As global investors increase their focus on combating climate change, Japan has joined the environmental, social and governance (ESG) trend early. Among nations across Asia, Japan has been well ahead on the road towards decarbonization, net-zero carbon emissions as well as in establishing a green strategy. Increasing interest from the government as well as companies along with greater market awareness about corporate governance has made Japan a fertile ground for ESG.
Japanese companies are establishing a competitive edge by embedding ESG principles. According to a McKinsey study, large players outperform smaller players in terms of their ESG initiatives in Japan. The country accounts for more than 40% of the world’s companies that are over a hundred years old.
With fund houses pivoting to accommodate continued investor demand, the popularity of funds that boost ESG stocks is rising in Japan. ESG fund craze in Japan is much higher than any other country in Asia, accounting for 80% of ESG exchange-traded fund assets in the region. Not only that, Bloomberg data suggests that Japanese ESG mutual funds also dominate the list of the largest funds in the region. In the third quarter, Japan registered growth of 30% in its sustainable net inflows, data as of September 2021 by Morningstar research showed.
ESG integration in Japan: selected funds
The following selected ESG funds by Fidelity and JPMorgan provide European investors with exposure to Japanese companies that follow ESG principles. These two following funds are designed for investors looking to capture ESG responsible firms out of Japan while screening out controversial business areas.
Fidelity Funds – Sustainable Japan Equity Fund
The Sustainable Japan Equity Fund by Fidelity Group was launched in Luxembourg on 03 July 2006. The fund invests in Japanese companies, considering a wide range of environmental (E) and social (S) characteristics on a regular basis.
Where environmental characteristics include climate change, mitigation and adaptation, water and waste management and biodiversity, social characteristics include product safety, supply chain, health and safety and human rights. The fund also follows a research-based approach, by adhering to the Fidelity Sustainable Family Framework and ESG research, as well as additional market data. Through its ESG analysis, the fund selects companies that follow best practices and sustainable development, and have high ESG scores and low controversy risks. Under its sustainable focused strategy, the fund invests a minimum of 70% in shares of companies that maintain sustainable potential.
The fund is actively managed by manager Hokeun Chung since March 2021. The fund manager references the Tokyo Stock Exchange TOPIX Total Return Index and seeks to ascertain rapid changes that are typical for the Japanese market and regularly monitors controversies involving environmental and social characteristics of securities that may change over time. It also excludes investments in issuers with a Fidelity Sustainability Rating of ‘C’ or below, or having exposure to fossil fuel extraction, gambling and adult entertainment.
The Japan ESG fund has a 96.9% allocation in equity. In the last year, the fund rose by 16.8% YoY.* It has generated returns of 9.7% since the beginning of the year**.
Sector-wise, the fund is mostly allocated in electric appliances (20.4%), chemicals (16.7%), other sectors (11.2%), wholesale trade (9.3%) and precision instruments (7.0%)**. With a fund size of $618 m***, the total expense ratio (TER) of the fund is at 1.93% p.a.
The top 5 holdings out of 45 include Japanese multinational conglomerate Sony Group (6.3%), human resources firm Recruit Holdings (5.6%), insurance holding company Tokyo Marine Holdings (4.8%), general trading firm Itochu (4.8%) and industrial group Misumi Group (4.5%), which together constitute 25.92% of the total holdings****.
JPMorgan Investment Funds – Japan Sustainable Equity Fund
The Japan Sustainable Equity Fund by JPMorgan was launched in September 2012. Domiciled in Luxembourg, the fund invests in equity securities of companies that lead their peer groups in respect of sustainability performance.
With a TER of 1.81% p.a., this large-cap fund is managed by Shoichi Mizusawa, Michiko Sakai and Naohiro Ozawa, since 19 November 2020. Using a fundamental, bottom-up security selection process, the fund managers seek to identify high-quality Japanese companies with above-average and sustainable growth potential, in terms of social and environmental issues.
The fund is mostly allocated in sectors like electric appliances (28.2%), information and communication (10.3%), chemicals (9.6%), insurance (6.2%) and services (6.0%).** Also benchmarked on TOPIX (Total Return Net) Index, the fund has a volume of $57 m***. It has risen 11.44% since the beginning of the year***.
The top 5 holdings – Electric Appliances Company Sony Group (6.8%), Japanese diversified financial services group Orix (4.3%), multinational conglomerate Hitachi (4.3%), human resources company Recruit Holdings (3.8%), and direct sales organization Keyence (3.5%)- constitute 37.97% of the total holdings****. The fund has a 98.11% allocation in equity.
* 31 December 2020
** As of 30 September 2021
*** As of 1 November 2021
**** As of 2 November 2021