Nippon Life Insurance Co. said it will become Japan's first institutional investor to use the ESG assessment for all asset management, starting from April 2021.
The ESG concept is used to help judge the sustainability and growth potential of a company by taking into account environment, social and corporate governance issues. The judgement criteria include reduced environmental burdens, improved working conditions, attitude toward information disclosure and appointment of outside corporate officers.
Using its original assessment criteria, Nippon Life aims to improve investment returns and reduce risks by increasing investment in companies with factors such as high management transparency and high sustainability.
Nippon Life manages in the market the premiums collected from insurance policyholders as a way to prepare for insurance benefit payments. The company's total assets amount to about 70 trillion yen.
The scale of ESG investment has been small in Japan compared to the United States and other western nations such as those in Europe. Nippon Life's move could give a big boost to ESG investment in Japan.
For domestic equities, Nippon Life will have dialogue with each company in which it is investing to talk about ESG measures. For example, Nippon Life will ask companies emitting large amounts of greenhouse gases to disclose its management risks associated with climate change and emission reduction measures. Unless improvement is seen in the company's measures, Nippon Life will consider selling shares or bonds in that company.
When it comes to government bonds, Nippon Life reportedly will use data from the World Bank and other information and reduce the amount of government bonds it holds that have low ESG ratings.
For real estate held for management and other purposes, Nippon Life will make efforts to obtain environmental certification.
According to research by a Nippon Life group company on changes since 2008 in the stock prices of companies Nippon Life has invested in, companies with high ESG ratings have enjoyed stock prices higher than the average of all invested companies. Nippon Life intends to focus on ESG investment so that it can increase policyholders' dividends and reduce insurance premiums.
-- Other firms aim for same path
Nippon Life's emphasis on ESG investment results from prolonged low investment returns in major industrialized countries, which makes it difficult to select investment destinations.
Traditionally, respective life insurance companies have invested mainly in long-term Japanese government bonds. Since 2013, however, when the Bank of Japan implemented large-scale monetary easing, the yields of JGBs have declined: The yield on a 30-year JGB has fallen from around 2% to about 0.6%.
Seeking high returns, other large life insurance companies are also looking at ESG investment. The Dai-Ichi Life Insurance Co. will invest about 400 billion yen allocated for investment in foreign stocks in issues comprising an ESG-oriented index before the end of fiscal 2020. In May, Meiji Yasuda Life Insurance Co. announced a policy on ESG investments and loans. Sumitomo Life Insurance Co. reportedly plans to invest about 300 billion yen in bonds related to solutions to ESG issues by fiscal 2022.
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