ESG

• From FY3/2027, companies with market capitalization of over 3 trillion yen will be required to disclose GHG sequentially. 76% of companies with market capitalization of over 500 billion yen disclose.
• A guarantee program is scheduled to be introduced in FY3/2028, but only 21% of companies with market capitalization of over 500 billion yen have disclosed their guarantees.
• The guarantee program will begin in Scope 1 and 2 with limited guarantees. Disclosure of guarantees will increase once the discussion on qualification system for guarantee service providers is finalized.

• One year has passed since the disclosure of sustainability information in annual securities reports, and the FSA is considering restructuring its disclosure guidelines to support sustainability disclosure by listed companies.
• Sustainability information in annual securities reports is shifting from “what should be stated” to “what content should be stated,” and the volume of information is increasing accordingly.
• Valuable information is that investors can understand what initiatives the company has implemented to address the challenges, the goals and timelines it has set, and whether its progress is justified.

• In many cases, management is involved rather than seeking clarification of the actual situation from an independent body. This is the reason why scandals are repeated.
• In Japan, awareness of integrity and code of ethics compliance remains very low. A thorough awareness change is required to consider “what is ethical to do and what is not.”
• Even after the revision of Whistleblower Protection Act in 2022, harassment of whistleblowers hasn’t stopped. Consequently, the number of whistleblowers is low and whistleblowing hasn’t been able to deter scandals.

• With the TSE shortly declaring the conclusion of discussions regarding parent-subsidiary listings, more parent-subsidiary listings (including listed affiliates) are likely to continue to appear going forward.
• “TSE’s Request” states a restructuring of business portfolio, but leaves out the issue of restructuring the parent company’s business portfolio and shifting to a management approach that increases corporate value.
• The parent-subsidiary listings (including listed affiliates) that continue to be created will continue to provide investment opportunities for investors, including activist investors.

• KEPPEL INFRASTRUCTURE TRUST (KIT) is an infrastructure trust listed in Singapore. KIT is managed by Keppel Infrastructure Fund Management Pte Ltd (KIFM) and is sponsored by Keppel, a global asset manager and operator. KIFM is a wholly-owned subsidiary of Keppel.
• The Trustee-Manager, KIFM, has dual responsibility of safeguarding the interests of KIT Unitholders, and managing the business conducted by KIT.
• The Trustee-Manager has general powers of management over the business and the assets of KIT and its main responsibility is to manage KIT’s assets and liabilities for the benefit of Unitholders as a whole.

• In many cases of bad disclosures where the capital allocation policy has not been adequately considered, the company often fails to develop a concrete growth strategy using cash.
• The reason for the misaligned disclosures with investors may be that the company lacks the process to produce projected financial statements and to estimate corporate value/share price calculated from DCF.
• If a plan containing unreasonable figures is disclosed as is, the independent outside director may not be involved in the decision making or may not be accompanied by adequate skills.

• The measure to implement 100% inclusion or separation of subsidiary profits from parent company profits is only the first step, and this alone won’t reflect positively on the stock price.
• The key is the second phase of measures to strengthen the parent company’s overall ability to generate cash flow by investing in highly profitable businesses after restructuring its business portfolio.
• Hitachi is one of the few cases where it quickly implemented the second phase and reflected growth in corporate value in its stock price through realization of cash flow expansion.

• Since there’s little confidence that merely disclosed share buybacks and medium-term management plans will increase corporate value in future, it’s natural that institutional investors’ evaluation of these plans is low.
• For companies that develop budgets and plans each January, the key is to incorporate into their budgets the use of cash that will ensure future growth in corporate value.
• For companies that lack the time to translate “mid-term management plan” into strategy to increase corporate value within two months, including “going private is an option” is an effective disclosure.

• While female directors and nominating/compensation committee, for which TSE has specified specific goals, have made progress, foreign directors, for whom no specific goals have been set, have lagged behind.
• Even now, with over 40% of companies with P/Bs below 1x and ROE not exceeding the cost of capital, not many companies moved to value-creating management with functioning corporate governance.
• Nominating committee should make its selection, including whether to replace the incumbent director with another candidate. If it fails to do so, it’s not fulfilling its responsibilities as nominating committee.

• Outside directors, initially just a number- matching and “just for show,” gradually improved amid demands for improved capital profitability and board practices as the foreign ownership increased.
• It’s important to pay outside directors sufficient compensation to enable them to fulfill managerial responsibilities. The company needs to recruit talent with skills and background to achieve its business goals.
• People who can make insightful and rational judgments in an independent position to fulfill their role for the long-term expansion of the company’s value should be appointed as outside directors.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We assess Buenaventura’s ESG as “Adequate”, in line with its Social and Governance scores, while the Environmental pillar is “Weak”. Controversies are “Immaterial” and Disclosure is “Adequate”.

• This is the third report issued by CML on Keppel’s transformation to a global asset manager per its Vision 2030.
• CML has earlier issued two reports on this subject. The first examines the lack of disclosure by Keppel on critical information and data pertaining to its asset management business.
• This is disappointing as Keppel is almost halfway to its fund under management (‘FUM”) target of S$200bn, and we include peers which are similar in size.

• The limit is to serve on the boards of two companies concurrently in order to preview the agenda for the monthly board meetings in advance.
• There may be challenges to the effectiveness of the nominating committee of a company that nominates a candidate to serve on the board of directors of three or more companies.
• With the growing demand for female outside board members, it’s hoped that active investment managers will pay attention to the issue of concurrent board membership and make a clear statement.