Page 22 - DIY Investor Magazine | Issue 34

WORK TO DO ON DECARBONISATION AND ENERGY SECURITY
On other sustainability issues, however, Japan still has plenty of room for improvement. Energy security remains a concern a decade on from the major earthquake and associated nuclear disaster at Fukushima, which led to the Shortlist of all Japan’s nuclear power reactors. Japan’s dependence on imported fossil fuels remains very high as a result.
That reliance is leading to some complicated trade-off’s. For example, while UK firm Shell withdrew from the Russian LNG project Sakhalin-2 following Russia’s invasion of Ukraine, two Japanese trading companies remain invested in the project. Prime Minister Kishida recently indicated that there won’t be domestic political pressure on the companies to divest these assets.
Meanwhile, investment in a more resilient power grid is sorely needed. This was demonstrated in March when a combination of an earthquake and unexpectedly cold weather saw power
‘WORKING HARD TO IDENTIFY WHICH COMPANIES HAVE THE ABILITY TO RAISE THEIR OWN PRODUCT PRICES TO OFFSET THOSE HIGHER COSTS’
reserves plunge. A blackout in Tokyo was only narrowly averted by residents and businesses heeding a government plea to limit electricity use.
As in the rest of the world, gas and electricity prices in Japan are rising and this is putting pressure on corporate profitability. Our analysts based in Japan are working hard to identify which companies have the ability to raise their own product prices to offset those higher costs.
BOARD INDEPENDENCE AND DIVERSITY REMAIN A CHALLENGE
Finally, mention must be made of the lack of diversity on Japanese boards. Different perspectives and opinions are essential for good decision making in any group, and help counter the risk of ‘group think’. Japan’s boards remain largely homogenous, dominated as they are by older Japanese men. Changing this will be neither quick nor easy. For example, companies will need to develop and promote more mid-career women so that they gain the experience required to sit on boards.
The language barrier, and the limited foreign representation in the workforce, also restricts companies’ ability to build cultural diversity into their boards.
But one positive sign is that corporate governance, including the push for greater diversity on boards, is now less a political issue than a regulatory one. The introduction of Japan’s Corporate Governance Code, and the related Stewardship Code, were initially driven by former prime minister Shinzo Abe.
However, subsequent revisions of the code are now being pushed through by regulators, rather than politicians, with a focus on strengthening the structure and functioning of boards, making core management more diverse and improving disclosure.
HOW WE ARE INVESTING
Of course, as stewards of our clients’ capital, we are using our voice (and our vote) to push for more progress on ESG issues. Currently we see numerous investment opportunities in the smaller, more domestically-focused end of the Japanese equity market. Such smaller companies are often those where we can have the biggest impact in terms of engagement on ESG issues.
This is partly because we may hold a larger position, giving
us correspondingly stronger voice. Also, such firms may be
at an earlier stage in formulating their own ESG positions and this gives us the opportunity to engage with them in terms of best practise, drawing on the resource and capabilities of both our local analyst team in Japan and Schroders’ Sustainable Investment Team.
Keep up to date with the latest Schroders news here
DIY Investor Magazine · July 2022 22