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MARKET SCRAMBLE:

Will SRI Prove To Be Stock Market's Savior?

2002/11/05

TOKYO (Nikkei)--Foreign investors continue to scour for opportunities in the Japanese stock market, despite disappointment in the government's anti-deflation package and uncertainty about the corporate earnings outlook.

Daiwa Securities Group Inc. (8601) on Oct. 30 hosted an unusual group of as many as 10 fund managers from South Korea, France, the U.K., the U.S. and Italy, among other nations -- all participants in the annual conference of the Association for Sustainable & Responsible Investment in Asia (ASrIA).

In a sign of how the socially responsible investment (SRI) approach is starting to matter here, Daiwa executives were peppered with questions about social equality in employment, human rights and other issues that Japanese investors would not normally raise.

The fund managers wanted to know whether Daiwa analysts look at SRI issues when they assess companies, noting that analysts in Europe, for example, will examine how companies respond to environmental issues.

The annual ASrIA conference, held in Tokyo from Oct. 28-30, drew some 300 attendees from financial institutions and investor relations firms. Various participants also paid calls on Sony Corp. (6758), Cosmo Oil Co. (5007), Ito-Yokado Co. (8264) and Dowa Mining Co. (5714), among other firms.

SRI has shown sharp growth over the past 10 years. In the U.S., assets in funds that employ an SRI approach swelled to more than 200 trillion yen as of last year, double the figure from the mid-1990s.

SRI is also taking off in the U.K., where new pension legislation requires fund companies to disclose whether they employ SRI criteria in their investment decisions.

Meanwhile, SRI fund managers are starting to show a growing interest in the Japanese market. The Calvert Group, the largest U.S. provider of SRI funds, holds some 5 billion yen of Japanese stocks, accounting for about 20% of its total holdings of foreign shares. Barbara Krumsiek, president of the Calvert Group, suggests that Japan might represent an SRI opportunity, as a growing number of companies bring corporate ethics to the forefront in response to a rash of scandals.

Some listed companies, meanwhile, see SRI-conscious investors as a new source of buying in the stock market.

"The portfolio weighting of Japanese shares at foreign SRI funds is low," says an executive at Sompo Japan Insurance Inc. (8755). "This is actually a chance to reach a new group of buyers."

One of the key points for companies is whether their shares are included in SRI indexes used by fund managers.

The Dow Jones Sustainability Indexes (DJSI), for example, are used by 41 fund companies in 14 countries, with around 250 billion yen in total assets.

The DJSI comprise companies that are considered leading practioners of corporate sustainability, or a business approach that focuses on creating "long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments," according to the indexes' sponsors.

At this point, the indexes include only 37 Japanese companies, or about 10% of the total. SRI funds tend to take a long-term approach and are not swayed by short-term shifts in investment performance. But this does not mean that they are kinder and gentler than other investment funds.

According to Brian Pearce of the Forum for the Future, a growing number of SRI funds engage in short-selling, targeting firms hit by scandal. One unnamed Japanese company, meanwhile, was persuaded not to sell a particular product in Europe that uses a certain chemical substance by the mere threat of being dropped from the DJSI.

Japanese companies engaging SRI fund managers should be aware that SRI entails its own forms of pressure.

? --Translated from an article by Nikkei staff writer Hajime Matsuura
(The Nikkei Financial Daily Tuesday edition)