1. Fundamental Objective
As a leading Japanese and Asian investment manager, Tokio Marine Asset Management Co., Ltd. (hereafter "TMAM") takes its responsibility as an investor very seriously. As part of our management philosophy, we aim to contribute to the promotion of a prosperous society and spur economic development through responsible investment and asset management. As such, we carefully consider not just the financial aspect of a company but also its Environmental, Social and Governance (ESG) policy when making investment decisions. In addition, we aim to improve the mid-term investment return of clients by taking an active role in pursuing and pushing for growth in our investee companies.
2. Our Approach to Responsible Investment
- 1. Development of Organisational Frameworks
- 2. Signatory of UN Principles for Responsible Investment (PRI)
- 3. Signatory of Principles for Financial Action for the 21st Century
- 4. Adherence to Japanese Stewardship Code
1. Development of Organisational Frameworks
At TMAM, we have established a committee to oversee responsible investment which is made up of each responsible party for investment. During these committees, decisions about fundamental policies in this regard are made and organisational frameworks according to these policies are developed. In addition, the corporate governance approaches of investee companies are discussed and draft policies regarding the use of voting rights, processes, and development of frameworks are made. The committee is also in charge of selecting companies that need special attention (e.g. companies with poor performance and/or poor ESG standards, etc.) and final decisions on voting action regarding these companies are made here.
We strive to fulfil our responsibility as an institutional investor through responsible investment and going forward, we will continue to deepen our understanding of ESG standards.
2. Signatory to UN Principles for Responsible Investment (PRI)
The UN Principles for Responsible Investment (PRI) Initiative was set up by the United Nations Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact (UNGC) and is based on a proposal by then UN Secretary- General Kofi Annan in 2006. The principles state that institutional investors must carefully consider the ESG policy of companies during the investment decision process, with the aim of improving clients’ mid-term returns.
TMAM endorses the UN Principles for Responsible Investment (PRI) and became a signatory in April 2011.
For more information about these principles, please see below.
3. Signatory of Principles for Financial Action towards a Sustainable Society (Principles for Financial Action for the 21st Century)
The Principles for Financial Action for the 21st Century is a proposal made by the Central Environment Council (part of the Ministry of the Environment) to widen the scope of initiatives related to environmental finance, and was drafted by a committee including members from a large number of financial institutions. The principles aim to encourage domestic financial institutions to push forward the best initiatives relating to ESG policy.
TMAM endorses the Principles for Financial Action towards a Sustainable Society (Principles for Financial Action for the 21st Century) and became a signatory in February 2012.
For more information about these principles, please see below.
4. Adherence to Japanese Stewardship Code
TMAM endorses the Japanese Stewardship Code and declared its acceptance of Principles 1-7 in May 2014. The Code encourages institutional investors to hold constructive dialogue (engagement) with investee companies to raise company value and urge them to continue to grow, thereby improving clients’ mid-term investment returns.
The principles outlined in the Code are closely linked to our own management philosophy; we aim to improve the mid-term investment return of clients by taking an active role in pursuing and pushing for growth in our investee companies. As a responsible institutional investor, we do our utmost to carry out activities that uphold the principles set out in the Code and take steps to make further improvements.
For more information about the Code, please see below.
The following statement has been prepared to demonstrate TMAM’s agreement to the Code, which was launched in February 2014 by the Japanese Financial Services Agency (FSA). The statement sets out our approach to Principles 1-7 of the Code.
Principle 1 Fulfilling our stewardship duties
As part of our management philosophy, we aim to contribute to the promotion of a prosperous society and spur economic development through responsible investment and asset management. As such, we carefully consider not just the financial aspect of a company but also its non-financial background (i.e. ESG policy) when making investment decisions. In addition, we aim to improve the mid-term investment return of clients by taking an active role in pursuing and pushing for growth in our investee companies. This philosophy is applied to all our leading actively managed Japanese equity products and it is through constructive dialogue with investee companies that we aim to fulfill our stewardship responsibilities. In the case of passively invested products and quantitative investment management products, we aim to influence investee companies through exercising our voting rights.
At TMAM, we conduct thorough, in-depth qualitative research on investable companies and work hard to invest responsibly; each individual company is examined and judged by the sector analyst on the basis of governance, management strategy, business performance, capital structure and risk (both social and environmental).
To further assess a company’s non-financial qualities, specifically with regard to environment, social, governance and risk management factors (ESGR), we utilise the research conducted by Tokio Marine & Nichido Risk Consulting Co., Ltd., a group company, which evaluates companies’ CSR.
We are also strongly committed to shareholder responsibility and company stewardship; rather than just making simple use of voting rights, as a shareholder we express our views and opinions to the senior management of companies and promote the sharing of information. In this way, we take a pro-active approach when engaging with investee companies and place a high importance on good corporate governance, which in turn should improve mid-term investment returns.
We strive for productive and open dialogue with management including independent external directors which centres on improving a company’s value and capital efficiency, with the goal of encouraging continuous growth. Whether these are private meetings, small meetings with management, or results briefings, we use every opportunity to actively engage with investee companies. Additionally, for this dialogue to be meaningful, our analysts and fund managers continually research and review each company and share this information internally.
One of our actively managed products is our Engagement Fund. For this fund, we believe in active communication prior to investing in any stock being considered for inclusion in the fund. When we do invest, we limit this to a concentrated portfolio of stocks in which we are able to invest a greater amount of our time and resources into each investee company than is possible with our other actively managed products in order to work with the company towards a shared objective.
Principle 2 Our approach to conflicts of interest
At TMAM, the importance of building and retaining customer trust is incorporated into every aspect of our business. To be a trusted and indispensable partner to our clients, we prioritize client wealth when providing solutions and making any agreement. To achieve this priority, we consign duly selected distributors for promotions. Please also note that we do not consign any promotions to our parent company.
We act against potential conflicts of interest according to our internal guidelines. Specific categories of potential conflicts of interest and our approaches against them are outlined below.
- 1. Potential conflict of interest in purchasing securities issued by affiliated companies
In principle, we do not invest in securities issued by our affiliated companies in client portfolios. Exceptions to this rule are where investing in these securities will be of benefit to our clients or where not investing in these securities will be a disadvantage to our clients. For these exceptions, we set internal rules and procedures where our CIO approves individual trades case by case.
- 2. Potential conflict of interest in shareholder voting for affiliated companies
In cases of shareholder voting for our affiliated companies, we have internal rules to exercise these voting rights, advised and guided by third-party institutions. In other cases, such as proxy voting to invested companies, we intend to avoid any potential conflict of interest by completing proxy voting decision-making process within our investment division.
(Please refer to Principle 5: Objectives in exercising voting rights)
- 3. Potential conflict of interest in our employee’s personal trading
We have guidelines for personal trading according to our employee’s job functions. Also, we have personal trading rules to avoid the case where there can be a conflict of interest between these employees and our clients.
Principle 3 Monitoring of companies we invest in
When investing in stocks, we make decisions through the evaluation of company value, taking into account both the financial and non-financial aspects of each company. Especially in the case of validating mid-to-long term growth potential, we analyse the business strategy and growth drivers contributing to the increase in company value and confirm the superiority of its business model using our proprietary qualitative valuation sheet. After making investments, we continue to monitor these companies for their sustainable growth. Here, we cover various elements such as business fundamentals, external/internal factors, corporate/financial strategies, governance/risk management, etc., on a continuous basis to capture signs of changes and challenges in a timely manner.
- 1. Business Fundamentals
- 1. Short term/Long term financial performance (cyclical and structural factors)
- 2. Progress of implementing their strategic business plans and identifying gaps between plans and results
- 2. External Factors
- 1. Target market (size, growth, demand and supply, etc.)
- 2. Competition (number of competitors, barriers of entry, threat of substitutes, etc.)
- 3. Internal Factors
- 1. Costs (R&D, purchasing, manufacturing, sales & marketing, etc.)
- 2. Differentiation (quality, brands, R&D, technical strength, etc.)
- 4. Corporate Strategies
- 1. Firm-wide strategies (resource allocation, business portfolio, etc.)
- 2. Business-unit strategies (competitiveness, expanding existing businesses, incubating new businesses)
- 5. Financial Strategies
- 1. Deployment of cash flow (investments for growth, shareholder returns, financial strengthening, etc.)
- 2. Corporate Finance (financing, payouts, attention to ROE, etc.)
- 6. Governance/Risk Management
- 1. Governance (independent directors, anti-social misconduct, board meeting reviews, etc.)
- 2. Risk Management (including risks related to social, environmental issues)
We believe that monitoring companies continuously and comprehensively as described above allow us to identify early signs of issues which potentially distract from shareholder wealth and of challenges in respect to mid-to long-term growth potential.
Principle 4 Constructive dialogue with companies
TMAM actively engages in dialogue with management which centres on improving a company’s value and capital efficiency, with the goal of encouraging continuous growth.
In evaluating a company’s value, we look at whether the company is capable of providing returns greater than cost of capital and its equity spread (ROE – cost of equity). Through the items listed in the above “Principle 3: Monitoring of companies we invest in”, we attempt to accurately identify factors relating to the company’s mid-term growth potential. If we identify aspects that could damage that company’s value, or ways in which the company could further add value in favourable business conditions, we will relay that information to the company and communicate with them on how best to move forward.
Examples in which we will hold dialogue with the company are as follows:
- When a change in strategy is required due to a change in business environment
- Holding talks with companies on the need to switch strategies, rationalise costs in non-profitable businesses and improve profits when the environment changes from deflationary to inflationary.
- When a strategy is necessary for sustained growth
- Holding discussions on the need to implement R&D strategies and form alliances to achieve further growth.
- When a company needs to adjust its capitalisation policy as part of its financial strategy
- Holding discussions on achieving a balance between investment for growth and shareholder returns for capital efficient cashflow.
- With regard to governance and risk management systems
- Holding discussions with companies on the prevention of scandals, on measures relating to business risks and succession, and on the need for external directors.
These discussions will generally be held with members of management (including external directors). While we prefer to conduct these talks through private meetings, we are mindful that these talks do not interfere with the regular duties of management. As such, we make use of every opportunity open to us for dialogue with the company, including small meetings with management and results briefings.
We do not ask/receive non-public sensitive corporate information from companies when conducting these dialogues, in view of each company’s disclosure policy, and we consider this information unnecessary for our purposes. If we do receive non-public sensitive corporate information, we treat it according to our internal guidelines.
Principle 5 Objectives in exercising voting rights
TMAM exercises voting rights based on our judgement of investee companies through constructive discussions and daily research activities with these companies. Exercising voting rights correctly, we believe, will lead to an enhancement of the governance structures resulting in medium to long term improvements in shareholder value and sustainable growth.
In terms of proxy voting, in principle, all the holdings companies under our active investment strategies will be included for examination of voting rights. We recognise that our clients eventually bear the related costs from these votes, hence we vote taking into account impacts of cost on performance. Given this, we screen out target companies according to our investment policy for passive strategies. As a general rule, we choose to respect the management decisions of companies screened out in this way. In addition to exercising voting rights on companies held in our active portfolios, we also exercise our voting rights on companies selected by the Responsible Investment Committee as the subject of focused research (companies suffering from poor performance, companies that have committed anti-social acts, companies with issues in corporate governance, etc.) and/or scrutiny.
We have set out the following guidelines with regard to exercising voting rights.
- 1. Exercising voting rights for companies with anti-social behaviour
We define anti-social behaviour as violations of the law, disrespecting public order, displaying poor morality, and actions to damage the social credibility of the companies which result in economic losses for shareholders, customers and employees. In addition, actions resulting in social losses, such as pollution, are considered to be anti-social behaviour. We will in principal exercise our votes to object to the election of a director or an auditor in charge of the department responsible for any anti-social behaviour. This exercise, however, is not to deny the company’s decision immediately but to demonstrate our views by carrying out due diligence individually to ensure clarification of management’s responsibility and any countermeasures to pursue shareholder benefits.
- 2. Evaluation of company performance when exercising voting rights
When making judgements individually, we also take into account the company’s performance. In general, we will respect the management decisions of companies with good performance. If performance is poor, however, we take a firmer approach to make sure the proper governance standard is applied. Companies with poor performance are defined as companies with recurring operating losses or with no dividend payout for the previous three years. For these poor performing companies, we will not take a short-term view but a medium to long term view and exercise our votes accordingly.
- 3. Exercise of vote in disunity
As a general rule, we will not vote in disunity unless our clients provide particular instructions to do so. However, if these instructions are considered to be irrational, we will voice our opinion to the customer at that time.
There is also a provision for exceptional circumstances in the voting rights policy for the engagement strategy.
Notification of objection votes are sent to companies who wish to be sent them individually and to companies which we believe will rise in value with this notification. In this way, we try our best to contribute to the sustainable growth of investee companies.
Furthermore, we sometimes use external advisory companies to get a better understanding of the consensus, and we receive a report based on the guidelines of the advisory company. We may use these reports as a reference when making voting decisions.
Furthermore, we receive reports from advising companies (ISS: Institutional Shareholder Services Inc.) based on their specific guidelines. We may use these reports as a reference in order to get a better understanding of the consensus when making final voting decisions.
While the dedicated ESG specialist in the Responsible Investment Group is the primary contact for all proxy voting matters, the research analysts in charge of the relevant companies will also attend meetings related to proxy voting and share any necessary information with the specialist.
Furthermore, the dedicated ESG specialist, the other research analysts and the relevant fund managers share the execution of proxy voting. In addition, the Responsible Investment Committee selects companies to be closely monitored due to poor performance, antisocial acts or corporate governance issues and reviews the proxy voting for those companies.
In principle, we provide our clients with reports about our voting decisions at fixed term intervals. We also publish all our voting decisions on our website.
Principle 6 Regular reporting to clients
In addition to the notification of voting decisions as described in Principle 5, we report at fixed intervals the content of the dialogue with investee companies and how our stewardship activities are carried out, as a general rule. However, these reports may be omitted in the case where clients do not require such information. In respect to dialogue with investee companies, we report on the constructive communication we have with these companies, such as sharing mid-term views on how to improve company value, sharing and improving on company ideas, and discussions with management if performance is poor. We keep records of all dialogues (through MOM) and we make reports based on these. Of course, when we do send reports to clients, we judge what information would be most beneficial from the client’s perspective and try to improve on this.
Principle 7 Organisational Learning
As a responsible institutional investor, we strive to enhance our internal resources to exercise stewardship activities so that we contribute to our investment companies’ sustainable growth through constructive dialogue.
We make sure our efforts are substantial; key decision makers in our investment activities, such as the PMs and the analysts for Japanese equities, respectively make significant efforts in order to conduct meaningful dialogue with investee companies. In an effort to encourage this, in addition to holding an internal seminar about stewardship activity, we review our investment activities from a stewardship point of view regularly and accumulate organisational knowledge and experience by sharing individual activities which we think significantly contributed to investee companies’ higher value and sustainable growth. Also, we make efforts to strengthen our stewardship capability through exchanging views with external organizations and holding dialogue with investee companies conducted by our dedicated ESG specialist in the Responsible Investment Group. We aspire to lead the Japanese asset management industry through participation in working groups in this area, such as the Principle for Responsible Investment, the Principles for Financial Action for the 21st Century and the Japan Stewardship Forum.
1. Basic Policy on Proxy Voting
From the perspective of fiduciary responsibility pertaining to the asset management business, as a basic policy on proxy voting, we request invested companies address corporate governance in good faith, for the interests of clients (of discretionary investment management) and beneficiaries (of investment trusts). We recognize the importance of corporate governance as a means to increase investment returns and seek to communicate our views as a shareholder to, and share challenges with, the company management beyond proxy voting. As part of these efforts, particularly in voting proxies, we ensure we fulfill our fiduciary responsibility by expressing our intention proactively.
2. Purpose of Proxy Voting
- In voting proxies, on the premise that the effective owners are clients and beneficiaries, we make judgments solely for the purpose of contributing to the interests of clients and beneficiaries.
- In our equity investment, we put focus on shareholder value which companies create enduringly as a primary source of investment return.
- Corporate governance is particularly influential in three aspects: (i) good-faith management, (ii) effective use of resources and (iii) adequate selection of investments, and from these aspects, we make judgments for the purpose of seeking to maximize the shareholder value through proxy voting. We recognize that the company should be managed in view of balancing the interests of shareholders with the interests of stakeholders such as employees, business partners and regional community rather than only seeking the short-term interests of shareholders, and that the long-term interests of shareholders can be achieved by establishing a good cooperative relationship with these stakeholders.
3. Proxy Voting Guidelines
In voting proxies, we make judgments and express our intention individually on the following main proposals, among others, on a case-by-case basis pursuant to the basic policy. Voting proxies with regard to foreign equities, are based on a similar policy, while giving consideration to institutional aspects of countries.
- 1. Income allocation: financial conditions, dividend payout ratio and balance with growth potential, etc.
- 2. Election of directors: scandals in which candidates have been involved, status of executive officers who concurrently hold other positions and independence of outside directors, etc.
- 3. Election of statutory auditors: scandals in which candidates have been involved and independence of outside statutory auditors, etc.
- 4. Election of accounting auditors: background of changes, etc.
- 5. Share buybacks: fair treatment of the shareholders' interests and liquidity after buybacks, etc.
- 6. Grant of retirement benefits: scandals in which officers have been involved and grant of retirement benefits to outside directors and statutory auditors, etc.
- 7. Revision of compensation for officers: scandals in which officers have been involved and deviation from the standard level, etc.
- 8. Merger, acquisition and transfer of business: disclosure of important information and impact on the shareholders' interests, etc.
- 9. Stock options: eligibility of officers who are granted options and content of conditions for granting options, etc.
- 10. Article amendments: contents of enhancement to authorities of the board of directors, background behind an increase in authorized capital and changes to business content, etc.
- 11. Decrease in capital: judged on a case-by-case basis from the perspective of restructuring the business.
- 12. Shareholder proposals: fair treatment of the shareholders' interests, etc.
- 13. Takeover defense measures: approval at the shareholders' meeting, disclosure of important information and independence of a decision to invoke measures in emergency situations, etc.
4. Proxy Voting Structure
In voting proxies, equity investment groups within the Investment Division closely review proposals and make recommendations for votes. With regard to proxy voting for Japanese equities, the Investment Research Group Leader approves recommendations and reports them to Head of Investment Division. The Responsible Investment Committee, with a managing director serving as the Chair, also makes a final review on poor-performing companies and companies that have committed anti-social acts, etc. The status of proxy voting is reported to the Investment Management Committee held later in every month.
In voting proxies, shares held in active products in principle are subject to scrutiny. Among shares held in passive products, etc., those that continuously exhibit a low level of metrics concerning capital efficiency and credit risk, etc. for a certain period of time and that have committed anti-social acts, etc. are subject to scrutiny.