Guidance on Stewardship Code for institutional investors in Japan to perform their duties effectively has been published by the Principles for Responsible Investment (PRI), the United Nations Environment Programme Finance Initiative (UNEP FI) and the Generation Foundation as part of its series on Fiduciary Duty in the 21st century.

The Japan Roadmap outlines recent developments led by the government that have taken place in the country and have strengthened the role of institutional investors and Japanese corporate governance. These include the work of Japan's Financial Services Agency (FSA)  which has recently revised and updated its stewardship code, developed a corporate governance and has established the Council of Experts to oversee, monitor, update and provide guidance for both.

The report was developed through extensive industry consultation and sets out recommendations to ensure that the modern interpretation of fiduciary duty is reflected in investment practice in Japan. The authors said it also set the Japanese capital market in a broader international context as regulators and investors respond to a rapidly-changing investing environment.

The Roadmap recommended that the FSA should improve its oversight of the Stewardship Code; mandatory disclosure of proxy voting records should be introduced and Japanese company pension plans should be encouraged to sign the Stewardship Code.

Other recommendations are that the FSA should review the Corporate Governance Code on a triennial basis and that there should be improved disclosure of key environment, social and governance (ESG) issues under the code and there should be continued pressure to enhance corporate governance expectations.

The authors also recommend that the Ministry of Economy, Trade and Industry (METI) and the FSA should review the quality and comparability of the corporate disclosure of material ESG information while the Japanese stock exchange should issue ESG guidance for listed companies.

The Roadmap suggests that more needs to be done to counter the misconceptions that remain in the Japanese market so that investors understand that ESG investment should not be considered as a separate product line but as an integral part of the investment process for all and that ESG integration does not mean negative screening.

The authors suggest that ESG factors may be some of the most consequential that an investor has to consider in relation to investee companies and that neglecting them may cause the mispricing of risk and poor asset allocation decisions.

Sustainability or ESG factors can also be central to the wider economy, according to the report. In the case of Japan, a rapidly ageing and declining population means that more women need to be encouraged to participate in the workforce and good human capital management by companies has become very important.