As a leading Japanese and Asian investment manager, Tokio Marine Asset Management (TMAM) takes its responsibilities as an investor very seriously. Embedded in our management philosophy is our 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 aspects of a company but also its Environmental, Social and Governance (ESG) policy when making investment decisions. In addition, we aim to improve the longer-term investment return of clients by taking an active role in pushing for continued growth in our investee companies.
TMAM defines Tokio Marine Asset Management Co.,Ltd. in all information within Sustainability.
Our Approach to Responsible Investment
1. Development of Organisational Frameworks
Our Responsible Investment Committee, consisting of the heads of investment in each asset class, creates the basic policies upon which our organisational frameworks are built. The committee also discusses how investee companies approach corporate governance, and oversees shareholder voting policies, guidelines and processes.
As an institutional investor, we have a duty to consider and deepen our understanding of ESG issues. We will be tireless in our efforts to strengthen our responsible investment framework and capabilities and live up to the high expectations of our clients – and of the wider society at large.
2. Signatory to the UN Principles for Responsible Investment (PRI)
The UN Principles for Responsible Investment initiative, based on a proposal by then UN Secretary-General Kofi Annan in 2006, was set up by the United Nations Environment Programme Financial Initiative (UNEP FI) and the UN Global Compact (UNGC). The principles require that institutional investors incorporate ESG issues into investment analysis and decision-making processes, with the aim of improving clients’ longer-term returns.
TMAM endorses the UN Principles for Responsible Investment and became a signatory in March 2011.
For more information about these principles, please see below.
3. Signatory to the 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 are based on a proposal made by the Central Environment Council (part of Japan’s Ministry of the Environment) to widen the scope of environmental finance initiatives, and were drafted by a committee drawn from a large number of financial institutions. The principles aim to encourage domestic financial institutions to push for progress on the best initiatives relating to ESG policy and other key issues for the future.
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. Signatory to the Access to Medicine Foundation Investor Statement
Since its establishment in 2003, the Foundation’s mission has been to improve access to medicine in in low- and middle-income countries, through proprietary research and comprehensive assessments of pharmaceutical companies, published as the Access to Medicine Index. Signatory investors can integrate scores and rankings from this index into the investment decision-making process, encouraging pharmaceutical companies in their efforts to improve access.
Dialogue with pharmaceutical companies on their efforts to improve access to medicine is one more example of how TMAM works tirelessly to fulfil our commitment to responsible, sustainable investment and to integrate this further into our investment practices.
For more information about the Foundation, please see below.
Adherence to Japan’s Stewardship Code
TMAM endorses Japan’s Stewardship Code and declared its acceptance of the Code’s seven principles in May 2014. This endorsement was renewed in accordance with the June 2017 revision of the Code.
The Code encourages institutional investors to engage investee companies in constructive dialogue to raise corporate value and encourage sustainable growth, thereby improving clients’ longer-term investment returns.
The principles outlined in the Code are closely aligned with our own management philosophy; we aim to contribute to the promotion of a prosperous society and spur economic development through responsible investment and asset management, and thereby improve the longer-term investment return of clients. As a responsible institutional investor, we do our utmost to uphold the principles set out in the Code and press for further improvement.
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 aspects of a company but also its non-financial aspects when making investment decisions. In addition, we aim to improve the longer-term investment return of clients by taking an active role in pushing for continued growth in our investee companies.
We apply this philosophy to all our leading actively managed Japanese equity products, and it is through engaging investee companies in constructive dialogue that we aim to fulfil our stewardship duties.
In the case of passively invested products and quantitative investment management products, we aim to influence investee companies by exercising our voting rights.
At TMAM, we believe that the financial and non-financial aspects of companies subject to investment under our actively managed Japanese equity products are inseparable; our research analysts examine each company on the basis of governance, management strategy, business performance, capital structure, and business risk and revenue opportunities (including social and environmental aspects). To further assess a company’s non-financial qualities, specifically with regard to environmental, social, governance and risk management factors (ESGR), we utilise research conducted by group company Tokio Marine & Nichido Risk Consulting Co., Ltd. We take our fiduciary duties very seriously, and recognise the importance of corporate governance in improving longer-term investment returns; in addition to exercising our voting rights, we use our position as shareholders to engage investee companies in constructive dialogue as an effective means of encouraging longer-term growth, and we see greater engagement as core to our stewardship duties.
We strive for productive and open dialogue with the senior management (including independent external directors) of investee companies, with a longer-term focus on improving corporate value and capital efficiency, thus encouraging sustainable growth. Whether through 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 portfolio managers continue to research each company, share examples of effective engagement, and strengthen organisational capabilities in this area through regular review.
Our Engagement Working Group, consisting of the CIO and the Responsible Investment Group, monitors progress and acts as a supervisory organ for ongoing qualitative improvement in dialogues on stewardship. Records of these dialogues are made accessible to the Investment Division, with the aim of sharing information and examples to ensure effective engagement throughout the organisation. Analysts give their own assessment at the time of engagement, and report regularly to the Engagement Working Group on progress in dialogues with companies, including how companies respond, and any new or revised items on the agenda.
One of our actively managed products is our Engagement Strategy, in which we stress active communication prior to investing. We then invest in a concentrated portfolio of stocks, allowing us 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. We have independent decision-making and oversight structures to prevent any external interference, be it from group companies or from our own sales divisions, and ensure that we are a trusted and indispensable partner to our clients. Internal guidelines to identify and manage potential conflicts of interest are reviewed regularly by our Board of Directors, and include the specific categories outlined below.
- 1. Potential conflict of interest in shareholder voting for affiliated companies
In some cases, equities held in portfolios of entrusted assets may include TMAM’s parent company or other companies with capital ties, or companies that have business ties with the Tokio Marine Group, including with TMAM itself. In such cases, to ensure there is no impediment to the exercise of proxy voting rights due to such affiliations, the Responsible Investment Committee follow clearly stipulated internal guidelines to ensure the following situations are handled appropriately.
When exercising shareholder voting rights with regard to our parent company, we shall follow criteria provided by a proxy advisory firm in order to avoid any conflict of interest.
When exercising shareholder voting rights with regard to investee companies other than our parent company, decisions shall be made within investment departments in order to avoid any conflict of interest.
Shareholder voting results shall be reported each month to the Performance Review Committee, and each quarter to the Board of Directors. These shall also be published for each invested company and proposal.
Persons in charge of shareholder voting (dedicated ESG analysts, research analysts, and portfolio managers) shall make voting decisions independently, without the influence of any information, advice, or explanation from persons inside or outside TMAM, with the exception of issuers and proxy advisory firms.
We have established a governance framework on shareholder voting, with mechanisms in place to monitor the process and avoid any conflict of interest; specifically, decisions are reported to the Board of Directors, which allows for third-party monitoring from two independent external directors to check whether decisions are made in accordance with TMAM’s voting guidelines. Any revisions to the basic policy and guidelines on shareholder voting are to be resolved by the Responsible Investment Committee and reported to the Board of Directors.
- 2. Potential conflict of interest in purchasing securities issued by our parent company
In principle, we do not invest in securities issued by our parent company in client portfolios.
An exception to this rule is where not investing in these securities will disadvantage our clients; in such cases, we have internal rules and procedures to confirm and approve maximum holding ratios and reasons for individual trades on a case-by-case basis.
- 3. Potential conflict of interest regarding group companies
Internal TMAM rules prohibit the sharing of client information for marketing purposes, etc., with group companies, except where expressly agreed.
- 4. Potential conflict of interest in execution of trades
We ensure that trades executed in the course of managing assets entrusted to us go through brokers satisfying specific criteria and offering best execution, with no consideration given to business relationships with TMAM.
- 5. Matters regulated under the Financial Instruments & Exchange Act, etc.
We have detailed guidelines on personal trading, broken down by job function, to prevent any misuse of trading information relating to assets entrusted to us.
We also have internal rules and monitoring mechanisms in place regarding transactions between funds under management, covering acts prohibited or restricted under the law.
The Responsible Investment Committee and the Compliance Committee will be among a number of internal organisations responsible for the ongoing handling of cases not otherwise explicitly restricted under company rules where there is a potential conflict of interests with clients.
Internal controls regarding structures for managing possible conflicts of interest are checked by TMAM’s internal audit department, and are subject to monitoring and regular review by the Board of Directors, including its two independent external directors.
Principle 3 Monitoring of companies we invest in
At TMAM, we take into account both financial and non-financial aspects when assessing company value and making investment decisions in our actively managed Japanese equity products. We use a proprietary qualitative assessment sheet in evaluating longer-term growth potential and confirm the competitive edge of a company’s business model by analysing the business strategy and growth drivers contributing to any increase in its corporate value. To further assess a company’s non-financial qualities, specifically with regard to environmental, social, governance and risk management factors (ESGR), we utilise research conducted by group company Tokio Marine & Nichido Risk Consulting Co., Ltd. to monitor any major areas with a potential impact on corporate value. We then continue to monitor for sustainable growth after investing. Ongoing coverage includes business fundamentals, internal and external factors, corporate and financial strategies, and ESGR factors, with the aim of capturing any signs of change or possible challenges in a timely manner.
- 1. Business Fundamentals
- Longer-term financial performance (cyclical and structural factors)
- Strategic business plans (progress in implementation, identification of gaps between plans and results)
- 2. External Factors
- Target market (size, growth, supply and demand, etc.)
- Competition (number of competitors, barriers to entry, threat of substitutes, etc.)
- 3. Internal Factors
- Costs (R&D, purchasing, manufacturing, sales & marketing, etc.)
- Differentiation (quality, branding, R&D, technological expertise, etc.)
- 4. Corporate Strategies
- Firm-wide strategies (resource allocation, business portfolio, etc.)
- Business unit strategies (competitiveness, expanding existing businesses, incubating new businesses)
- 5. Financial Strategies
- Deployment of cash flow (investing in growth, shareholder returns, financial strengthening, etc.)
- Corporate finance (financing, total return ratio, attention to ROE, etc.)
- 6. ESGR Factors
- Environmental (climate change response, environmental management frameworks, etc.)
- Social (occupational safety and health, quality safety management measures, etc.)
- Governance (independent director selection criteria, assessing BoD function/effectiveness, etc.)
- Risk Management (business continuity planning, information security framework, etc.)
We believe that comprehensive ongoing monitoring of the above factors allows us to identify early signs of issues which could detract from shareholder wealth, and of any challenges affecting longer-term growth potential.
Principle 4 Constructive dialogue with companies
TMAM actively engages investee companies in constructive dialogue centred on improving corporate value and capital efficiency, with the goal of encouraging sustainable growth. In addition to monitoring investee companies, we strive to reflect the results of constructive dialogue with corporate management into our investment decisions for more accurate company valuations.
In evaluating a company’s value, we look at whether the company is capable of providing longer-term returns greater than cost of capital and its equity spread (ROE – cost of equity). We attempt to accurately identify factors relating to the company’s longer-term growth potential through the items listed under “Principle 3: Monitoring of companies we invest in” above. If we identify aspects that could damage a company’s value, or ways in which the company could further add value under favourable business conditions, we will relay that information to the company and communicate with them on how best to move forward.
We will also work to identify cases where engaging investee companies in constructive dialogue has lead to improvements in corporate value, and share such cases throughout the organisation with the aim of increasing awareness of effective engagement.
We recognise that collective engagement with investee companies, i.e. in conjunction with other institutional investors, may at times be a more effective form of engagement than one-on-one dialogue; we will adopt a flexible approach as necessary.
Cases in which we will engage companies in constructive dialogue include the following:
- When a change in strategy is required due to a change in the business environment
- We will discuss with companies 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
- We will discuss the possibility of overseas business development and new business development to achieve further growth.
- When a company needs to adjust its capitalisation policy as part of its financial strategy
- We will discuss how to achieve the right balance between investment for growth and shareholder returns for capital efficient cash flow.
- With regard to ESGR factors
- We will discuss Sustainable Development Goal (SDG) initiatives and the effectiveness of independent outside directors.
These discussions will generally be held with members of the senior management team, including external directors. While we prefer to conduct these talks through private meetings, we are mindful that these talks should not interfere with the regular duties of management. As such, we will make use of every opportunity open to us for dialogue with the company, including small meetings with management and results briefings.
Given investee company disclosure policies, we neither request nor receive non-public corporate information when conducting these dialogues, and consider this information unnecessary for our purposes. If we do receive non-public corporate information, we treat it according to our internal guidelines.
The Engagement Investment department holds dialogues with investee companies, accompanied by an engagement advisory specialist, as part of our engagement strategy product. Building ties of mutual understanding and trust with members of the management team and Board of Directors is essential, and we are careful to dedicate sufficient time to achieving this; with a strong working relationship established, and through the course of constructive dialogue, we share an engagement agenda with the investee company to add to longer-term corporate value. This engagement agenda is largely focused on governance, management strategy, business performance, capital structure, business risk and revenue opportunities (including social and environmental aspects).
Principle 5 Objectives in exercising voting rights
TMAM exercises voting rights based on our judgement of investee companies from constructive engagement and day-to-day research. We believe that voting appropriately will lead to an enhancement of governance structures resulting in longer-term improvements in shareholder value and sustainable growth.
All companies held in our active investment strategies will in principle be subject to scrutiny under our voting rights policy. Voting costs are ultimately borne by our clients, and we take into account the impact this has on performance when exercising voting rights. Under our passive strategies, we screen for companies exhibiting ROE of less than 5% for three consecutive years, and companies selected by the Responsible Investment Group as requiring increased scrutiny (due to poor performance, violations of social norms, corporate governance issues, etc.). Shareholder voting is handled by dedicated ESG analysts, research analysts, and portfolio managers. Discussions on shareholder voting involve dedicated ESG analysts sharing information and exchanging opinions with investee companies, with research analysts generally also participating.
We have set out the following guidelines with regard to shareholder voting.
- 1. Voting on companies that violate social norms
We define violations of social norms as including violations of the law, disrespecting public order, displaying poor morality, and actions damaging to the social credibility of companies resulting in economic losses for shareholders, customers and employees. In addition, we consider actions resulting in social damage, such as pollution, to be violations of social norms. We will in principal vote against the election of a director or an auditor in charge of the department responsible for any such violations. We will not, however, immediately dismiss the proposals of a company that has violated social norms, but will indicate our intentions on individual proposals in line with the interests of shareholders, upon scrutinising the nature of proposals from the standpoint of clearer management responsibility and response measures taken after the fact, etc.
- 2. Evaluation of company performance when exercising voting rights
We also take into account the company’s performance when making individual judgements. In general, we will respect the management decisions of companies performing well, but will take a firmer approach to companies with poor performance (those with recurring operating losses, net losses, or with no dividend payout for the previous three years).
- 3. Division of votes
As a general rule, we will not divide our votes on a given proposal unless specifically required to do so by client instructions. However, if we consider these instructions 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 our engagement strategy.
Furthermore, we receive reports from a proxy advisory firm (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.
Clients are in principle provided with periodic reports about our voting decisions. We disclose details of our basic policy and guidelines on shareholder voting, and publish voting results for each invested company and proposal for greater transparency regarding whether we are voting in line with the guidelines as established.
Principle 6 Regular reporting to clients
In addition to reporting on voting decisions as described under Principle 5, as a general rule we report to clients at fixed intervals on our engagement with investee companies and on how we fulfil our stewardship duties. These reports may be omitted, however, in cases where clients do not require such information. We strive to improve reports to clients on investee company engagement, based on what information would be most beneficial from the client’s perspective.
Principle 7 Organisational learning
TMAM’s management team recognises the importance of its role and obligations in effectively fulfilling our stewardship duties, and strives to enhance our companywide capabilities and operations. Directors and executive officers are appointed to (or dismissed from) TMAM’s management team by a Nomination Committee chaired by an independent external director in order to strengthen corporate governance as an investment manager.
As a responsible institutional investor, TMAM recognises the importance of stewardship training and development for key investment decision makers to ensure that engagement with investee companies is constructive, and contributes to said companies’ sustainable growth.
Portfolio managers and research analysts for Japanese equities make significant efforts to ensure dialogue with investee companies is meaningful. We encourage this by holding internal stewardship seminars and conducting regular reviews of our investment activities from a stewardship point of view; by sharing cases where we believe we have significantly contributed to raising investee company value and sustainable growth, we aim to further improve our organisational capabilities. Also, we make efforts to strengthen our stewardship capabilities through the appointment of dedicated ESG specialists in the Responsible Investment Group, through participation in working groups on the Principles for Responsible Investment, the Principles for Financial Action for the 21st Century and through our involvement in the Japan Stewardship Forum. With the aim of continually strengthening our stewardship capabilities, we regularly assess the state of our own governance framework and our conflict of interest management, as well as our policies and guidelines regarding the stewardship code itself, and publish an overview of these.
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.