In 2021, I was provided the unique opportunity by the good folks at Refinitiv Financial Solutions to look under the hood of their newly launched sustainable development scores tool. For anyone who is not familiar with it, this product is used by investors and analysts to gauge how well sovereigns align with the U.N.’s sustainable development goals.
At the time, I noted that the diligent, bottom-up methodology underpinning Refinitiv’s country sustainable development goals (SDG) scores would help unleash a new level of environmental, social, and governance (ESG) data clarity and standardization across the industry—a clear win for investors and their financial advisors keen to integrate ESG factors into investment selection.
I remember looking at the rankings for different countries I was interested in and noting that Japan was, at the time, high up on the list at #19 out of 201 nations. I was somewhat surprised by this—particularly for a country that, for as long as I can remember, has been one of the largest CO2-emitting countries in the world.
On the other hand, Japanese multinational Panasonic has recently made remarkable environmental strides in its quest to become more environmentally friendly by reining in dependence on expensive cobalt batteries, thereby reducing the price of electric vehicles. I raise this simple example to illustrate that there is no black and white when it comes to SDG scoring. While current ESG politicization presents challenges to stakeholders up and down the value chain, opportunities are presenting themselves in spirited fashion across the globe.
Therefore, Japan’s recent announcement on published draft guidelines that mandate ESG disclosures for public companies caught my attention. I immediately started to think about how Aite-Novarica Group’s financial institution partners in Japan will need to cope and adapt in short order, as this new mandate goes into effect after March 31 (when companies in Japan end their fiscal year) and will impact reporting beginning in June. Following are some other key implications.
Implications for Japanese Financial Institutions
For asset managers, it clearly means ESG factors will be considered for security selection. For the wealth management industry, if the rest of the world is any indicator, the sector can expect several key reactions, including increased focus on product strategy, private client onboarding, portfolio construction, data analytics, and impact reporting.
Japanese wealth practices, like their global peers, have a long list of technology improvements that must be addressed, including upgrades to digital engagement, digital communication, client reporting, customer relationship management, and financial planning platforms. While each firm has its priorities, with this new regulation, Japanese firms now need to take a stance in technology initiatives related to ESG.
I predict that Japanese wealth managers will need to increase their focus on embedding sustainability data and metrics into their investment portfolios and on training their financial advisors to become more in tune with sustainable investing. Financial advisors and wealth tech platforms will need to become intimately familiar with their clients’ values and personal beliefs. The ability to communicate and report the financial and nonfinancial impacts of their investments is vital as well. Not doing either will needlessly put the client relationship at risk, leaving it vulnerable to attrition. The competition is quite fierce, and financial institutions will poach clients that don’t have the needed impact reporting capabilities.
ESG data will become more prominent on Japanese advisors’ workstations, tighter consolidation of ESG factors into investment selection will take place, and financial advisors will need to be trained to learn about the U.N.’s SDG goals to use and apply the data appropriately to clients’ decision-making. Indifference or ambivalent attitudes toward issues such as climate change/carbon emissions, sustainable natural resources/agriculture, and corporate board issues won’t be received well by certain emerging private client segments.
Additional Information and Contact Details
We are excited to collaborate with our partners in Japan and across the globe on this sector. Should you wish to learn more about this sector, key trends, and how ESG is finding its way into the hearts and minds of wealth managers and financial advisors across the globe, read Aite-Novarica Group’s reports: ESG Data Market Dynamics Within Wealth Management and Dawn of a New Era: ESG Integration Into Wealth Management or contact me directly at firstname.lastname@example.org.