao Teshirogi, who became Shionogi’s president in 2008, has led the company so successfully that his management acumen is revered as the “Teshirogi magic” in the pharmaceutical industry. During his decade-long tenure as president, the price of Shionogi shares has tripled.

As an eventual departure of President Teshirogi is considered by many investors to be the greatest risk factor, Shionogi has decided to make clear a succession plan in its integrated report. The company has developed a variety of human resource development programs tailored to younger employees, the middle management and the senior ranks. Shacho Juku (the president’s class), in which President Teshirogi gives lessons himself, is held seven to nine times a year with around 10 people selected from the senior management ranks as students. Four of the incumbent corporate officers are “graduates” of this class.

As it is unusual for companies to outline a succession plan in such detail as in the case of Shionogi, “investors are most interested in this respect,” said Naoki Kouyama, an associate director (IR group).

Miyao of Nomura Asset Management said: “It is desirable for companies to disclose information not only on growth opportunities but also on risks. They may assume that investors see risks in a negative light, but if companies disclose risk information and show readiness to address risks, they earn our high regard.”

Although many companies are reluctant to disclose risk information, a lack of disclosure is now viewed as a risk factor. Companies must change their mindset if they are to earn the trust of ESG-oriented investors and other stakeholders.