Japanese companies take ESG seriously

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For Hitachi, the appointment of its first environmental director in April meant filling a critical gap in its sustainability efforts.

In recent years, the Japanese industrial group has radically revamped. It pulled out of its thermal power business, spent $ 6.4 billion to purchase the power grid assets of Swiss-Swedish engineering group ABB, and strengthened its global presence in railways.

Hitachi’s range of activities has also enabled it to better seize new opportunities arising from disruptions linked to climate change, more than at any time in the Group’s 111-year history.

Still, Alistair Dormer – whose April appointment means he now leads Hitachi’s environmental initiatives as well as its mobility business – says a tangible top management commitment to achieving sustainability goals was still lacking.

“We worked there for about five years, but it was done almost in a corner of Tokyo,” says Dormer. “We had top-level sponsorship for sure, but who cared on a day-to-day basis and who made it happen? It’s my job.”

Mandatory road maps

Responsibility is a common challenge for Japanese companies. With Prime Minister Yoshihide Suga committed to achieving carbon neutrality by 2050, many companies have followed suit by setting long-term goals in addition to existing sustainability goals. Honda, for example, wants to end the sale of gasoline and diesel cars by 2040.

But few companies provide a detailed roadmap showing how they will go about achieving these ambitions.

“As a first step, it is extremely important to present a target,” explains Norichika Kanie, sustainability expert at Keio University. “The next phase is to ensure that concrete action is taken. It is true, however, that more and more companies are now realizing that sustainability efforts lead to real business success. “

At Hitachi, Dormer led efforts to introduce a compensation system for business unit heads that will link annual bonuses to meeting carbon emissions targets. He also persuaded Managing Director Toshiaki Higashihara to sponsor the COP26 climate change summit in the UK later this year.

“We need to be creative in how seriously executives engage with goals that are far into the future,” said Keiji Kojima, Hitachi’s newly appointed chairman. “It’s hard to get things done when you think you can leave it to the next generation. This is why we have made sure that everyone does their job with the environment in mind on a daily basis.

While measures to incorporate environmental, social and governance (ESG) measures into annual executive compensation are widespread in the United States and Europe, Japanese companies are only beginning to introduce them. Sony entertainment group and cosmetics company Shiseido are among those taking the lead.

A survey by consulting firm Willis Towers Watson last year suggested that 15 percent of Japan’s top 100 companies by market capitalization had such programs in place. However, analysts estimate the proportion to be less than 5% for the roughly 2,000 companies listed in the first section of the Tokyo Stock Exchange.

This compares to 52% of S&P 500 companies and 63% of companies listed in major European indices, according to the Willis Towers Watson study. Meanwhile, initiatives to link ESG to long-term incentives are much less common, both in Japan and elsewhere.

Takaaki Kushige, senior director of Willis Towers Watson, explains that one of the reasons for Japan’s delay in linking ESG to executive pay is that many companies have governance structures that are not sophisticated enough. This, in turn, means they don’t have the type of independent compensation committees that can fairly assess ESG metrics, which are more complex than stock prices and other financial metrics.

Cleaner and greener

Yet companies are increasingly concerned with ensuring that senior executives meet sustainability goals, as investments to reduce carbon emissions become critically important in sectors built around fossil fuels.

Mitsubishi Heavy Industries, for example, is looking to reinvent itself in clean energy as it tries to move away from companies such as coal-fired power plants and shipbuilding. A key technology it is investing in is carbon capture, which was recently chosen by Drax, the FTSE 250’s power company, for use at its main site in the north of England to achieve ” negative emissions ”.

“The market [for carbon capture] does not exist yet, but if we wait for the construction of the market, we will not be able to achieve carbon neutrality by 2050 ”, says Makoto Susaki, head of the working group on carbon capture, use and storage by MHI. “It’s very hard for us [financially] in the short term, but we must continue these efforts towards 2050.

Even as companies strive to improve their environmental play, the pressure is increasing to address other ESG concerns.

Executives say the challenge is even greater with social issues such as work practices. Already, the supply chains of businesses ranging from Fast Retailing, owner of Uniqlo, to the electronics group Panasonic have come under scrutiny.

Joji Tagawa, director of sustainability at Nissan, said that since his appointment in 2019, the automaker’s management has increased its focus on human rights, alongside efforts to reduce carbon emissions and maximize the recycling.

Nissan last month released global human rights guidelines that underscored its opposition to forced labor and child labor and promised protection for whistleblowers. In recent years, activists have highlighted the dependence of electric vehicle manufacturers such as Nissan on cobalt, some of which is mined under operating conditions in the Democratic Republic of the Congo.

“The focus on human rights and sustainability has grown more than mainstream businesses expected,” Tagawa said.

“We are not perfect but we are working on it intensively. ”


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