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First Systematic Guidance and Policy Recommendations Compiled Concerning ESG and Intangible Assets Investment Release of the Ito Review 2.0

In August 2016, the Ministry of Economy, Trade and Industry (METI) established the Study Group on Long-term Investment (Investment Evaluating ESG Factors and Intangible Assets) toward Sustainable Growth and since then, the study group has been holding discussions on ideal approaches to strategic investment for companies to improve their corporate value, methods that investors should take for evaluating companies from long-term perspectives, and ideal approaches that companies should take to disclose information and hold dialogues with investors. In this context, METI compiled the summary of discussion and the recommendations of the study group into a report titled “Ito Review 2.0 (“Final report of the Study Group on Long-term Investment (Investment Evaluating ESG Factors and Intangible Assets”) toward Sustainable Growth”; hereinafter referred to as the “report”),” and hereby releases the report.

Note:The term “ESG” is an acronym of Environment, Social and Governance.

1. Background

For companies to improve their earning power and enhance corporate value, and for investors to enjoy sustainable return from investments in such companies, effective “investment chains” (the various paths and processes of capital flowing from its providers down to where companies deploy it towards business activities) are crucial. From this standpoint, the government of Japan has been advancing corporate governance reform and capital market reform.

In 2014, METI released the “Ito Review.” As a foundation for the series of reforms in Japan, the report presented the results of comprehensive analysis and the policy recommendations aimed at increasing capital efficiency in Japanese companies, improving Japanese-style ROE (Return-On-Equity) management, and for enhancing dialogue between companies and investors. Since then, the government of Japan has been introducing and implementing various policy measures, while companies and investors have been advancing efforts for the improvement of both corporate value and company-investor dialogue. The ROE of companies listed in the first section of the Tokyo Stock Exchange (TSE) increased from 2.5%-5% in 2014 to 5%-7.5% as of 2016.

Looking at future challenges, companies should take the necessary measures to ensure sustainable growth and strive for long-term investment that will bring about profits. At the same time, as some point out, corporate governance reform may attract public attention to profitability and this may in turn cause companies to avoid long-term strategic investment, which might put pressure on short-term profits. In a changing and intensifying internationally competitive environment, sources of earning power have shifted from tangible assets (e.g., facilities and equipment) to intangible assets (e.g., human resources, technologies and branding) whose value is difficult to quantify.

Moreover, in recent years, global institutional investors, in particular, those focusing on a long-term perspective have been placing weight on non-financial information (e.g., ESG factors) as factors for assessing companies. In response, Japanese institutional investors are also moving in this direction, as seen by the fact that the Government Pension Investment Fund, Japan (GPIF) signed the United Nation Principles for Responsible Investment (UNPRI) and announced that GPIF adopts ESG Indices.

The study group addressed trends and challenges since the release of the Ito Review, held intensive discussions concerning issues surrounding intangible assets, ESG factors and other issues, and examined future policy measures. Finally, it compiled the discussion results into a report titled “Ito Review 2.0.”

2. Outline of the Ito Review 2.0

The Ito Review 2.0 firstly points out that the Fourth Industrial Revolution has dramatically changed companies’ challenges and approaches to competition and that this change is increasing the importance of strategic investment in intangible assets as a source of competition. The report shows an increase in the total investment in intangible assets by global companies and sluggish growth of R&D investment and a low level of investment in off-JT training programs by Japanese companies compared to those of overseas companies.

Furthermore, as a change in capital markets surrounding long-term investment, the report systematically presents major issues and challenges caused by an increase in capital inflow into passive/index investment and growing attention to ESG factors. In particular, concerning ESG factors, most investors view them as a source of long-term risk, and investor opinions and assessments vary considerably regarding the impacts of these factors on their return on investment.

Based on this, the report analyzed the financial performance of Japanese companies and compared them with overseas companies, and found that Japanese companies have improved ROE, while there are still differences in capital efficiency and capital policies between Japanese companies and Western companies. The study group conducted an international comparison of PBR (Price Book-Value Ratio), as an index representing the assessment of corporate value by markets. The report pointed out that the PBR of Japanese companies has remained at a level of about one for a long time (theoretically, higher value lies in dissolution of a company, in this case), and that comparison with Western companies by sector, asset structure and other elements shows significantly lower levels of PBR in Japanese companies.

Bearing in mind such challenges, the study group proposed the Guidance for Integrated Corporate Disclosure and Company-Investor Dialogues for Collaborative Value Creation (Guidance for Collaborative Value Creation) under which companies should review their approaches to management so as to sustainably create value and pursue dialogue with investors concerning their business models, strategies, governance and other material issues. The report explains the respective elements of the guidance and offers eight recommendations as follows.

  1. Formulate the Guidance for Collaborative Value Creation
  2. Establish a platform that facilitates integrated disclosure of corporate information and company-investor dialogues
  3. Encourage institutional investors to utilize the guidance in their investment decision-making and stewardship activities
  4. Develop a better environment for corporate disclosure and dialogue/engagement between companies and investors
  5. Improve the database for non-financial information in capital markets and enhancing accessibility thereof
  6. Enrich research and statistical surveys concerning intangible assets, etc. as a foundation of policies, corporate strategies and investment decisions
  7. Design incentives to promote investment in intangible assets that improve corporate value, e.g., human capital, investment in R&D or IT and software
  8. Continuously discuss challenges to sustainably improve corporate value

3. Future actions

METI will strive to realize the recommendations of the study group in cooperation with related ministries, agencies and organizations.

METI plans to establish a platform (working group) for conducting research and discussion on: best practices of companies, implementation of model projects, and investors’ assessment of corporate disclosure. In this effort, METI will also encourage relevant business or corporate associations and investors to discuss related issues and collaborate with projects through the platform.

In line with this, from 2017, the Guidance for Collaborative Value Creation will be incorporated into the processes for examination of applicants for the Corporate Value Improvement Award*1 organized by the TSE and the Award for Best Integrated Reporting organized by an international organization (for details, visit the websites [ⅰ] and [ⅱ] below). Moreover, based on the Guidance for Collaborative Value Creation, the Stock Research Center (SRC)*2 will conduct a project for formulating and releasing analysis reports from time to time on, in particular, promising emerging companies and entities which investment analysts do not cover (for details, visit the website [ⅲ] below).


  1. TSE is working to revise the listing rules and promote better business practices. As part of these efforts, TSE created the Listed Company Award System, with the aim of encouraging proactive measures on the part of listed companies. TSE has given out Corporate Value Improvement Awards since FY2012. This award is given to listed companies of high corporate value and had implemented management deemed to improve corporate value through initiatives that consider capital cost and other investor concerns.
  2. SRC is an organization deploying activities aiming to make stock markets more active. In their activities, it prepares analyst reports from a neutral position, mainly featuring companies that investment analysts do not cover sufficiently, and releases them broadly to the public.
  3. WICI is a private/public sector partnership for improving the reporting of intellectual assets and capital and key performance indicators that are of interest to shareholders and other stakeholders.

4. Reference


Release date

October 26, 2017

Division in Charge

Industrial Finance Division, Economic and Industrial Policy Bureau

Ministry of Economy, Trade and Industry1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8901, Japan Tel: +81-(0)3-3501-1511
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