The two major Proxy Advisors in Japan appear at risk of being run over by the accelerating ESG traffic. Institutional Shareholder Service (ISS) and Glass Lewis (GL) in their Proxy Voting Guidelines for Japan in 2020 have yet to articulate specific policies on voting on Sustainability and ESG. In recent years, the importance of sustainability has shifted ESG expectations at asset owners and managers. So why do Proxy Advisors seem left behind? Ignorance? Inertia? Policy?
This is a puzzle. We can safely eliminate ignorance. ISS has an ESG arm while GL teamed up with Sustainalytics in 2018. What is clear is that the Proxy Advisors remain focused on traditional issues: board structure, independence, X-shareholdings, etc. That is fine, but it is not enough. Why the glaring lack of explicit ESG policy? Sure, these issues are complex topics and difficult to assess. They are not just about picking a 5% ROE benchmark in order to give corporate boards a thumbs up or down. However, isn't that why their ESG research has been strengthened? From this vantage point, it seems the Proxy Advisors are frozen in time while still holding considerable influence on voting. Meanwhile, tectonic shifts are happening around sustainability and ESG.
Firstly, there is increased clarity on ESG factor resiliency. COVID-19 has proven to be a successful test. ESG funds in 1Q 2020 have outdone their weaker peers. Research from Blackrock demonstrates that ESG factors have not only outperformed but are more resilient on the downside to market shocks. The reality is that ESG factors consider the SUSTAINABILITY of revenue; cost effectiveness of Human Capital and Environmental Concerns; and Governance and Management Risk Control. All these go into providing sustainability for growth in corporate value while strengthening resilience.
Secondly, asset owners and managers have signed up UN's Principles for Responsible Investing (PRI) as well as SDGs. Japan's GPIF, the most significant asset owner in the world with AUM of $1.4tn, is no exception. Over the last six months, they clarified their long term sustainability focus and integration ESG principles in all their assets. If Japanese asset managers had previously hesitated to formalize ESG integration, they are now likely to rush forward with the GPIF move. As for asset managers, in his annual letter in January 2020, Blackrock's Larry Fink took the revolutionary step of putting sustainability front and center of his company's investment and will be voting against management where there is no progress on sustainability. Other asset managers will likely do the same.
Thirdly, the continued support of ESG factors by the Japanese authorities. The recent revision in the Japanese Stewardship Code (Dec 2019) made it clear that the FSA wants asset managers to focus on long-term sustainable growth to increase corporate value. The revisions call for institutional investors to engage with companies and state how they incorporate ESG into their investment strategies. METI and the Ministry of Environment continue to lead the ESG agenda. Even the Japan Exchange Group has gotten into the act, becoming a member of the Sustainable Stock Exchanges Initiative.
So back to the Proxy Advisors. GL at least has ESG mentioned in its Japan advisory under the voting for directors, but absolutely no detail. ISS is particularly interesting. There is an almost word for word match of their statements on E & S related voting in 2014 vs this year's latest guidelines..save for one sentence: "Whether there are significant controversies, fines, penalties, or litigation associated with the company's environmental or social practice".
Yes, a one-sentence addition in six years.
References
Blackrock, “Sustainable investing: Resilience and uncertainty.” May 19, 2020 https://www.blackrock.com/corporate/about-us/sustainability-resilience-research
Fink, Larry “A Fundamental Reshaping of Finance” 2020 https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
GL, “2020 Proxy Paper. Guidelines. An Overview of the Glass lewis Approach to Proxy Advice. JAPAN” https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_Japan.pdf
GL,” Glass Lewis Season Preview & Coronavirus Polices for Japan’s Proxy Season” May 2020 https://www.glasslewis.com/glass-lewis-season-preview-coronavirus-policies-for-japans-proxy-season/
Principles for Responsible Investors, March 2020 https://www.fsa.go.jp/en/refer/councils/stewardship/20200324/01.pdf
GPIF, “Stewardship Activities Report 2019-2020” March 2020. https://www.gpif.go.jp/en/investment/Stewardship_Activities_Report_2019-2020.pdf
ISS, “Japan. Proxy Voting Guidelines. Benchmark Policy Recommendations. Effective for Meetings on for after February 1, 2020” https://www.issgovernance.com/file/policy/active/asiapacific/Japan-Voting-Guidelines.pdf
ISS,” Japan Proxy Season 2020-Impacts of the COVID-19 Pandemic. Additional ISS Policy Guidance” May 2020 https://www.issgovernance.com/file/policy/active/asiapacific/Japan-Policy-Guidance-Impacts-of-COVID-19.pdf
ISS, Proxy Voting Guidelines for 2014 to 2019. See ISS Website.
METI, “Report on SDG Management/ESG Investment Study Group” June 2019 https://www.meti.go.jp/press/2019/06/20190628007/20190628007_01.pdf
Ministry of Environment, Japan. Working Group Report. Jan 2017. https://www.env.go.jp/en/policy/esg/pdf/ESG_WG_report.pdf