Hello, everyone. My name is Kazuhiro Kimura from Nissay Asset Management Corporation. It is my great privilege to talk about our approach of ESG integration in this TBLI workshop. My presentation title is “An approach of integration of ESG issues into in-house research”. We have been working on integration of ESG into investment research and portfolio management intensively only for a couple of years. However, we have been realizing a responsibility or a mission as an institutional investor for more than a decade and gradually expanding our activities as a responsible investor. Today, I would like to explain our approach to ESG integration touching upon our history as responsible investor.
This is usual disclaimer to insert. So let’s skip this page.
Please look at the 3rd page first. This is company data of Nissay Asset. Nissay Asset is an asset management arm of Nippon Life Insurance Company, which is one of the largest life insurance companies in Japan. Back in the middle of eighties, the Japanese life insurance companies, then known as SEIHO were the most powerful institutional investors in the world, investing much in sovereign bonds, municipal bonds, equities and real estate in the world. I started my business career at that time at Nippon Life and invested increasing new money in large amount of US treasuries, UK gilts and several other sovereign bonds every day. Most transactions were buying or at least net transactions were always buying. After 90’s as you know, the Japanese economy has been stagnated. So the relative presence among global investors has been lowered but still Japanese life insurance companies are powerful long-term institutional investors in Japan. Our company inherits such culture of long-term investment from our parent company. Therefore, we think we have high affinity with ESG consideration, which is needed for long-term sustainable return. Since Nippon Life was one of the largest institutions that managed pension funds, we Nissay Asset could also grow in pension fund management. Therefore we have second largest AUM in corporate pensions in Japan and over 400-client base. We used to be the largest but now a global passive manager becomes the largest. We have 400 employees with over 100 investment professionals.
Here I would like to explain our history of ESG consideration Our ESG consideration started with proxy voting, next corporate governance and now ESG total. An important event was signature to UN PRI in 2006. Since then, we have been consciously working on ESG consideration. First of all in 2007, we started to learn ESG issues and preceding cases to integrate ESG issues into investments mainly in Europe. And in the following year, we put it into practice by introducing ESG Rating, launching ESG funds in various asset classes and setting up advisory committee consisting of outside intellectuals.
I would talk a little more in detail. Page5 First, we started to vote for pension funds in the middle of 1990’s. In 1999, we made proxy-voting guideline and analysts stared to examine proxy voting. This is because analysts know the companies better and are able to make appropriate proxy judgment rather than mechanically judged box-ticking approach. And also, we thought that having analysts to review proxy voting helps analysts to know the companies from different angle and to broaden their perspective as shareholders. It actually enhances dialogues between analysts and company management on important issues such as proposed at AGMs. Analysts ask management for reason behind why they introduce anti-takeover measure and what they think of introducing independent directors. We think it also help analysts to stand as a responsible shareholder to share interest in better management toward long-term sustainable growth.
We next came to think corporate governance is an important factor to influence investment value. We started to make use of corporate governance factors in two ways. Firstly we use it as negative factors. Corporate values are likely to be destroyed by misconduct or scandals due to poor corporate governance. So we put warning flags if companies show some symptom of poor corporate governance. We usually avoid such stocks. Secondly we use it as positive factors. Corporate governance is important foundation for sustainable growth. So we have included corporate governance aspect in our core research report.
After signing to UN PRI, we have come to realize that ESG issues are becoming more and more important in investment analysis. Taking environment as an example, climate change or global warming has been not only natural phenomena but also an important political matter. Therefore, political actions such as carbon tax, emission trading and Green New-Deals are considered in many countries and actually have been introduced. They would directly influence financials and how to manage carbon emission is also an interest in analyzing corporate value toward the future.
Our approach to integrate ESG issues into research and investment is to evaluate companies from ESG aspects. We express it as ESG Rating. ESG Rating is newly provided research information to portfolio manager team from analysts in addition to conventional financial analytical information such as research report of company and industry, earnings forecast, valuation expressed as stock rating, analysts’ recommendation expressed as subjective rating and so on. Currently, ESG product team is consciously making use of ESG Rating and practicing to manage a portfolio utilizing ESG Rating
This illustrates how to make ESG Rating. We decided to evaluate ESG aspects of companies by our in-house analysts. We have 20 equity analysts and cover about 500 companies. So each analyst concentrated covers 25 stocks on average. They have various contacts with companies, say not only IR but top management, factory, R&D center and so on. Besides they often approach to suppliers, buyers and competitors to get to know the real pictures of the companies from various angles. Our strength is this through research by our in-house analysts. Therefore, our analysts are able to evaluate ESG of companies by making use of their deep knowledge and impression of the companies through direct contacts including top management. Therefore, the key input of ESG rating is analysts’ comprehensive judgment gaining from multi-faceted contacts. And ESG rating expressed as relative evaluation in the sectors each analyst cover. However, in order to make ESG rating comparable to each other in all sectors, our ESG team backed up by ESG Advisory Committee provides the criteria to look at ESG aspects of companies and quantitative CSR scoring made of publicly available extra-financial data for their reference.
Here are the criteria to evaluate companies from ESG aspects. As to environment, we first look at impact on environment by own business and how well the management recognize it. Next we look at the company’s efforts and commitment to reduce their own environment impact. Thirdly, we evaluate how the company is contributing to global environmental issues through its main business such as eco products. Finally, we look at how they communicate regarding their environmental policy and activities. We think it is good practice to disclose quantitative impacts in detail and make a commitment setting a clear target to cope with it. As to social, we first look at ethics of management and check if company philosophy is widely shared in the company. We also look at attitude by management toward social issues and what a company is doing to solve social issues. In Japan, fewer children issue is a material social problem. So we look at how a company is coping with issues like fewer children or work-life balance. Also we think it is important for a company to keep good and sound relationship with stakeholders including its employees. This is especially important in a sense of securing a sound business ground for its sustainable growth. As to Governance, we look at if its business strategy is suitable for sustainable development. Business should basically be focused on areas with its strength; otherwise it is difficult to continue for long. Secondly, we look at capital efficiency and management attitude how to return to shareholders. Thirdly, and maybe very important is management leadership to execute business strategy and sense of trust to management. As we directly have contact with top management and exchange views, we come to know if we can trust them. And we also check if the company is well-controlled with transparent disclosure. This is important to judge if a company can stay away from misconduct or scandals.
In summary, here are the focuses for our analysts to evaluate ESG.
This is our check process of PDCA cycle. The Line chart shows the cumulative extra performance of ESG Rating 1, the highest, against the universe. We use simple arithmetic mean for ESG Rating 1 performance and universe performance. The bar chart shows monthly TOPIX return. Since we started to make ESG Rating in July 2008, it is still too short to say something meaningful. But during a little less than 2years, we find the following. 1. Rating 1 stocks have not created alpha so far yet 2. But have shown interesting tendency of performance positive alpha in down-markets and negative alpha in up-markets
This slide shows how we have integrated ESG Rating into a portfolio management. We launched a ESG fund that make use of ESG Rating and financial analysis in July 2008. Since this fund is not theme fund but ESG integration fund, we construct a well-diversified portfolio. As you can see from the active weight matrix, heavy overweight on high ESG Rating and high investment rating. We consciously control sector risk, beta risk and some other factor risks. Portfolio performance against the benchmark, TOPIX, it is a little plus of +.5%. Considering that ESG Rating1 performance did not positively contribute for this period, portfolio management including investment rating could cover it. Another important feature of this fund is relatively low turnover ratio compared with our other actively managed fund. This is because we invest in Good ESG companies as a long-tem basis. We believe considering ESG factors will improve investment return in the long-term. We’d like to keep this track record and also improve integration process for higher investment performance.
An Approach of Integration of ESG Issues into In-house Research
An Approach of Integration of ESG Issues Into In-house Research ＴＢＬＩＣＯＮＦＥＲＥＮＣＥ ＡＳＩＡ２０１０ 2010/5/27 Attendees only Kazuhiro Kimura, CFA Corporate Governance Officer Nissay Asset Management Corporation TBLI Conference Asia 2010
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Company data <ul><li>Established in 1995 as an asset management arm of Nippon Life Insurance Co., which is one of the largest life insurance companies in Japan with over 40 Tril in AUM </li></ul><ul><li>Second largest AUM in corporate pensions in Japan </li></ul><ul><li>Over 400 clients base and 5.49 Tril in AUM (≒$60 Bil) as of March 31, 2010 </li></ul><ul><li>400 employees with over 100 investment professionals </li></ul>【 AUM by asset class 】 【 AUM by type of Services 】 3 Investment Trust 35% Discretionary /Advisory 65%
Our history of ESG integration <ul><li>1999 Proxy voting guideline / Review by analysts </li></ul><ul><li>2002 Corporate Governance Committee </li></ul><ul><li>2003 Negative check from governance and social criteria </li></ul><ul><li>2004 Inclusion of corporate governance in core research report </li></ul><ul><li>2006 Signature to UN PRI </li></ul><ul><li>2008 Intoroduction of ESG rating / Launch of ESG funds </li></ul><ul><li>ESG Advisory Committee </li></ul>Corporate Governance ESG Proxy Voting 1999 2002 2008 4
Proxy voting <ul><li>Since 1999, inhouse analysts have reviewed proxy voting. </li></ul><ul><li>This means </li></ul><ul><li>to consider carefully with better understanding of each companies </li></ul><ul><li>not to take mechanically-judged, box-ticking approach </li></ul><ul><li>and... </li></ul><ul><li>to broaden analysts’perspective as shareholders </li></ul><ul><li>to enhanse dialogue between analysts and corporate managemnt of invested companies on important items at AGM such as anti-takeover measure or independent directors </li></ul><ul><li>to help analysts to stand as a responsible shareholder to consider better management toward long-term sustainable growth </li></ul>5
<ul><li>As Negative Factors </li></ul><ul><li>inadequate internal control </li></ul><ul><li>one-man company / abuses in manage-ment </li></ul><ul><li>greediness / naked pursuit of short-term profit </li></ul><ul><li>opaque decision-making process </li></ul><ul><li>lack of respect for shareholders’ interest </li></ul><ul><li>As Positive Factors </li></ul><ul><li>respect for shareholders’ interest </li></ul><ul><li>transparent management </li></ul><ul><li>high-level accountability and disclosure </li></ul><ul><li>shareing of corporate philosophy </li></ul>Corporate Governance Warning flags as symptom of misconduct or scandals Inclusion of corporate governance aspect in core research reports 6
Increasing importance of ESG consideration Envionment Social Governance ・ Population increase ・ Poverty ・ Child labor ・ Accounting corruption ・ Remuneration problem ・ Minority shareholder ・ Climate change ・ Peak oil ・ Water scarecity ・ Human right issues ・ Supply chain issues ・ Local operation ・ Global standard of governance structure ・ Effectiveness of board ・ Carbon tax ・ Emmision trading ・ Green New Deals ESG factors are becoming important for investment analysis <<ESG issues>> <<Policies or actions to be taken>> Carbon pricing Global supply chain management Change in management mind 7
ESG Rating by in-house analysts <ul><li>In-house analysts have started to provide ESG Rating for their research coverage stocks to portfolio manager team since 2008 . </li></ul>8 Analyst Team PM Team Financial Analysis Information <ul><li>Company report / Industry report </li></ul><ul><li>Earnings forecast / ＣＦＲＯＩ </li></ul><ul><li>Stock rating based on DCF model </li></ul><ul><li>Subjective rating (Analyst recommendation) </li></ul><ul><li>Investment universe </li></ul><ul><li>Negative screening </li></ul>ESG Information <ul><li>ESG Rating (New) </li></ul>Basic materials Capital Goods Telecom/Services Financials Core Concentrated ESG Long-Short Consumer Utilities/Infrastructure 20 analysts 20 portfolio managers
How to evaluate ESG of companies Companies ESG Rating Ｅ： 1 ・ 2 ・ 3 ・ 4 Ｓ： 1 ・ 2 ・ 3 ・ 4 Ｇ： 1 ・ 2 ・ 3 ・ 4 Overall ： 1 ・ 2 ・ 3 ・ 4 Analysts <ul><li>Relative evaluation from ESG aspects within sector </li></ul><ul><li>With emphasis on comprehensive judgment using information gaining from multifaceted contacts </li></ul>CSR Scoring using public information ESG Team (Equity) ESG Advisory Committee Review Meeting Support, advice 9 ESG Criteria ＩＲ Management Factory Suppliers Buyers Competitors
Environmental Social Governance <ul><li>Ethics and philosophy of management </li></ul><ul><li>Attitude toward social issues </li></ul><ul><li>Trust between employees and management / employee motivation </li></ul><ul><li>Relationship with stakeholders </li></ul><ul><li>Business strategy toward sustainable development </li></ul><ul><li>Capital efficiency and appropriate return to shareholders </li></ul><ul><li>Management leadership / sense of trust </li></ul><ul><li>Transparency of management / internal control </li></ul><ul><li>Impact on environment by own business and its recognition </li></ul><ul><li>Efforts and commitment to reduce own environment impact </li></ul><ul><li>Contribution to global environment through own main business </li></ul><ul><li>Communication regarding environmental policy </li></ul>Criteria of ESG Rating 10
<ul><li>Top management views on and commitment to ESG issues </li></ul><ul><li>Corporate culture and philosophy shared among employee </li></ul><ul><li>Compatibility of business strategy with sustainable growth </li></ul><ul><li>Sense of trust to management </li></ul><ul><li>Social mission or role of its business </li></ul>Our focuses: 11
ESG Rating performance analysis <ul><li>Rating 1 stocks have not created alpha so far yet </li></ul><ul><li>But have shown interesting tendency of performance </li></ul><ul><li>positive alpha in down-markets and negative alpha in up-markets </li></ul>
Integration of ESG Rating into portfolio management <ul><li>Portfolio Concept </li></ul><ul><li>To integrate ESG into investment with ESG Rating and financial analysis </li></ul><ul><li>To construct a well-diversified portfolio </li></ul><ul><li>Started in July 2008 </li></ul>
Wishing for a sustainable society <ul><li>Thank you very much ! </li></ul>