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Category: Pension investment policy

Three things trade union pension trustees should know about the Japan Stewardship Code

Posted: June 20, 2014   By: Hugues Létourneau Category: ESG , Pension fund governance, Pension investment policy,

On June 10th 2014, the first list of investors who signed Japan’s Principles for Responsible Institutional Investors (“Japan Stewardship Code”) was published by the Japanese Financial Services Agency. The list includes 127 investors ranging from asset owners (including Japanese institutions such as the Government Pension Investment Fund and foreign funds such as Sweden’s AP4), asset managers (including many foreign asset managers) and service providers. There are 3 key points that trade union trustees should know about the Stewardship Code: 1) how the Code is relevant in promoting long-term and responsible investment, 2) how trustees can encourage adoption of the Code by ensuring adoption by their Japanese equity managers and 3) how trustees can use the Code as a levy to foster wider acceptance of responsible investment in Japan when negotiating mandates with prospective asset managers.

1) The relevance of the Stewardship Code in promoting long-term and responsible ownership practices

The Code is part of a larger strategy by the Japanese government to promote economic policies that aim to revitalise the Japanese economy. It was notably inspired by the UK Stewardship Code which was adopted in 2010. In light of the relatively weak uptake by Japanese investors of international responsible investment initiatives such as the PRI (there are only 29  Japanese PRI signatories and only 6 asset owners) the Code is likely to provide a necessary impetus to drive active ownership approaches such as proxy voting and shareholder engagement over ESG issues in Japan. It also aims to promote long-term ownership which is intended to enhance value creation that is beneficial to the Japanese economy over the long-term.

Investors that sign on to the Stewardship Code are expected to:

-Have a clear policy on how stewardship responsibilities are fulfilled;
-Have a clear policy on the management of conflicts of interest (e.g.: proxy voting at the AGM of the beneficiary’s employer);
-Monitor investee companies with an orientation toward the sustainable growth of companies;
-Seek to “solve problems through constructive engagement with investee companies”;
-Have a clear disclosure of voting activities that “should not be comprised of a mechanical checklist”;
-Report publically on how they fulfill their responsibilities to clients and beneficiaries;
-Have the required knowledge on companies to be good stewards

JTUC-RENGO, the CWC’s Japanese partners, advocated in favour of tying stewardship responsibilities to social and environmental considerations. JTUC-RENGO, welcomed the adoption of the Stewardship Code and indicated that its implementation should be carried out alongside with the Principles for Financial Action for the 21st Century (sometimes referred to as Japan’s version of the PRI) which narrow in on the environmental and social components of responsible investment.

2) Trustees can encourage adoption of the Stewardship Code among their current asset managers

Given the significance of Japan and its financial markets in global finance, trustees at large, medium and small sized funds are likely to have portfolio exposure to the Japanese market. Trustees can play a positive role in driving wider adoption of the Japan Stewardship Code by their asset managers responsible for Japanese equities and thereby help foster a wider acceptance of responsible investment and sustainability considerations by Japanese corporations. In order to do this, trustees are encouraged to take the following actions:

I. Review which of your asset managers are responsible for managing your Japanese equity holdings;
II. Use the list of Code signatories that is compiled (and regularly updated) by the Japanese Financial Services Agency to identify whether your current asset manager or prospective asset managers have signed the code;
III. If your asset manager has not signed the code, communicate with them and indicate your interest in having them sign the Code.

3) Trustees can drive adoption of the Stewardship Code when negotiating mandates with prospective Japanese equity asset managers

Trustees have significant leverage toward prospective asset managers when they are negotiating mandates. When negotiating a mandate with asset managers that will manage Japanese equities, they may utilise this leverage by specifying that adoption of the Code is a required condition for any asset manager who wishes to win the investment mandate.

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