Policy Briefing — Japan Stewardship Code Revision
Japan’s Financial Services Agency released the second revision of the Stewardship Code on March 24, 2020, deepening expectations for investor engagement, sustainability oversight, and proxy voting transparency across Japanese markets.
Executive briefing: The Council of Experts on the Stewardship Code, convened by Japan’s Financial Services Agency (FSA), published the revised Japan’s Stewardship Code on . The update strengthens expectations for institutional investors to promote sustainable corporate growth, emphasising environmental, social, and governance (ESG) factors, enhanced disclosure, and collective engagement. Signatories, including domestic and foreign asset managers, pension funds, and insurance companies, must adapt stewardship policies and reporting.
Key revisions
The 2020 revision introduces seven principles, reinforcing prior commitments and adding guidance on ESG integration, stewardship responsibilities for asset classes beyond listed equities, and effective oversight of asset managers by asset owners. Principle 2 now requires institutional investors to have clear policies on managing conflicts of interest and to monitor asset managers’ stewardship activities. Principle 3 emphasises monitoring investee companies’ strategies, capital policies, and sustainability performance.
Principle 4 highlights the importance of constructive dialogue (engagement) with investee companies, including consideration of collective engagement when appropriate. The revision encourages investors to engage on material ESG issues, capital efficiency, and governance structures. Principle 7 (new) requires institutional investors to have an organisational structure enabling effective stewardship, including human resources, expertise, and incentive systems.
ESG integration and disclosure
Investors are expected to integrate ESG factors into investment decision-making and engagement. The code references global initiatives such as the UN Principles for Responsible Investment and the TCFD. Signatories should disclose how ESG considerations influence voting and engagement, including rationale for supporting or opposing shareholder proposals on climate risk, diversity, and governance.
Annual stewardship activity reports must detail engagement topics, voting behaviour, and outcomes. Investors should use metrics and case studies to demonstrate effectiveness. Asset owners are urged to monitor asset managers’ ESG capabilities and to incorporate stewardship expectations in mandates.
Collective engagement and collaboration
The revised code recognises the value of collective engagement when individual dialogue is insufficient. Investors can collaborate through industry groups such as the Asia Investor Group on Climate Change, the Climate Action 100+, and Japan’s Institutional Investors Collective Engagement Forum. Policies should outline when and how investors join collective actions, manage confidentiality, and comply with antitrust laws.
Collective engagement expectations align with Japan’s Corporate Governance Code and METI’s guidance on investor-company dialogue, reinforcing the stewardship and governance framework introduced in 2014 and revised in 2018.
Implications for asset managers and asset owners
Asset managers must review stewardship policies, resource allocation, and training. They should enhance analyst coverage on ESG issues, implement stewardship committees, and ensure voting decisions align with stated policies. Asset owners, including pension funds and insurance companies, must monitor outsourced asset managers, evaluate stewardship reports, and integrate ESG criteria into manager selection and evaluation.
Signatories are encouraged to publish detailed stewardship plans, including engagement priorities, escalation steps (e.g., voting against directors), and performance indicators. They must ensure compliance with Japanese regulations and international fiduciary standards.
Reporting and transparency
Investors should provide clear disclosures on stewardship structures, resource allocation, and how stewardship contributes to risk-adjusted returns. The FSA encourages the use of standardised reporting templates to enhance comparability. Disclosure should cover governance arrangements, conflicts management, engagement outcomes, and voting records at the resolution level.
Transparency extends to communication with beneficiaries. Asset owners must explain how stewardship activities align with beneficiaries’ interests, including sustainability goals. Reporting should be accessible and timely, with consideration for English-language summaries for international stakeholders.
Global context and investor expectations
Japan’s Stewardship Code aligns with global stewardship trends, complementing the UK Stewardship Code 2020 and the EU Shareholder Rights Directive II. International investors see the revision as a signal that Japanese companies should enhance disclosure on capital allocation, cross-shareholdings, and climate risk. Companies listed on the Tokyo Stock Exchange should prepare for more assertive investor dialogue.
Investors integrating the code can leverage frameworks like SASB Standards and the International Integrated Reporting Council (IIRC) to structure engagement discussions. Cross-border asset managers must reconcile Japanese expectations with other jurisdictions’ stewardship codes, ensuring consistency across global portfolios.
Action plan
- Immediate: Review existing stewardship policies against the revised code. Identify gaps in ESG integration, governance structures, and reporting.
- 30–60 days: Update engagement strategies, voting guidelines, and resource plans. Train stewardship teams on ESG topics and collective engagement protocols.
- 60–90 days: Publish updated stewardship statements, align with FSA reporting templates, and communicate changes to clients and beneficiaries. Establish metrics to evaluate engagement effectiveness.
- Continuous: Participate in industry forums, monitor FSA guidance, and coordinate with corporate governance code developments. Evaluate outcomes annually and adjust strategies accordingly.
Adapting to the 2020 Stewardship Code revision strengthens investor credibility, supports sustainable corporate performance, and aligns Japanese stewardship with global best practices.
Proxy voting and escalation practices
The revised code encourages investors to disclose voting policies with greater granularity, including criteria for opposing management proposals, supporting shareholder resolutions, and escalating concerns through board engagement. Investors should publish annual voting records at the resolution level and explain significant votes. Escalation steps may include private dialogue, voting against directors, filing shareholder proposals, or collaborating with other investors.
Asset owners are expected to monitor proxy advisors to ensure recommendations align with stewardship objectives. They should assess conflicts of interest and evaluate how proxy voting policies incorporate ESG considerations, cross-shareholding concerns, and capital efficiency metrics such as ROE and cost of capital.
Implementation challenges and support
Smaller asset managers may face resource constraints implementing robust stewardship programmes. Industry groups, such as the Japan Investment Advisers Association, provide guidance and training. The FSA encourages proportionality, allowing smaller firms to tailor approaches while maintaining core principles. Technology solutions—engagement tracking systems, ESG data platforms, and analytics—can help manage increased reporting demands.
Investors should establish KPIs to measure stewardship effectiveness, including number of engagements, ESG outcomes achieved, and client satisfaction. Continuous improvement involves benchmarking against global peers, participating in stewardship forums, and incorporating feedback from investee companies.
Alignment with corporate governance reforms
The stewardship revision complements Tokyo Stock Exchange initiatives on prime market restructuring and disclosure of cross-shareholdings. Investors should coordinate engagement with corporate governance code requirements, focusing on board independence, capital efficiency targets, and sustainability disclosures ahead of the 2021 market segmentation.
Follow-up: The Financial Services Agency’s 2021 progress review reported that more than 90% of institutional investors adopted the revised code, and Tokyo Stock Exchange market reforms plus 2023 diversity targets now require Prime Market issuers to evidence board refresh plans.
Sources
- Japan Stewardship Code (2020 revision) — Financial Services Agency, Japan; Official text of the second revised Principles for Responsible Institutional Investors ‘Japan’s Stewardship Code’.
- FSA news release on revised Stewardship Code — Financial Services Agency, Japan; Financial Services Agency announcement summarising the key enhancements to the 2020 Stewardship Code revision.