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  5. Study Group on Approaches to Making More Substantial the Dialogues for Creation of Sustainable Corporate Value Compiles Interim Report

Study Group on Approaches to Making More Substantial the Dialogues for Creation of Sustainable Corporate Value Compiles Interim Report

- Recommendations on Sustainability Transformation (SX) and extraction of "elements of substantial dialogues" -

August 28, 2020

As the business environment continues to increase in uncertainty and companies are increasingly requested to enhance sustainability and resilience, it is considered important for companies and investors to determine approaches to achieving substantial dialogues that lead to improvement in sustainable corporate value.

Against this backdrop, the Ministry of Economy, Trade and Industry (METI) inaugurated a Study Group on Approaches to Making More Substantial the Dialogues for Creation of Sustainable Corporate Value (hereinafter referred to as the “study group”) in November 2019. Since then, it has brought together representatives of companies and investors in eight meetings that have enriched discussions on challenges facing the development of substantial dialogues between companies and investors to improve companies’ mid- to long-term corporate value as well as future directions of solutions to such challenges. The relevant effects of the expansion of the novel coronavirus disease have also been taken into consideration. METI hereby announces that on August 28, 2020, the study group compiled the results of the meetings into an interim report.

In the interim report, the study group presents its recommendations on “sustainability transformation (SX),” an approach that will strike a balance between companies’ earning power and the ESG (environment, society and governance) factors. In addition, it explains the “elements of substantial dialogues” which are necessary for holding company-investor dialogues contributing to creation of mid- to long-term corporate value.

Aiming to popularize the recommendations on SX and the elements that are necessary to substantial dialogues, METI will further enrich discussions on ideal approaches to specific management methods to develop these recommendations and elements into practical actions as well as approaches to those dialogues.

1. Background

Since its release of the Ito Review (1*), METI has encouraged companies to hold dialogues with investors and advance corporate governance reforms. Through these efforts, METI has contributed to helping companies make a certain level of achievements, including improvement of their returns on equity (ROE). However, as some have pointed out, there is still a challenge in encouraging companies to have more substantial dialogues with investors that lead to sustainable corporate value.

In the processes of making corporate-investor dialogues more substantial, it is considered necessary for companies and investors to ascertain the variety of changes that have occurred in environments surrounding dialogues, on which they are aware of since the release of the Ito Review. In particular, as the environmental changes (e.g., due to expansion of the novel coronavirus disease) surrounding business management are increasingly uncertain in recent years and companies are increasingly requested to enhance sustainability and resilience, ideal approaches to management and dialogues for achieving mid- to long-term improvement in corporate value are important challenges.

2. Study Group on Approaches to Making More Substantial the Dialogues for Creation of Sustainable Corporate Value

In November 2019, METI inaugurated a Study Group on Approaches to Making More Substantial the Dialogues for Creation of Sustainable Corporate Value and, since then, the study group held eight meetings to discuss the challenges in approaches to co-creation of value between companies and investors through dialogues and other measures for overcoming such challenges.

At these meetings, participants held discussions on a variety of topics and enriched their discussions, while considering not only past efforts and discussion results, e.g., the Ito Review, the Ito Review 2.0 (*2) and the Guidance for Collaborative Value Creation (*3), but also a variety of environmental changes which companies and investors are facing (e.g., expansion of the novel coronavirus disease) which began during the period of these meetings.

3. Overview of the interim report

Based on the results of the discussions held by the representatives of companies and investors participating in the meetings, the interim report presents well-organized challenges facing the establishment of more substantial dialogues and future directions of solutions to the challenges.

Chapter 1: Recognition of current situations after the release of the Ito Review

This chapter presents the current situations of and changes in business management, capital markets and environments surrounding business management after the release of the Ito Review and explains that while returns on equity (ROE) are improving, Japanese companies are still struggling with low level of intangible assets and have only partially achieved co-creation of corporate value through company-investor dialogues. In addition, this chapter focuses on environments surrounding business and explains the increasing uncertainty and the increasing demand for social sustainability (future vision for and sustainability of society).

Chapter 2: Defining problems involving improvement of mid- to long-term, sustainable corporate value

This chapter presents the recognition gap between companies and investors concerning details of dialogues and the widening differences among companies concerning understanding of approaches to dialogues and necessary content of the dialogues, which are challenges which the study group discussed in particular. As specific subjects related to these gaps between companies and investors concerning the details of dialogues, it presents business portfolio management, creation of new businesses and efforts to implement ESG or the Sustainable Development Goals (SDGs) (*4), demonstrating the differences in perspectives and recognition gaps that exist between companies and investors.

Chapter 3: Future directions of solutions to problems

As solutions to the recognition gaps that exist between companies and investors, which are explained in Chapter 2, this chapter presents the need for companies and investors to share long-term time axes for dialogues. In particular, as the environments surrounding business are increasingly uncertain in recent years, as seen in expansion of the novel coronavirus disease and impacts on countries all around the world caused by climate change, the chapter presents the importance of improving management and advancing dialogues and engagement. These are elements that synchronize “corporate sustainability” (sustainability of corporate earning power) and “social sustainability” (future vision for and sustainability of society), after expanding the current time axes, which are the basis of dialogues, to a longer period. Following this, it offers ideal approaches to such management and dialogues as tools to “sustainability transformation (SX),” as the study group has named it.

Moreover, this chapter focuses on ideal approaches to substantial dialogues and reviews the significance of dialogues based on the changes found in recent dialogues, and based on this, it extracts and presents the essential elements of substantial dialogues, organized under the themes of: “principles of dialogues,” “details of dialogues,” “approaches to dialogues” and “actions after dialogues.” It also explains the need for providing “opportunities” for sharing practices of dialogues. In addition, the chapter provides organized topics on which the study group held discussions concerning elements necessary for developing individual environments for companies to improve corporate value through making dialogues more substantial and expanding such dialogues to the mid- to long-term.

METI will further enrich discussions on ideal approaches to specific management and to dialogues (approaches to flexibly introducing the elements of substantial dialogues into companies in accordance with the situations which such companies are facing, in addition to indices, KPIs and other methods of evaluating these approaches) in order to develop SX and the elements of substantial dialogues, which are explained in the interim report, into practical actions.

Notes:
1. Final Report of the Ito Review “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” Project (formulated by METI in August 2014)
2. The Ito Review 2.0: A report compiled by the Study Group on Long-term Investment (Investment evaluating ESG Factors and Intangible Assets) toward Sustainable Growth (formulated by METI in October 2017)
3. The Guidance for Collaborative Value Creation: the Guidance for Integrated Corporate Disclosure and Company-Investor Dialogues for Collaborative Value Creation: ESG integration, Non-financial Information Disclosure and Intangible Assets into Investment (formulated by METI in May 2017)
4. The Sustainable Development Goals (SDGs) are international goals aimed at achieving a sustainable world.

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Industrial Finance Division, Economic and Industrial Policy Bureau