Japanese pin hopes on ethical behaviour

(Published in the Financial Times of 4 August 2003).

Last month, Morningstar Japan ranked Asahi Breweries in first place in its new socially responsible stock index of 150 companies. The firms were chosen and ranked in accordance with five criteria, including their accountability, employment practices and broader societal contributions.

In terms of societal contribution, Asahi Breweries, Japan’s biggest beermaker, hasn’t done much to save the whales. But, it could be argued that Asahi has lifted more than one salaryman out of his recessionary blues – albeit temporarily – by producing Y150 ($1.25) cans of happoshu, or low-malt beer, with a pricing scheme tailored to the country’s deflationary environment.

The inclusion of Asahi Breweries in the index in the first place highlights the difference between the socially responsible investing (SRI) ethos of Japanese investors compared with that of US and European counterparts.

A Morningstar spokesman admitted "the choice of Asahi may seem strange in terms of US or European SRI standards", adding that the company ranked highest according to the five criteria.

Instead of avoiding "sinful" sectors, such as alcohol or tobacco, some Japanese SRI indices are using a "best in breed" approach, which allows them to invest in a limited range of companies in industries that they believe are relatively enlightened.

Japanese investors have started to pay closer attention to corporate governance practises and SRI following a string of scandals in recent years. Household names such as Snow Brand and Nippon Meat Packers dealt a blow to consumer confidence by mislabelling food products. Last year, Tepco, Japan’s largest utility, admitted doctoring safety reports on its nuclear power plants.

Against this backdrop, SRI funds, indices and screening services have sprouted up over the past two years. Integrex, which provides information to clients regarding socially responsible companies, was formed two years ago by One Akiyama, a former bond trader who first heard about SRI while working in the US.

"Two years ago, no one knew what compliance meant," says Ms Akiyama. "But society has changed, and people recognise these terms in Japan now. Companies have to change as well to adapt to the shift in society."

Integrex polled and screened 3,609 companies according to several criteria: commitment of the chief executive to corporate ethics initiatives, transparency, corporate governance, accountability, risk and crisis management and environmental issues.

It then whittled down its list to the top 100 firms. These companies gained roughly 10 per cent in terms of their combined market capitalisation from January 1991 to May 2002, while the broader Topix index fell 30 per cent in the same period.

"It’s not just about a company’s profits, but how firms are achieving those profits," says Ms Akiyama. "Up until now, people looked only at the economic value of a company, and not its societal value."

But critics say that SRI misses the point: the bottom line. "The ultimate goal of a company is to create wealth for shareholders," says Toshiaki Oguchi, chief pension portfolio adviser at Nissay Asset Management in Tokyo. "Economical and ethical investments are not mutually exclusive. The question is, can being a socially responsible company increase future cash flow?"

Others maintain that SRI does not create value for shareholders, as they are investing in companies that already have good corporate track records, and thus trade at a premium.

"With a corporate governance fund, an improvement in the company’s practices generates value for the shareholders," says Takahiro Goto, senior pension portfolio adviser at Nissay Asset Management. "But SRI means investing in a company has already improved its practices. It’s unclear whether SRI generates additional value for the shareholders."

Though SRI has taken off in recent months in Japan – paralleling the upswing in the stock market – it is questionable whether the trend is sustainable.

When times are good, people can afford to invest in a company that treats its employees well or recycles its garbage. But when times are tough, investors focus solely on financial performance. Over the past three years, from April 2000, the benchmark Nikkei 225 average shed 64 per cent. With it, SRI languished.

Ms Akiyama is hoping that the SRI will attract younger investors and more women into the market. She maintains that the capriciousness of the stock market, coupled with a decade-long recession, will not affect the growth of SRI in Japan.

"A lot of companies say to me, ‘because we are in a recession, we can’t be socially responsible’," says Ms Akiyama. "But being socially responsible does not warrant a financial contribution. It’s about being ethical and becoming accountable for your actions. SRI is not a three-month investment – it’s a long-term endeavour."

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