Pioneering impact investing in Japan

With an AUM of US$742 billion at the end of 2020, Sumitomo Mitsui Trust Asset Management (SuMiTRUST) is one of the largest asset managers in APAC. The firm has been recognised by Asia Asset Management (AAM) in multiple categories in their Best of the Best Awards 2021, namely Japan Best Equity Manager, Japan Best REITs Manager, and Japan Best Impact Investing Manager.

SuMiTRUST believes that long-term investment in companies able to provide sustainable solutions to environmental and societal issues will generate excellent financial returns. Having developed impact investment capabilities since 2015, the firm is a pioneer in Japan. The company launched its first impact investment strategy for Japanese listed companies in October 2019.

As Kuniyuki Sugihara, chief portfolio manager of SuMiTRUST’s Japan Impact Opportunities strategy notes, the Japanese phrase, “Sanpo Yoshi” takes its values from top tier merchants in the Edo period (17-19th century) which emphasises three-way satisfaction and business transactions which provide benefits to all stakeholders.

“ESG awareness has already existed in the history of Japanese business for a long time. That’s why we believe that Japanese companies are more likely to seek to make a positive impact on the environment and society during their business development. The concept of impact investing fits very well into Japanese business culture,” Sugihara tells AAM.

Key features

The strategy starts by identifying companies which can potentially have a positive impact on the environment and society through a series of unique Key Performance Indicators (“KPI”) used to measure the impact of each investee company. Each KPI is designed to meet the 17 goals and 169 targets that come under the Sustainable Development Goals or SDGs developed by the United Nations.

“Our KPIs include the reduction of CO2 emission, increased jobs through training, and decreased medical spending. We understand how difficult it is to measure the impact a company has on the environment and society, but this framework enables us to evaluate this quantitatively.”

Another key feature of the strategy is proactive engagement with companies. SuMiTRUST has ten engagement specialists and more than 20 research analysts covering 800 Japanese listed companies. They regularly engage with corporate management teams to help to improve ESG and to generate sustainable financial returns.

“We always take a constructive and non-hostile approach and believe building long-term relationships with companies is important. Our engagement specialists often present their insights and quantitative comparison analysis within the industry to support the management in finding effective and beneficial solutions that can deliver positive outcomes to the environment and society,” notes Sugihara. “In addition, SuMiTRUST’s local presence, long history and knowledge of industries, make investee companies much more inclined to listen to our opinion,” he adds.

Investment Performance and Outlook

The portfolio includes 25-50 names and has generated 21.24% absolute return (gross of fees) since its inception in October 2019, outpacing TOPIX by 13.34%.

“Tackling the environmental and societal issues set out by the UN’s SDGs has become a global agenda, and creating innovative solutions has become increasingly important. These solutions will continue to be incentivised by greater consumer demand and moves by the corporate sector to meet the growing requirements of their supply chain, investors, and governments,” observes Sugihara.

SuMiTRUST’s impact investing solution sets out to offer an optimal set of secular growth opportunities for investees who can generate sustainable profit by solving not only Japanese but also global issues.

He concludes: “Long-term investments into quality companies can deliver compelling financial performance throughout economic cycles and unforeseen events such as the Covid-19 pandemic. Our solution allows us and our clients to make a positive contribution to the people and the planet, leveraging the “Sanpo Yoshi” principle of Japanese companies.”