MW-56 -- Socially Responsible Investment Pays in Japan

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Weekly Financial Commentary from Tokyo

Issue No. 56
Tuesday, December 9, 2003

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++ Viewpoint: Socially Responsible Investment Pays in Japan

The Bottom Line
o The global wave of socially responsible investing (SRI) is
becoming a mainstream investment "style" and moreover has
begun to take off in Japan. Globally, there is estimated to be
more than 200 trillion yen in investment funds that use SRI
screening. If we assume an 8-9-percent market weight for
Japan, that's 16-18 trillion yen of SRI-screened funds
available for Japanese equities.

o SRI proponents in the US insist that the returns on these
funds are competitive. A simple comparison of the Dow Jones
Sustainability Index (DJSI) and the S&P 500 for the last 10
years appears to bear out these claims out.

o What about Japan? Some 114 Japanese companies are already
constituents of global sustainability indexes such as the
DJSI, FTSE4Good and the Ethibel Sustainability Index.

o A quick analysis of the market-cap-weighted performance of the
35 Japanese companies in the DJSI since 1993 shows clearly
superior performance. On the downside to the recent trough
earlier this year, these SRI constituents held up much better
than the Topix. The conclusion is that SRI pays in Japan as

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++ Viewpoint: Socially Responsible Investment Pays in Japan

SRI is becoming a mainstream investing style around the world. A
Thomson-Extel survey of European institutional investors showed that
45 percent of institutions surveyed have invested over 10 percent of
their total assets in SRI-screened funds.

In effect, Europe is moving SRI into a more mainstream policy
position than it occupies in North American or Asian markets.
Ethical investing has become the fastest growing sector of the
UK retail funds market, expanding tenfold over the past decade to
become an approximately $6 billion industry; more than 20 funds have
been launched in the past three years. However, the most dynamic
retail market is France, which has tripled its number of funds between
2000 and 2002. Pension fund participation has also increased
dramatically. The UK Social Investment Forum reports that nearly 75
percent of UK pension funds involved in SRI are also active in some
type of shareholder engagement, and according to researchers at
Nyenrode University, 74 percent of Dutch pension funds expect to be
using social or environmental criteria in investment decisions in the
near future. In the US, the pool of SRI-screened funds is a huge $2.2

SRI from the corporate issuer perspective is called CSR, or corporate
social responsibility. Corporate management of any large listed
company cannot afford to ignore this already large and growing
investment approach. The four pillars of CSR are community investment,
human rights and employee relations, environmental practices and
ethical conduct.

The International Organization for Standardization (ISO) has
carried out a feasibility study regarding the establishment of
standards for CSR and has launched a forum to gather stakeholder
views from around the world. There is also talk that the ISO
will establish global standards for CSR by 2007.

How SRI Funds Select Stocks
The Social Investment Forum finds that social investment screens
usually occur in packages of several screens; very few screens are
used by themselves.

In the US, tobacco is the most broadly used screen, applied to $135
billion in US invested assets, over 80 percent of the total socially
screened mutual fund universe. Alcohol is also a broadly used screen,
employed by over half of the total assets in socially screened mutual
funds. Labor relations, environment, gambling and defense/weapons are
also commonly used screens, applied by 15-20 percent of total socially
screened mutual fund assets in the US. On the other hand, equal
employment opportunity, beneficial products and services, human rights
and community impact are specialty-use screens, employed by less that
15 percent of total screened mutual fund assets in the US.

Global SRI Benchmarks
Launched in 1999, the Dow Jones Sustainability Indexes were the first
global indexes tracking the financial performance of the leading
sustainability-driven companies worldwide. More than 46 DJSI licenses
are currently held by asset managers in 14 countries to manage a
variety of financial products including active and passive funds,
certificates and segregated accounts. In total, these licensees
presently manage close to $2billion based on the DJSI.

Another benchmark, the FTSE4Good Indices, have been designed to
measure the performance of companies that meet globally recognized
corporate responsibility standards and to facilitate investment in
those companies. The Financial Times publishes the results of its
regular six-monthly FTSE4Good index review.

New To Japanese Companies
All of this social responsibility stuff is quite new to Japanese
companies. When SRI surveys started hitting the desks of investor
relations officers at Japanese companies, they at first did not know
what they were for. But with more than 11 SRI research organizations
globally, Japan's larger companies are beginning to see many such
surveys crossing their desks.

Aside from the SRI wave, there is also a movement to establish
CSR standards for Japanese companies. Keidanren (The Japan
Business Federation), in cooperation with the Economic and Social
Research Institute of the Cabinet Office, is in the process of
establishing a CSR framework for Japanese companies that should
be announced around June of next year.

After Australia, Japan is seen as Asia's most developed and promising
SRI Market, but it is still small. The first SRI fund was introduced
in Japan only three years ago, and there is now over 100 billion yen
invested in 11 indigenous SRI funds. However, Japanese SRI fund
managers and investors do not consider cigarettes, alcohol, gambling,
nuclear power or weaponry "anti-social;" rather, social screens are
most often focused on environmental, human rights and supply chain

Does SRI Pay?
Perhaps the most controversial question for SRI funds is, do SRI funds
outperform regular funds that are based on more conventional
fundamental analysis?

The Social Investment Forum in the US insists that SRI funds as a
whole do outperform others. In the US, socially responsible investing
continues to perform "competitively" and attract new assets, the
forum says, despite the US market's sustained downturn over the past
two years. Socially responsible mutual funds tracked by Morningstar in
the US have consistently been more likely to receive the highest
rankings from both tracking organizations (four or five stars from
Morningstar and an "A" or "B" ranking from Lipper) than the overall
universe of mutual funds.

In Europe, however, the last two years have seen a shrinkage of total
SRI fund assets amidst a generally difficult environment for asset
management and financial investment activities across Europe as a
whole. SRI assets in Europe suffered heavily from bearish European
financial markets since the assets are primarily equity funds, and
there was an inordinately high exposure to IT.

While there are no Japan-specific global SRI indexes, there are 114
companies included in the major sustainability index benchmarks such
as the Dow Jones World Sustainability Index (35 companies), the
FTSE4Good (87 companies) and the Ethibel Sustainability Index (25

If the Dow Jones Sustainability Index has tracked the S&P 500 fairly
closely over the past 10 years (which it has), how have the Japanese
companies in this index faired against their Japanese benchmarks?
Comparisons of the market-cap-weighted performance of the 35 Japanese
DJSI stocks and the Topix since 1993 makes it pretty clear that this
select group of Japanese companies has done much better than the
Topix, especially after the DJSI was launched in 1999. The sharp rise
seen in market cap of these stocks leading up to 2000 is a telltale
sign that there was a heavier weighting in IT stocks, because this run
coincided with Japan's mini IT bubble.

It is also interesting to note what stocks made the cut for the DJSI
and what stocks didn't. For example, the Hachijuni Bank, a regional
bank, is the only bank currently in the index, while the trading
companies and more recently the shipping companies are well if not
over-represented when compared to a typical Japan portfolio. Indeed,
all three of the shipping companies have been included in the index in
the past five months, which is unusual for a global free float
market-cap-weighted index that includes only 35 Japanese companies.
This is particularly interesting in light of our comments last week
(Money Watch No. 55) about the relative attractiveness of shipping

-- Darrel Whitten

Money Watch No. 55

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Written by Darrel Whitten

Edited by J@pan Inc staff (


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