NSSK: Identifying ESG opportunities in Japan

Private equity has a key role to play in empowering women and protecting the environment while generating financial returns, say NSSK’s Jun Tsusaka and Kiyomi Matsuda.

This article is sponsored by NSSK.

While ESG has been gathering momentum in Japan, the country languishes near the bottom on some key social indicators – Japan is ranked 116 out of 146 countries on the World Economic Forum’s Global Gender Gap Index 2022, for example. 

However, Jun Tsusaka, CEO of Nippon Sangyo Suishin Kiko and chair of the firm’s ESG committee, and Kiyomi Matsuda, finance director and ESG leader, say prioritising the empowerment of women and minorities can be a key ingredient for success in the Japanese market. With the importance of ESG now beginning to gain traction, they tell Private Equity International that more Japanese firms are ready to make commitments on social and environmental action.

How is the challenging global macroeconomic situation affecting attitudes towards ESG in Japan?

Jun Tsusaka, NSSK

Jun Tsusaka: On a relative basis, Japan is faring quite well economically. Almost 60 percent of our economy is based on domestic consumption, so Japan is not as exposed to the various factors that are contributing to the global slowdown.

While the economic pressure is a little less acute in Japan than in other developed markets, people are asking the question of whether we should be deploying resources towards ESG. I believe most actors agree the answer is ‘yes’. Part of the reason for that is there is a sense that we are behind on ESG, for example in the empowerment of women and with the whole concept of diversity and inclusion. Almost everybody recognises that Japan has a lot of work to do. 

My understanding is that fewer than 20 Japanese GPs are signatories to the UN Principles for Responsible Investment. That is remarkably low. We will see more and more firms make commitments on ESG, but it takes time and investment. It involves creating a strategy, building an organisation, setting objectives and then executing. The requirements for disclosure mean firms need to produce evidence that they really are fulfilling their commitments.

The ESG movement in Japan did start to build momentum through the pandemic, and that momentum is continuing as we enter a weaker economic environment. The emerging consensus now in Japan is that ESG, irrespective of short-term fluctuations in the economy, is a ‘must do’ in terms of creating a better future for our children and grandchildren. 

To what extent has the argument that ESG can drive better financial returns gained acceptance among Japanese investors?

Kiyomi Matsuda, NSSK

JT: At NSSK, we have put diversity and inclusion front and centre in all our investment activities, and we are now reaping the benefits. We are generating top-quartile returns, even in these difficult economic conditions, and we attribute that largely to our diversity and inclusion initiatives. 

We have more than 12,000 employees in portfolio companies in our flagship fund – 70 percent of staff are women, and 35 percent of managerial positions are held by women. That’s a big increase from where it was when we first invested in these businesses. As control investors, we choose who is going to run our businesses, and in 39 percent of our companies, we have a woman or a minority in the chief executive or chief operating officer positions.

We still have work to do, but we are on a nice trajectory upwards. In fact, in Japan, it’s considered best practice to have around 13-14 percent of managerial positions held by women, so we are triple where the so-called best practice is. 

In terms of appointing female CEOs and COOs, our performance is off the charts. That is what we believe is driving our top-quartile performance. 

What can private equity firms in Japan do to help accelerate the journey towards net zero?

Kiyomi Matsuda: In private equity, we have an advantage because we tend to be control investors. As a minority investor, there is only so much you can do to influence a company. But as control investors, we can really put our money where our mouth is – we are in a position to execute on the promises we make around net zero during fundraising, because we have control.

One of the biggest challenges for setting a net-zero target is understanding the baseline that we are starting from. We need to have tools and processes and procedures that not only help us measure where we are but help us track progress going forward. There must be a clear and transparent way to do that. 

That whole process of implementing new control measures is something that private equity is good at. As an industry, we are good at helping our portfolio companies and management teams implement new business processes and procedures. The private equity industry as a whole, including in Japan, can play a very substantive role in helping companies understand where they are and put in place business processes that can help get companies to net zero over time.

The Japan Private Equity Association launched an ESG committee in 2023, and NSSK was appointed as a core member. We expect this organisation will help accelerate ESG initiatives in general in the PE industry in Japan and ensure the healthy development of the industry. 

Building a 20- to 30-year programme and coming up with a roadmap for net zero is very complicated. It’s going to take money and we are all going to have to do a lot of financial planning. But that is what private equity does well. So, we think private equity has a big role to play in the net-zero journey.

How will taking action on climate affect financial returns? 

KM: Compared with diversity and inclusion, the benefits will be felt over a longer time horizon. The implementation processes take longer. However, very often, taking action to protect the environment also produces a cost saving. Moving to alternative energy sources, or using energy more efficiently, for example, will reduce greenhouse gas emissions, but also cut costs.

We are focusing on the quick wins. Why? Because the market is hungry to see success stories, and we want to build as many success stories as possible so that everybody gets on the bandwagon. There are still a lot of critics and sceptics who are saying you cannot be environmentally friendly and make returns. The best way to change that rhetoric is to have some successes, and that’s what we are trying to do.

Also, when you are trying to exit a company, whether you are going through an IPO or you have a large company buying your business, the minimum requirement is that you have the right governance in place. Having a robust net-zero strategy for the company is part of that, so it does open up your exit options as an investor if the company has a commitment to net zero and is executing on that in a transparent fashion. That is something that drives value.

In terms of ESG regulation, what are the most important factors for PE firms in Japan to consider?

JT: At NSSK we have had the honour to be appointed as the Asia regional chair for the Operating Principles for Impact Management. Part of our work involves coordinating with other GPs and LPs, but also with government entities that are reviewing what regulations should potentially be implemented around private equity. What we are discovering is, ultimately, there will be some form of regulation around ESG that will apply not only to private equity firms, but to all corporations in Japan.

The good news is that this process is being accompanied by a great deal of dialogue. The goal of these signatory organisations, like the Operating Principles, is to provide transparency and to make sure that we are already taking action before governments need to take action. 

We want to work with governments to come up with regulatory guidelines – as opposed to requirements or restrictions – that make sense for everybody. This is because, if regulations don’t make sense and they become too costly for corporations to implement, then they are a value destroyer, not a value creator.

Women account for around half of management positions, including that of COO, at NSSK-backed Japanese language school International Study Institute

Why did you decide it was so important to focus on gender and diversity?

JT: One of the unique things about NSSK is that we have a chief philosophy officer who works with the management teams and employees in our portfolio, and talks with them about their purpose. What is their mission in life? How do they incorporate ESG into their corporate goals? That helped us to see that Japanese women and minorities are a tremendous asset to the country and if we could only mobilise them more effectively we would get much better results. 

We saw that the first thing we could do to have a near-term impact with ESG would be on empowering women. However, we didn’t start by saying we were going to be a gender-lens investor. Instead, we started out by asking how we could generate superior returns in the Japanese marketplace. We asked where we could find opportunities where women have not been in a position of influence, and if we changed that equation we would change the business and financial outcomes.

One of our theses was that we wanted to motivate women in the workforce to achieve not only higher positions in their companies, but to have the ability to control outcomes. We thought that if we could do that, we would generate better financial results. It is about getting people to buy in to the corporate mission. It’s what we refer to as the ‘heartware’. We invest capital in our companies and we invest in hardware and software, but ‘heartware’ is the mindset that drives action.

Gender-lens investing is normally defined, in part, as investing in companies that are already being led by women – whereas, in our case, we are investing with the intention to empower women, so that we get better outcomes. Ultimately, the active managerial decisions that we make help to transform companies so that they would be suitable for a gender-lens investor when we exit.