On March 24th 2020, the Financial Services Agency of Japan (FSA), through the Council of Experts on the Stewardship Code it had established, offered a revision to the Stewardship Code that had been published in 2014. The revision prompts a focus on environmental, social, and corporate governance (ESG) factors surrounding sustainability and investor stewardship.
Previously, the Code had featured seven principles. With this revision, an eighth principle is added, applicable to many financial service providers, including investment consultants for pension funds, and proxy advisors. These professionals should endeavor to contribute to the enhancement of the investment chain’s function and provide appropriate services for institutional investors.
The revised Code also asserts that asset owners should encourage asset managers to secure beneficial owners’ interests by engaging in effective stewardship activities. Under the revised Code, stewardship responsibilities are defined as:
“The responsibilities of institutional investors to enhance the medium – to long-term investment return for their clients and beneficiaries by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement, or purposeful dialogue, based on in-depth knowledge of the companies and their business environment and consideration of sustainability consistent with their investment management strategies”.
In April this year, nearly 300 institutional investors accepted the suggested changes to the Code and adopted a “comply or explain” approach when the Code is not applied. We have not, to date, heard much from the FSA regarding its views on how culture and conduct related risks feature in connection with this new emphasis on stewardship.
However, as in many other markets, Japan has suffered prominent misconduct scandals in the last year and these revisions to the Stewardship Code may be driven in part by concern for improved management of non-financial risks among Japanese firms.