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«14 CSR White Paper Economy ESG Investing as an e Unchanging Face of Japanese Antidote to Myopic Employment Management International A airs Japanese ...»

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Uni-Voice is a technology developed by JAVIS (Japan Association for the Visually-impaired Information Support) that can turn text into an audio message with the use of a smartphone or cellphone. It converts up to 800 characters of text into a two-dimensional barcode, which can then be “read” aloud by a phone by using the phone’s camera. DDL chose to work with JAVIS to expand the use of this technology to meet specific social needs.

For people with visual impairments, Uni-Voice offers a way of accessing written information that they would prefer to keep private. This system was first used for pension statements and is now being extended to tax payment slips and bank balance statements. Its use is also being promoted in pharmacies to ensure that information about medication and medical expenses are conveyed accurately.

An added feature is a translation function, which enables users to have the information contained in the scanned barcode read out in English, Chinese, or

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Korean. Such a function may be quite useful for tourists during the 2020 Tokyo Olympics and Paralympics, as well as for confirming one’s bank balance and obtaining pharmaceutical information.

Integration with Main Business Operations The mission of DDL is to draw on Dentsu’s communication expertise to promote diversity in the workplace and in society, eliminating prejudice, shedding light on “everyone’s” various needs, and making diversity a fact of life. The biggest challenge it faces may be to synergistically integrate DDL’s initiatives and Dentsu’s main business operations. From the company’s perspective, there must be tangible results to match the money it spends.

DDL members express a wish to more fully integrate its activities with the company’s operations, precisely because the work it does has value for society.

Dentsu is a communications specialist, so diversity is a field that could easily lead to new business opportunities.

Some DDL participants may be satisfied doing pro bono work in their field of expertise, contributing something to society without seeking anything in return.

But it is often by integrating such activities with business operations that the solutions offered can be made to conform to the exacting, professional standards society demands. A serious business approach can abet the development of truly effective solutions.

Dentsu is fully aware of the merits of integration and endorses DDL’s activities and employee participation precisely for this reason. It sees DDL as not only contributing to the solution of social issues but also enriching its own value chain. The ideas, frameworks, and solutions developed through DDL are actively being applied in Dentsu’s business operations, helping the company to enhance diversity-oriented R&D and marketing at the top of the value chain. (Researched by Zentaro Kamei, Tokyo Foundation)

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September 8, 2015 ESG Investing as an Antidote to Myopic Management Mariko Kawaguchi Investors can play a major role in promoting CSR by encouraging businesses to deepen their commitment to addressing social issues and restoring a long-term perspective to financial markets. Enabling socially responsible investment, says CSR expert Mariko Kawaguchi, requires the disclosure of a company’s environmental, social, and governance performance and policies, in addition to financial data.

* * * T o the extent that corporate social responsibility consists of efforts by individual companies to contribute to the resolution of social problems through their own business activities, investors have an important role to play as corporate stakeholders in promoting CSR. By using their own perspectives to assess corporate value on the basis of CSR criteria, investors can not only encourage businesses to deepen their commitment to CSR but also help restore a long-term perspective to financial markets that have become all too preoccupied with short-term results. In the following, I discuss the importance of a long-term approach and the role of environmental, social, and governance investment criteria in fostering long-term thinking, drawing on the results of the Tokyo Foundation’s CSR survey.

Long-Term Versus Short-Term Management The global financial crisis precipitated by the 2008 Wall Street meltdown led to harsh scrutiny of the “greed is good” brand of finance capitalism. In fact, some of the major market players, recognizing the pitfalls of short-term profit seeking, have Mariko Kawaguchi Managing Director and Senior Analyst, ESG Research Department, Daiwa Institute of Research.

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joined in the effort to reconsider the way these markets function. One focus of these reforms is to mitigate the emphasis on short-term results.

Many players have come to recognize the negative impact of short-term corporate valuation on financial markets—particularly the way quarterly financial reports affect corporate investment and stock prices. This priority on quarterly results encourages corporate executives to target their resources toward efforts to maximize sales growth during each three-month period, instead of research and development or other long-term strategic investment.

Take the case of a business that relies on timber resources. From the standpoint of quarterly earnings, it might be advantageous to boost the business’s shortterm cost-competitiveness by importing cheap Southeast Asian lumber harvested through clearcutting, instead of pursuing the costlier option of sustainably managing its own forest. From a long-term perspective, however, such procurement practices not only destroy forest ecosystems and promote desertification but also impact the company’s future access to raw materials. In the case of agribusinesses, a short-term orientation is likely to discourage organic farming, which generally results in lower yields, and incentivize the large-scale application of agrichemicals to boost short-term yields, even at the cost of depleted soil and poor harvests farther down the road (not to mention the costs of the agrichemicals themselves).

One need not look far to find companies that have sustained serious damage as a result of myopic cost cutting. In the fall of 2013, Japan was rocked by a series of revelations regarding false labeling by top-tier hotels and restaurants. These establishments became the objects of stinging criticism after admitting to the use of cheap substitutes for more expensive ingredients like lobster. In April 2013, more than 1,100 garment workers died after a factory collapsed in Bangladesh, a major supplier of cheaply made apparel to companies around the world. This led to local demonstrations and major public campaigns by nongovernmental organizations directed against foreign businesses, which were ultimately forced to implement major changes in their supplier agreements to substantially upgrade working and living conditions for garment workers.

When businesses focus narrowly on near-term profits, they not only miss opportunities to maximize long-term gains but can even jeopardize their own survival through unethical or unsustainable practices, such as mislabeling, complicity in child labor or poor labor conditions, and indiscriminate sourcing of timber and other resources. Good quarterly performance can mask such practices, their impact on society, and their risk for long-term performance. Even while keeping an eye on short-term fluctuations in earnings, investors need to avoid being distracted by

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Figure 1. Short-Term Business Forecasts and Long-Term Trends Source: Daiwa Institute of Research.

such “noise” and judge companies by their long-term business strategies if they want sustained performance.

Quarterly financial results can also fluctuate widely in response to temporary developments, including stages in the product cycle, the presence or absence of a hit product, shifting customer preferences, exchange rate fluctuations, weather conditions, and tax payments. In order to determine a company’s true trajectory, investors must look beyond such passing events and scrutinize the long-term trend.

Figure 1 is a schematic representation of the relationship between long-term and short-term trends.

The curve traces actual short-term performance. The slope of the curve at the end of each quarter (Q1, Q2, etc.) shifts dramatically from quarter to quarter, meaning that forecasts based on quarterly business performance would also fluctuate widely. But the long-term trend, represented by line A, is actually quite consistent. We should be using this trend line to make long-term assessments of business performance.

Long-Term Evaluation and ESG Investment However, the figures companies are required to release are those corresponding to Q1, Q2, Q3, and so forth. What do investors need in order to see the big picture, represented by line A? In addition to financial data, they need information about a

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company’s environmental (E), social (S), and governance (G) performance and policies.

The rise of socially responsible investing (SRI), also known as ethical investing, dates back to the 1960s in North America and to the 1990s in Europe. It emerged and took hold as a niche strategy oriented to religious organizations, labor unions, and other asset owners anxious to avoid investing in businesses that violated their religious or ethical principles (corporations involved in alcohol or tobacco were a prime example).

Then around 2006, a different style of SRI began to gain ground. Commonly known as ESG investing, it is aimed at achieving better long-term performance and compliance with fiduciary duties by taking into account factors pertaining to the three basic elements of CSR: environmental responsibility, social responsibility, and good governance. This approach was codified in the Principles for Responsible Investment adopted in 2006. The PRI were drawn up under the leadership of major American and European pension funds, such as Calpers and Hermes, with the support of the UNEP (United National Environment Program) Finance Initiative and the UN Global Compact. They have gained widespread support from those involved in long-term asset management—including public pension funds—from the standpoint of promoting socially responsible investment geared toward compliance with fiduciary duties, better performance, and the resolution of social issues. As of the end of July 2015, a total of 1,357 institutions (including asset owners like pension funds, investment managers, and financial service partners) had signed on to the PRI and were pursuing ESG investing based on those principles.

What is the overall scale, then, of ESG-conscious investing? According to the Global Sustainable Investment Review, published by the Global Sustainable Investment Alliance, the SRI market in all the regions covered by the report totaled $21.4 Table 1. Global Sustainable Investment by Region Source: Global Sustainable Investment Alliance, 2014 Global Sustainable Investment Review, http://gsiareview2014.gsi-alliance.org/

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trillion in 2014, about 30.2% of the total. By region, Europe (63.7%), the United States (30.8%), and Canada (4.4%) accounted for nearly 99% of this investment.

Of the remaining 1%, Oceania accounted for 0.8% and Asian countries for 0.2% of the global total (Table 1).1 It is noteworthy that the European and the US SRI market expanded by 55% and 76%, respectively, between 2012 and 2014.

The Significance of ESG Criteria

What are the factors driving the growth in ESG-conscious investment outside of Japan? As we have seen, one is the demand by investors for a more accurate and multifaceted evaluation of corporate value and performance. A second factor is the desire to contribute to the resolution of problems like environmental degradation and poverty through socially responsible investing. And a third factor is the growing recognition that ESG criteria provide a valuable tool for assessing corporate value over the long term.

How, then, do ESG criteria correlate with the assessment of corporate value?

The first point to keep in mind is that most key ESG goals, including environment-friendly business operations and sound human resources development, require long-term investment. For example, the administration of Prime Minister Shinzo Abe has placed great emphasis on more active participation by women in the workforce, but substantially increasing the percentage of executive posts occupied by women is a multiyear undertaking under the best of circumstances and in some settings may take a generation to accomplish. After all, women must be trained to function in executive posts, and in Japan, where executives generally rise up from the company ranks, such training must occur predominantly within each company. Similarly, environmental measures like afforestation and tree planting, clean-water programs, and other initiatives can take years or decades to show results. Large-scale investment in energy-saving equipment and processes generally pay off in cost savings as well as reduced CO2 emissions, but they offer no financial benefits over the short term.

Using a sports analogy, quarterly performance can be likened to running a 100-meter dash, while CSR corresponds to an athlete’s overall physical condition as gauged by such fundamentals as weight, height, pulse, blood pressure, muscle tone and strength, and the health of the heart, the liver, and other internal organs.

Of course, one needs more than strong muscles, heart, and bones to run like Usain Bolt. An athlete who suffers from a chronic ailment like heart disease or high blood http://www.gsi-alliance.org/resources/ 1

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pressure carries a high risk of collapsing. Maintaining good performance over the long term requires careful management of one’s total health and fitness. CSR is the health and fitness a company needs to run a good race, not only once or twice but repeatedly over time, with ESG corresponding to the specific components of that health, such as the muscles, bones, heart, and blood pressure.

At a December 2013 investment seminar organized by MSCI Japan—publisher

of financial indexes for global investors—Executive Director Seiichiro Uchi explained the importance of ESG factors as follows:

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