Sign up for our newsletter
Factor / Environmental

Exclusive: Nippon Life puts its faith in proprietary ESG ratings

The $660bn Japanese insurance company has started applying in-house ESG evaluation criteria to all its investments and set out plans to decarbonise its portfolio, among other moves that underscore its sustainability credentials.

Hiroshi Ozeki, CEO of Nissay Asset Management, thinks ESG ratings from external providers are still unreliable. (Photo courtesy of Nissay Asset Management)
  • Japan’s Nippon Life has started applying its in-house subsidiary Nissay Asset Management’s ESG ratings to its $660bn investment portfolio.
  • Nissay Asset Management’s CEO explains the criteria it uses for the ratings, and his firm and its insurance parent’s other plans for sustainable investing.
  • Counterintuitively, it narrowed down the number of assessment criteria to around 15, having initially used more than 100 ESG data points.

Europe may be leading the way in the institutional deployment and regulation of sustainable capital, but some investors in Asia are also making strong inroads.

Japan’s biggest insurer has stepped up its adoption of responsible investing practices this year, including applying environmental, social and governance (ESG) ratings to its entire portfolio. Nippon Life is thereby underlining its leadership on sustainable allocation among domestic asset owners: it was the first to set a target of net-zero emissions by 2050 for its bond and equity portfolio companies.

Hiroshi Ozeki, chief executive of Nissay Asset Management, the insurer’s in-house investment arm, spoke to Capital Monitor about recent and related plans in this area. He has previously held various roles at the insurer, including that of chief investment officer.

Nippon Life’s Y70trn (around $660bn) in general account assets form around half of Nissay’s total investment portfolio. The fund manager’s assets under management (AUM) has expanded from Y15trn to Y29trn this year after it was handed oversight of additional credit and alternative assets by its parent group.

In April, Nippon Life started applying ESG criteria to all investments in its portfolio. It can claim an advantage here in the form of Nissay's well-established proprietary ESG rating framework.

“We believe that, in terms of medium to long-term risk-return considerations, ESG factors can no longer be ignored,” Ozeki says. “The final ESG evaluations of invested equities and bonds include information that we have gained from our engagement dialogues with companies.”

Unreliable ESG ratings

The firm developed these ratings and began to integrate them into its investment processes back in 2008. Nissay initially used data from external service providers to create its internal ratings.

“We gave each item a weight and calculated the score quantitatively,” Ozeki says. “But [this] method is limited in its linkage to corporate value, and it is difficult to use it for investment decisions.”

As a result, the asset manager changed the evaluation method. It narrowed down the number of assessment criteria to around 15, having initially used more than 100 ESG data points. Its analysts also decided to apply qualitative assessments.

Today, all Nissay’s assessments apply internal qualitative judgments and do not use external ratings, Ozeki says. It focuses on the “material impact [of ESG factors] on the portfolio companies’ business models”. The firm improves its evaluation criteria as it deems necessary, he adds.

Companies that have incorporated the 'E' or 'S' factor to a high degree into their business models receive higher ESG ratings than others, he explains. Nissay looks to achieve impact by investing both in companies with high ESG ratings and in those with low ratings that are transitioning to a lower-carbon footprint.

Low correlations

Ultimately, Ozeki says ESG ratings from external providers still do not live up to the standard needed for investing: “When you compare the ESG ratings of, for example, MSCI and FTSE, a lot of research has shown that they have a very low correlation."

Japan’s huge Government Pension Investment Fund (GPIF) revealed similar findings in an ESG report in September 2020. It compared FTSE and MSCI ratings and found “some positive correlation in the case of ESG scores and 'E' scores, but no clear correlation in the case of 'S' scores or 'G' scores”. GPIF revealed last year it would create its own ESG benchmarks.

Moreover, in a report also published in September, the OECD observed a wide variance in the 'E' scores of Bloomberg, MSCI and Thomson Reuters. It concludes that the “environmental pillar may not be fit for purpose” for investors seeking to reduce their carbon footprint.

As a responsible investor, you cannot apply ESG ratings that produce completely different results depending on the provider.  Hiroshi Ozeki, Nissay Asset Management

These results are of major concern to Ozeki: “As a responsible investor, you cannot apply ESG ratings that produce completely different results depending on the provider and assess that ESG outperforms in one case and underperforms in another.”

A major reason for this is that disclosure and standardisation of data is still evolving, Ozeki adds, reflecting industry concerns and question marks over ESG ratings.

He also feels that combining ratings to create integrated ESG benchmarks may not be the best approach because the three elements have different characteristics. As a result, the providers use different weightings, he says.

“We haven’t looked at this statistically yet, but I believe that ratings become more reliable and show more correlation if they are segmented in separate, good 'E', 'S' and 'G' ratings and are not combined in ESG benchmarks.”

Ozeki feels benchmarks with easy-to-understand and clear goals, such as the EU’s Paris-Aligned Benchmark on climate change, are suitable for investors.

ESG disclosure and impact

Nissay Asset Management also has other sustainability-related developments in the pipeline. It plans to start disclosing its environmental impact in terms of greenhouse gas emissions from autumn this year, Ozeki says. He did not elaborate on what data this would include or how the firm would measure it.

In addition, the fund house is developing a quantitative methodology for equities that it will apply to its ESG funds, says Ozeki, but he did not provide more detail on this plan. Nissay already manages a fund that optimises risk returns by using the internal ESG rating and the expected return of stock prices as two alpha elements.

Meanwhile, Nippon Life has been expanding its investment into impact-focused strategies, adds Ozeki. In July last year it invested $20m into US private equity firm TPG’s Rise Fund II.

The fund has five main investment themes: healthcare, education, financial services, renewable energy, and food and agriculture, said Nippon Life in a release.

TPG is quantitatively assessing investee companies’ environmental and social impact, such as their contribution to the UN Sustainable Development Goals (SDGs), adds the insurer.

All these developments will help Nippon Life move closer to its net-zero portfolio emissions by 2050 and further demonstrate the firm's early-mover status among its peers. Since Nippon Life’s net-zero announcement, other major Japanese insurers have taken similar steps. Dai-ichi Life, Meiji Yasuda Life and Sumitomo Life have all declared their intentions to reduce their portfolio CO2 emissions, according to an April note from S&P Global Market Intelligence.

Net-zero plans

Nippon Life itself it has set decarbonisation targets. It will encourage companies to set targets and cut emissions, and consider divesting from those whose progress is not sufficient. Companies leading in their carbon reductions will receive the amount of freed up investments from divested firms.

In its mid-term management plan for 2021 to 2023, which it published in March, Nippon Life said its ESG strategy was built on three pillars: integration (incorporating ESG factors into investment and finance processes for all asset classes); engagement (conducting dialogue about targets and initiatives for net-zero emissions); and thematic investments (execute investments and financing that contribute to realising a decarbonised society).

It will review its progress on these goals from 2030 onwards based on factors including the revision of government targets. As of 2019, Nippon Life reported 168,000t of CO2 equivalent emissions as a company and 10 million tonnes for its portfolio as a whole.

Meanwhile, Nippon Life aims to have a cumulative total of Y1.5trn committed to ESG thematic investments between 2017 and 2023, and already had Y0.9trn of this sum invested in December. The insurer plans to invest above all in sustainable bonds and renewable energy projects to reach that target, Ozeki says.

For instance, Nippon Life bought the entire issue of a A$150m ($112.7m) sustainable development bond from the International Bank for Reconstruction and Development (IBRD) in October 2020. The IBRD, part of the World Bank, issued the 15-year debt to help improve nutrition in developing countries.

The investment is one way that Nippon Life is contributing to the achievement of the UN’s SDGs, said Toshihiro Nakashima, CIO of the insurer, in a statement at the time.

When big investors set examples in the numerous ways that Nippon Life has done – especially in Japan – their peers tend to sit up and take notice. That is to be heartily welcomed.