Global Expansion of ESG Investments alongside Movements for Decarbonization

Since the full-scale implementation of the Paris Agreement in 2020, many countries, including Japan, have set goals for ‘Net Zero by 2050’ and are advancing their efforts to reduce greenhouse gas (GHG) emissions. “National climate change initiatives have acted as a catalyst, significantly advancing the global proliferation of ESG investments,” explains Takeshi Akiba.

ESG investment refers to investments that consider non-financial factors such as ‘Environment,’ ‘Social,’ and ‘Governance’ in addition to financial information. According to Akiba, the spread of ESG investments began with the establishment of the ‘Principles for Responsible Investment (PRI)’ in 2006, which called for incorporating ESG considerations into investment decision processes and shareholder actions. “By 2025, it is predicted that one-third of global managed assets will have become ESG investment assets. While Europe has been leading the way, ESG investments in Japan made up a significant 24.3% of all investment assets in fiscal 2020,” he says.

Akiba's recent research has centered on ESG investments, specifically within Japanese insurance companies and mutual aid organizations. “Private life insurance and non-life insurance companies and mutual aid organizations operate in two business areas: insurance underwriting and asset management. Recently, ESG investments have become a significant theme in asset management within this industry, though misinformation is not uncommon. As the prevalence of ESG investments likely continues to progress, it becomes increasingly important to ensure that stakeholders receive accurate information,” he highlights his research objectives.

As previously mentioned, private life and non-life insurers and mutual aid organizations also serve as institutional investors. “The total assets of life insurance companies amounted to 412 trillion and 4.465 billion yen in fiscal 2020. These figures underscore their significant influence on the financial market as institutional investors.”

Recent emphasis on ESG themes highlights several key areas. Under ‘Environment,’ topics include climate change and GHG emissions, renewable energy, natural disasters, and biodiversity. In the ‘Social’ category, important issues include human rights, diversity, and animal welfare. ‘Governance’ concerns cover the use of external directors, sustainable business strategies, compliance, and transparency and accountability. Among these, investments targeting climate change countermeasures, particularly those aimed at reducing GHG emissions, are considered particularly crucial.

“Major Japanese life and non-life insurance companies have recently revised their operational portfolios in response to external environmental changes, prioritizing ESG investments,” notes Akiba, citing The Dai-ichi Life Insurance Company, Limited as an example. The company signed the PRI and has been actively pursuing decarbonization by setting GHG emission reduction targets. “The GHG emissions from their portfolio of listed stocks, corporate bonds, and real estate decreased from about 6.02 million tons in 2020 to about 4.93 million tons in one year, a reduction of 18%.”

Environmental NGO Shareholder Proposals Moved Big Corporations

“The methods of ESG investment are generally organized into seven types,” says Akiba. One is ESG integration, which involves incorporating non-financial ESG elements into the investment process.

The second approach is engagement, which involves influencing investee companies by exercising voting rights and shareholder proposals. According to Akiba, a notable instance demonstrated the power of engagement to the public.

In June 2020, the certified NPO Climate Network made a shareholder proposal to Mizuho Financial Group (Mizuho FG), urging the company to disclose a management strategy aligned with the goals of the Paris Agreement, specifically addressing Mizuho FG’s significant financing of coal-fired power generation in a critical manner. “Despite the rejection of the proposal, as many as 35% of the shareholders expressed their support. This notable response prompted other financial institutions and resource development companies to begin transitioning away from coal financing.”

Other methods include screening methods aligned with international norms established by United Nations organizations, the Organization for Economic Co-operation and Development (OECD), and human rights NGOs. Negative screening involves withdrawing investment from companies deemed unsuitable based on ESG criteria. Conversely, positive screening prioritizes investments in companies with high ESG performance. Thematic investing focuses on themes that strongly contribute to ESG goals, such as renewable energy projects. Lastly, impact investing aims to directly generate social and environmental impact.

Ever More Stringent Evaluation Standards, What is Expected of ESG Investment

“Concerns that ESG investing might affect returns have long made Japan hesitant about ESG investments. However, the high profitability of ESG investments has been reported in many studies,” says Akiba. Supporting this, the PRI has grown in signatories since its inception, expanding to 5,220 institutions as of October 2022.

Anticipating further expansion of ESG investments by private life and non-life insurers and mutual aid organizations, Akiba advises, “Institutional investors who have signed the PRI are required to invest according to the six principles set by the PRI, but these evaluation standards are becoming increasingly stringent each year. It is necessary to respond swiftly to these trends.”

Massive funds are needed for climate change counter measures. The insurance industry’s ESG investments could significantly impact the realization of a decarbonized society. By showing the way to appropriate ESG investments, Akiba is pushing this forward.