Kuniyuki Sugihara, chief portfolio manager of the Japan Impact Equity Strategy at SuMi Trust, explains how UN SDGs can be implemented in stock selection, using Japan as an example, and he cites three stocks that worked.
There is a lively debate among investors and fund selectors about the utility of the UN’s 17 Sustainable Development Goals (SDGs) as a measure of ESG impact. The SDGs were adopted by the UN in 2015 as a universal call to action to end poverty, protect our planet, and ensure peace and prosperity for all by 2030.
They comprise 17 goals with 169 specific targets under them focussing on social and environmental issues agreed by more than 190 countries. Although such issues are different in each country or region, the targets are a good barometer for investors to understand the common priorities the world is focussing on when it comes to social and environmental aspects. As such they can help drive research and generate ESG investment ideas.
In a country like Japan, the SDGs are of particular importance as a broad range of companies are already actively using them to revisit their business activities and are communicating with investors using them in the context of ESG. This is because the SDGs are popular and well known – even by the general public – thanks to government and media efforts to raise their profile.
According to our analysis looking at Japan, approximately 60% of the 169 SDG targets are related to the private sector and can be solved by innovative business solutions. These include target 8.2 of achieving higher levels of economic productivity through diversification, technological upgrading and innovation. Also, target 3.4, which is a target to reduce by one third the rate of premature mortality from non-communicable diseases through prevention and treatment, and promote mental health and well-being by 2030.
The rest are issues covered by governments and public sectors. Target 17.2 is for developed countries to fully implement their official development assistance commitments to least developed countries, for example.
The former targets are the areas where investors in Japanese equities should focus on to find profitable opportunities in line with ESG principles. However, it is worth noting that each of 17 SDGs does not imply the same degree of business opportunities and conducting thorough research is important to weed out potential unfruitful investment choices.
Yamaha making great efforts
So, how does this all work in practice? One way to effectively use the SDGs’ targets to identify ESG investment opportunities in Japan is by further distilling them into nine impact themes. These are: new healthcare; sustainable food chain; transition to green energy; circular economy; employment and education; closing the gender gap; access to clean water and protection of biodiversity; developing infrastructure; and research & development, technology, productivity.
Then, based on these themes, scrutinise the capabilities of Japanese companies to assess if they have the potential to generate positive impact, if the business model can achieve the set goals, and if the management team is committed to solving identified long-term challenges.
Bottom line, the SDGs are essential to hand-pick long-term quality growth stocks in Japan which have strong ESG credentials. Some examples of such companies include The Yamaha Corporation, the world’s largest piano manufacturer, as well as less known players such as Litalico, a provider of employment support and learning support services for people with disabilities, and Daiseki, a recycling service provider for industrial waste.
Firstly, Yamaha is making great efforts to support music education in developed and developing countries, including by supporting the music education system and providing musical instruments and teachers in schools, in line with part 3 of SDG4 (by 2030, ensure equal access for all women and men to affordable and quality technical, vocational and tertiary education, including university). Also, the company focuses on preserving local musical traditions in a globalised world, including storing the sounds of regional musical instruments through digital products and the production of such instruments, in accordance with part 4 of SDG 11(strengthen efforts to protect and safeguard the world’s cultural and natural heritage).
Then there is Litalico which runs multiple businesses focusing on people with disabilities including job training services for employment and social skill learning and education support for children. The company commits to contribute to create a society without any barriers, in line with part 8 of SDG5 (by 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value) and part 2 of SDG10 (by 2030, empower and promote the social, economic and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin, religion or economic or other status).
However, there have been issues around the low wages that Litalico offered to its employees which could violate part 3 of SDG10 (ensure equal opportunity and reduce inequalities of outcome, including by eliminating discriminatory laws, policies and practices and promoting appropriate legislation, policies and action in this regard). Following our continued active engagement with the company which started in 2020, wages have been reviewed and raised, further contributing to employees’ satisfaction and overall business success.
Waste reduction
Last, but not least, recycling company Daiseki is implementing services to transform industrial waste into useful resources by offering recycling solutions and materials in accordance with part 5 of SDG12 (by 2030, substantially reduce waste generation through prevention, reduction, recycling and reuse) and part 4 of SDG9 (by 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes, with all countries taking action in accordance with their respective capabilities).
Given the nature of its business, Daiseki has been increasingly attracting industrial companies that are required to manage waste and use materials in sustainable ways as clients, and has expanded capacity and offered new services – such as for complex waste – to meet rising demand. In doing so, it has had to pay close attention to the need to continue to care for regional society (it could violate part 6 of SDG11: by 2030, reduce the adverse per capita environmental impact of cities, including by paying special attention to air quality and municipal and other waste management) and employees’ safety (it could violate part 8 of SDG8: protect labour rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment).
Overall, the SDGs and its 169 targets are powerful tools for investors as now, more than ever, they need to pay great consideration to the different and interconnected ESG factors that may come into play when investing in companies in Japan and beyond.
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