Think big and be bold on ESG, says NSSK

This article is sponsored by NSSK

Why is responsible investment so important to NSSK and how has that manifested itself in the firm’s structure and approach?

Our firm is relatively young. NSSK was established just over five years ago, when the pursuit of responsible investment was in the ascendancy. In many ways, it was a question of being in the right place at the right time. We launched NSSK with the express purpose of helping to revitalise Japan through private equity and we incorporated environmental, social and governance principles into our mission statement from the outset. We are focused on generating superior outcomes for society and for the environment, just as much as we are focused on generating superior financial returns. NSSK was created with that big and bold ambition.

NSSK has placed a heavy focus on diversity and inclusion in its ESG goals. What is the driver behind that?

Of the 153 countries included in the World Economic Forum’s latest Global Gender Gap Report, which looks at economic, educational, health and political disparities between the sexes, Japan is ranked at number 121. We do not fare well at all. Of course, if nothing is done about that, the situation will only deteriorate. It was important for us to set big and bold objectives in this area, because without that you simply will not move the needle.

We are proud of the success we have already been able to achieve. NSSK now has a portfolio of 17 different companies with over 9,000 employees, and around 80 percent of those employees are women. Meanwhile, 49 percent of management positions are held by women and 40 percent of our CEOs and COOs are either women or people from minority backgrounds. Those are startling numbers when compared to the Japanese benchmark. In fact, we do not use Japan as a benchmark because the numbers are simply too low. We look to regions such as the Nordics for best practice and set our targets against what we see happening there.

What is holding private markets back when it comes to gender equality?

There is a lingering sense that prioritising responsible investment targets can negatively impact returns. There is still a feeling that there is a trade-off there somewhere, and yet there have been numerous studies showing precisely the opposite. Certainly, our funds generate top-quartile performance whilst also exhibiting year-on-year improvements in terms of the gender gap. People are economically rational animals, so once they fully buy into the fact that responsible investment is positively correlated with returns, that will go a long way towards helping the cause.

NSSK raised an impact vehicle at the same time as its first institutional private equity fund. Why did you decide to make that move?

It is consistent with our overall mission. We worked with private investors and government-related entities to establish our first impact fund in 2017, which was one of the first impact funds in Japan at that time. Today, we are in the process of raising four additional impact funds, each focused on community engagement, employment growth, improving social outcomes and gender diversity, which will mean we manage five out of the 10 impact funds that currently exist in Japan.

What is your strategy for resourcing responsible investment?

Responsible investment is the responsibility of every individual in our firm, and once we have invested in a company, it becomes the responsibility of every employee in that business as well. But it was also important to us to set up an infrastructure that could support our aims and help turn them into reality. Part of that has involved the appointment of a chief philosophy officer.

Some of the companies we back have had their mission statements in place for 100 years. You would be hard pressed to find any corporate mission statement from 100 years ago that included ESG principles. Our chief philosophy officer helps businesses think about their attitudes, behaviours and codes of conduct – what it means to be a responsible corporate citizen and to be responsible members of society – and to distil that into a mission statement fit for the modern world. We then start by educating small groups, who pass the message on. It becomes, in many ways, a missionary activity.

We also have a full-time ESG auditor whose job it is to look at NSSK and its portfolio companies to ensure we are doing what we say we are doing, and to offer advice on how to make improvements. Finally, I chair the ESG committee. That is because we believe it is vital that these things start from the top. ESG is not something to be delegated.

Employee wellbeing is crucial to your approach. How do you measure that and why do you believe happiness is so important in a business context?

There was a time when ESG initiatives were hampered by a lack of data. Now we have the data but are finding that those numbers do not necessarily tell the full story. We employ something called the Happiness Index to fill that gap. Fundamentally, we believe that you must have happy employees to create customer satisfaction. We are convinced there is a direct correlation between happiness and performance. Part of the philosophy officer’s job is to ensure that happiness is top priority in our portfolio companies.

We have identified three variables that we believe are critical to success, both in business but also in life. The first is hard work. The second is ability – because we know that with hard work ability levels can be raised. The third variable can be directly translated from the Japanese as ‘way of thinking’. We see the success formula for life as a mathematical equation – hard work, multiplied by ability, multiplied by way of thinking. Even if the first two are at 100 percent, a way of thinking that is even slightly negative will produce an overall negative result, which just shows the importance of having a positive frame of mind.

Of course, we want our portfolio companies to have the latest technology – the very best in hardware and software. But equally, we place great importance on what we call ‘heartware’ – being sympathetic, kind and respectful. We believe these attributes can go a long way towards making a company better.