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Stewardship responsibilities and ESG investment

Initiatives in Asset Management One

At the same time that Asset Management One, which is the Mizuho Group company responsible for asset management, began operations in October 2016, it newly established its Responsible Investing Department and proceeded with initiatives for active engagement in discussions with its investee companies regarding environmental, social, and corporate governance (ESG) issues and exercise of its proxy voting rights.

Moreover, with the aim of strengthening its capabilities for engaging in productive dialogue that will lead to sustained growth in corporate value, Asset Management One expanded its staff of ESG analysts who are responsible for engagement with passive investments both in and outside Japan. In April 2017, it also concluded an alliance with Hermes EOS, which is a leading engagement company with established processes in this area, and began a program of engaging with overseas companies.

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Approach to engagement activity

At Asset Management One, we select companies for developing close relationships and then conduct engagement activities.

In our passive asset management activities, which account for the majority of our equity investing, after taking into account the level of impact on the market, we select companies for ongoing dialogue regarding their initiatives to address their ESG issues and other matters.

In our active portfolio management, after considering the corporate issues and effect on corporate value of these issues at the time when they are solved, we then conduct our engagement activities.

Actual engagement activities

Weighting given to engagement activity themes

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  FY2017 FY2018
Corporate strategy 40.7% 25.7%
Performance 15.2% 6.5%
Capital structure 4.9% 7.4%
Governance 19.5% 27.5%
Social/ Environment (risks and opportunities etc) 18.6% 30.5%
Others (irregularities etc) 1.0% 2.4%

Note: Percentage of the number of client engagement activities related to climate change in FY2018 was 4.2% (87 activities)

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Corporate strategy Management strategy, business planning, etc. that contribute to medium– to long–term corporate value
Performance Changes in performance and their causes, etc.
Capital structure Financial strategy, capital policy, etc. for improving capital efficiency and enabling sustainable growth
Governance Management systems, etc., Corporate Governance
Social/ Environment Response to factors that will have a major impact on corporate management, such as climate change and work lifestyle reforms

Examples of engagement on various themes (Fiscal 2018)

Corporate strategy

Based on our market analysis, we discussed with the company similarities between promising global markets and the Japanese market, which led to new insights into future growth strategies.

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Analysts' awareness of issues Asian markets, especially the Chinese pharmaceutical market, need to be better informed about the market environments, growth potential, and business development. If the potential of these markets is recognized, we can expect a significant improvement in corporate value.
Dialogue with management Mizuho shared information with the company by providing them with reports we prepared. After presenting a hypothesis that the relationship between the past demographics of Japan and the market for ophthalmic pharmaceuticals can be used to forecast future changes in the Chinese market, discussions followed that focused on whether data showing the potential of the Chinese market, changes in disease patterns, and other information should be included in the next medium–term business plan.
Company A's response "We hope to maximize shareholder value with the valuable suggestions we have received," said the representative director & CFO. He added that "In addition to our business performance and medium–term business plan, the president & CEO and senior management also keenly recognize the need to focus on broad–ranging and bold growth strategies. We also recognized anew that our own intellectual capabilities are required to engage in high–level discussions."

Environmental issues

We held in–depth discussions on the topic of the information disclosure, which could contribute to improving the corporate value of a company that already has the world's highest level of energy efficiency in steel production.

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Analysts' awareness of issues With regard to climate change and reducing greenhouse gas emissions, one of the most important environmental issues in the world, energy efficiency in the company's steel production is already among the highest in the world. In order to make the company's climate change efforts known to a wide range of stakeholders, the company will need to not only disclose its efforts toward reducing greenhouse gas emissions, but also attract attention to its contributions to products and solutions, as well as its low environmental impact throughout its process lifecycle by recycling.
Dialogue with management Given the increasing global interest in climate change and the growing movement toward the divestment from coal and other fossil fuels, discussions focused on the importance of disclosing information on efforts to tackle climate change.
Company B's response The company said, "We have established a voluntary action plan for eco–processes, eco–products, and eco–solutions. While we recognize that each of these measures contributes to the improvement of corporate value, we have not yet resolved how to disclose information to investors and other stakeholders. We recognize these areas as issues and will address them accordingly."

Social issues

We recommended that a retail company, whose work style reforms had come into question, take a more proactive approach in addressing ESG issues, including with regard to information disclosure.

Analysts' awareness of issues The company was selected as a focus company under the ESG topic of "Work style reforms" because regulatory authorities reported that the company employed a policy of illegal long working hours and it was the lowest ranked company in its industry based on ESG evaluations conducted by outside ESG ratings agencies. In order to achieve business scale through mergers and acquisitions, it is necessary to balance unique business models and work style reforms.
Dialogue with management Our analysts praised the steady improvement of the company's corporate value through mergers and acquisitions, but pointed out the need to balance its unique business model with reform of working styles. Discussions also covered the fact that ESG evaluations by outside ESG rating agencies were among the lowest in the industry and that the ESG initiatives need to be strengthened, including the area of information disclosure.
Company C's response A representative director of the company said that "Human resources development nurturing the competitive spirit of employees through the delegation of authority and competition at each store is the foundation of our business model and will not change. However, as pointed out above, we would like to strengthen our management structure and ESG efforts in order to gain the understanding of as many stakeholders as possible."

Governance

The company abolished anti–takeover measures as a result of ongoing discussions with us on the necessity of such measures, which also took into consideration the perspectives of institutional investors.

Analysts' awareness of issues Institutional investors have become increasingly critical of companies that continue to employ anti–takeover measures. There is now concern that the introduction of anti–takeover measures may undermine the reputation of the company.
Dialogue with management We have had ongoing discussions with the company on the need for anti–takeover measures and whether the introduction of anti–takeover measures would adversely affect its reputation.
Company D's response The abolition of anti–takeover measures was announced when the company released its fiscal year 2018 results.

Development of products with a view to ESG

In recent years, interest has risen in "ESG Investing," among institutional investors, which considers environmental, social, and corporate governance (ESG) issues, which form the basis for medium–to–long financial information. To continue to be an asset management institution that contributes to the development of its customers and society as a whole, Asset Management One is strongly aware of the importance of ESG information as a foundation for financial information in the medium–to–long term and is working to integrate this into its ESG investment strategies.

Domestic ESG Bond Fund

As part of Asset Management One's investment strategy, which integrates ESG evaluations, Asset Management One established its "Domestic ESG Bond Fund" in August 2017 and began to offer it to institutional investors. This fund fuses Asset Management One's research capabilities, its know–how in ESG investment, its proxy voting database (covering about 2,000 companies each year), and the ESG data analysis model of Mizuho Daiichi Financial Technology. Using these integrated capabilities, Asset Management One eliminates stocks that have high risk from an ESG perspective and aims to reduce downside risk and secure stable return.

"Sustainability Research Strategy Fund" Concentrating on CSV* issues

Asset Management One carefully selects companies where growth in income is possible through initiatives to address social issues and offers its "Sustainability Research Strategy Fund" which concentrates on securing income. In selecting companies, this fund not only takes account of ESG assessments, but also gives more emphasis to return and carefully selects companies that are expected to report growth in income through initiatives to address and solve social issues. When establishing this fund, Asset Management One takes account of the Sustainable Development Goals (SDGs) and other sources including research on trends in social issues and corporate assessments from an ESG perspective and works in collaboration with Mizuho Information and Research Institute which has abundant CSR consulting experience for corporations. For companies to practice CSV management in the long term, we think it is important for their management philosophies to be in accord with CSV and for their management to insist on CSV ideals. The stance of potential investee companies toward CSV management is determined through constructive dialogues.

  • *CSV stands for Creating Shared Value, and it was developed by Harvard University professor Michael Porter in 2011 as a management model to enable companies to create simultaneously both economic value and social value.