1、 Corporate Governance in Japan An Introduction to Governance,Capital Stewardship,and the Adoption of a New Policy by Japans GPIFResearchReinventedSmartkarma is a globalinvestment research networkthat brings togetherindependent Insight Providers,institutional investors,andcorporate investor relations

2、professionals and management.At Smartkarma,We Do Things DifferentlyWe leverage the online economy,applying this innovative mindset to capital markets.For a single subscription,Smartkarma users can consume all the research they need,just like Netflix enables viewers to watch unlimited hours of conten

3、t on its platform.At the same time,we address a growing need for a modern approach to corporate access.In 2019,we launched Corporate Solutions,which allows company executives and investor relations personnel to connect seamlessly to investors and analysts,all within a single network.In this effort,w

4、e work closely with global exchanges such as Singapore Exchange,which became our investor,to provide such services to listed companies worldwide.Our model ensures that the research on our platform is objective and unbiased,independent and free from conflicts of interest.The platform determines appro

5、priate pricing according to the quality and value of each research piece.This helps independent Insight Providers monetise their research and incentivises them to produce truly quality,differentiated work that stands out from the rest of the market.A commitment to quality is also why we carefully ve

6、t and select our Insight Providers.Less than 10 percent of the independent analysts who apply are approved as Insight Providers on Smartkarma.We currently have over 100 such curated Insight Providers publishing on the platform,ranging from one-person operations to teams of multiple members around th

7、e world.In the following pages,you will be able to see for yourself the result of our efforts.In the meantime,we will be busy bringing you more exciting developments over the course of the year!2Cover photo by Tianshu Liu on UnsplashTable of Contents1.Corporate Governance In Japan.42.Theyre Here:ESG

8、 Short Sellers.273.The GPIFs New Policy Mix.464.Recent GPIF Moves-Rebalancing&ESG.533DavidBlennerhassettPan-Asia Catalysts/EventsGMO Internet|Event-DrivenCorporate GovernanceIn JapanBy David Blennerhassett|21 Jan 2020EXECUTIVE SUMMARYIf effectively implemented,the Japan Corporate Governance Code,the

9、 JapanStewardship Code,the Engagement Guidelines and the CGS Guidelineswould also represent a sea change in the role of Japanese boards in terms ofmanagement selection,management compensation,and capitaldeployment.If.This is largely a soft law rather than a hard regulatorychange,limiting the regulat

10、ors power to address minority rights.There is a need to see improvement in governance,independence,boardstructure,and capital stewardship by a very large number of companies inJapan.Enhancement of diversity on the board will enable increasedeffectiveness and also strengthen companies governance stru

11、cture.Investors are calling on companies to hire outside board members and tacklecross-holdings.The TSE-mandated Corporate Governance Code seeks atleast two independent outside board members for listed companies andpreferably a third,a majority,and provides an example of at least one-thirdindependen

12、t directors.But these examples,and other much-neededchanges,remain inadequate.One of the fundamental problems with the combination of the JapaneseCorporate Governance Code and the Companies Act,and the lack of liabilityof directors for their own decisions,is that they can hang their hat onirrational

13、 economic arguments and there are no repercussions.Investors want better governance,however,international investors seekmore than improving the box-ticking form prized by many Japanesecompanies.Analysing non-box-ticking ESG/governance is difficult.It isdifficult to track and analyse.And even if box-

14、ticking is evident,it is notnecessarily true that doing so will raise long-term equity returns.It ispossible it will raise costs,which would lower profit growth-this may begood for society,it may not be good for valuations.International investors are more concerned with improving informationaccess,m

15、anagement responsiveness to investors,and management efforts tomake companies become better economic engines.International investorswould like to see companies concentrate on their business rather than seethem run long-short funds(i.e.hold cross-holdings)with investor capital,hold excess cash,or inv

16、est in real estate as an alternative source of income.Corporate Governance In JapanDavid Blennerhassett4A Consultation Paper reviewing the TSE cash equity market-firstmentioned in December 2018,followed by a Market Consultation,culminating in four documents posted on the FSAs website last November-m

17、ake it clear to the TSE,governmental,and regulatory authorities thatexisting governance and stewardship levels dont cut it.For now,theres a lot of technocratic navel-gazing.DETAILIn the midst of the TSEs exercise in trying to gain international credibilityfor its market structure,rules,listing crite

18、ria,and governance-havingintroduced new Corporate Governance Code amendments in 2019,launcheda public display for TSE companies of how to unwind cross-holdings in 2018,seeing new METI guidelines on MBOs and Fair M&A in 2019,and over thepast 12 months a TSE/FSA/semi-public discussion about changing t

19、hemarket structure of the TSE-the TSE will now amend its Listing Regulationsto require only two years(instead of five)of auditor-approved financialreports to go from TSE2 to TSE1.Which ultimately looks like an utter gift toToshiba Corp(6502 JP).The ongoing Ghosn/Nissan Motor(7201 JP)fallout also spo

20、tlights the keygovernance issues.Sarah Parsons of consultant outfit Perspective opinesthat while corporate governance scandals are not the exclusive domain ofJapan,unique cultural factors enable inadequate internal controls topropagate.Parsons assigns blame to insiders or the impenetrable network of

21、 middle-aged men within the same company.Instead of raising their hands whenissues unfold at the senior level,the choice is made to maintain harmonyand not stir trouble.Given the strict hierarchies in Japanese society,expecting individualsto blow the whistle on their peers or,even worse,their senior

22、s is acultural no-no.The consensus-driven and long-winded nature of Japanese decisionmaking has in some cases led to a lack of willingness to beaccountable and a tendency to avoid the consequences until forced.Parsons1.An Introduction To Corporate Governance In Japan2.Recent Developments3.Committee

23、vs.Corporate Auditor4.Board Structure and Composition of the Board5.Delegating6.Remuneration of Directors7.Precaution-type Anti-takeover Measures“Corporate Governance In JapanDavid Blennerhassett58.Directors-Appointments,Nominations,Dismissals9.Directors Liability10.The Role and Involvement of Outsi

24、de Directors11.Legal Duties for Directors12.Auditors13.Financial Reporting and Accountability14.Communications with Shareholders15.Internal Control16.Shareholder Rights and Powers17.Rights of Dissenting Shareholders18.Major Shareholders Duties and Practice19.Shareholder Activism20.The Stewardship Co

25、de21.Recent Consultation Papers Towards a New Market Structure22.Toshibas Gift1.An Introduction To CorporateGovernance In JapanCompanies in Japan are typically regulated by the Companies Act(Act No.86of 26 July 2005).In addition,listed companies in Japan are regulated by theFinancial Instruments and

26、 Exchange Law(FIEL)and the Securities ListingRegulations(SLR)published by each securities exchange in Japan.Nevertheless,the securities exchanges in Japan generally follow regulationsissued by the Tokyo Stock Exchange(TSE),Japans largest bourse.Should a specific provision of the Companies Act be bre

27、ached,shareholders or creditors can bring a lawsuit against the company.Japans Financial Services Agency(FSA)enforces FIEL wherein certainindiscretions/violations may incur monetary fines or prison sentences,or both.The relevant securities exchange that issues the SLRs also enforcesthem.Sanctions fo

28、r violations can range from issuing an improvementplan through to delisting in extreme situations.2.Recent DevelopmentsSince its introduction in 2006,the Companies Act has been quite amenableas to the board of directors composition and the installation of a corporateauditor.SLR revisions in December

29、 2009 then required at least oneindependent director and corporate auditor,provided such appointmentswere in conflict(i.e.an existing business relationship)with shareholders.Corporate Governance In JapanDavid Blennerhassett6On the 1 May 2015,a newly enacted Reform Act required large publiccompanies

30、to have an outside director,and be subject to explanation atthe AGM if this was not in place.This was preceded by a TSE edictamending its SLR in February 2014,requiring listed companies to makebest efforts to elect at least one independent director.The Corporate Governance Code(Code)was issued by th

31、e TSE on theJune 1 2015 and was/is applicable to Japanese listed companies with anaim to facilitate and improve growth orientated governance such as aneed for fair,timely and transparent decision-making.The Code alsorequired that listed companies should appoint at least two independentdirectors.Subs

32、equently,Mitsubishi UFJ Trust and Banking(a major passiveasset manager and trustee)said it would oppose the appointmentof all board members if companies do not have at least two outsidedirectors;Sumitomo Mitsui Trust Bank said it would oppose boardappointments at companies with parent entities unles

33、s at leastone-third of the board was made up of outside directors.Asset Management One(a major domestic asset manager withnearly US$500bn in AUM)called for outside members to attend atleast 85%of board meetings instead of 75%previously.TokioMarine Asset Management also considered opposingappointment

34、s of outside members who had been in office for morethan 10 years.JPMorgan Asset Management reportedly decided to opposeappointments of presidents and other representative directors ifoutside members do not comprise at least one-third of boards.JPMpreviously opposed appointments only if companies di

35、d not havetwo or more outside board members.According to U.S.consulting firm Spencer Stuart,the averagepercentage of independent outside board members in the US is85%and 61%in the U.K,which compares to 33%for the top 100Japanese companies.On June 1,2018,the TSE announced revisions to the CorporateGo

36、vernance Code regarding the following issues:Cross holdings:does the company clearly explain the purpose(&appropriateness)of each cross-shareholding and the status of itscross-shareholdings,including any changes in its cross-shareholdings?Does the company make clear its policy regarding thereduction

37、 of cross-shareholdings,and take appropriateactions in accordance with the policy?Sony Corp(6758 JP)had not been a company prone to cross-holdings.Its holding in Olympus Corp(7733 JP)genuinelyoriginally had a purpose but SONY decided that cross-holdinghad now served its purpose,and Sony announced la

38、st Augustit was selling its 5.05%stake in Olympus.This is Sony takingthe JPX/TSEs guidelines and example(when the TSECorporate Governance In JapanDavid Blennerhassett7announced the sale of its stake in the SGX)-withoutspecifically mentioning the Corporate Governance Code-from March 2018 to heart.Ban

39、k Of Kyoto(8369 JP)sold shares in Nintendo Co Ltd(7974JP)last February,but it was not clear the sale was because ofa new focus on policy cross-holdings,or just BoK topping upprofit before the end of the fiscal year.BoK later said it has nointention of selling any of their other designatedshareholdin

40、gs in Nintendo,Omron,Kyocera,Murata oranyone else.This should be considered a failure of corporategovernance for the bank with regard to its own shareholders asthe ROE on those holdings is lower than anyones target for thebank.CEO Appointment/Dismissal and Responsibilities of the Board:Isthere an es

41、tablished policy on CEO qualifications in order toappoint a CEO who can make decisions decisively to generatesustainable growth and increase corporate value over the mid-tolong-term?Is a qualified CEO appointed through objective,timely,andtransparent procedures,deploying sufficient time andresource?

42、Is the board of directors constituted in a manner such that itis equipped with appropriate knowledge,experience,andskills as a whole and ensures diversity,including gender andinternational experience?Stewardship for Asset owners:As a pension fund sponsor,does thecompany take measures to improve huma

43、n resources andoperational practices,such as recruitment or assignment ofqualified persons,in order to increase the investmentmanagement expertise of corporate pension funds(includingstewardship activities such as monitoring the asset managers ofcorporate pension funds),thus making sure that corpora

44、te pensionfunds perform their roles as asset owners?3.Committee vs.Corporate AuditorPrior to 2015s Reform Act,companies either had a corporate auditor orcommittee structure.In most cases,a corporate auditor was in place,whichaudits the execution of the directors duties.A committee oversees auditing(

45、directors duties and salaries,appointments/dismissals)and monitoringfunctions.A majority of the committee must comprise outside directors.The Reform Act introduced a third structure,an audit committee,comprising at least three directors,the majority of which must beoutside directors.Corporate Govern

46、ance In JapanDavid Blennerhassett8The comply-or-explain rule for the appointment of outside directorsunder the Reform Act introduced in May 2015 has helped improvedcorporate governance,together with clarifying the liabilities and rightsof parent companies with and their subsidiaries.4.Board Structur

47、e and Composition ofthe BoardCorporate auditor.While a company may opt not to elect a board ofdirectors,as is its right under the Companies Act,most companies doso,and this requires at least three or more directors.Except with acompany with a committee,a company with a board of directors isrequired

48、to have a corporate auditor.The board has authority over thecompanys management,while a companys management decisions arethe responsibility of other executive directors.The corporate auditoraudits the execution of duties by directors.Committee.The key difference with a company with a committee is th

49、epotential delegation to executive officers in deciding the acquisition ofassets,drawing down debt and appointment/changes to staff.The auditcommittee not only audits the directors duties but also theappropriateness of those duties.Audit committee.The board will still implement internal controlsyste

50、ms and supervise the business execution by other directors.Material operational/business decisions rest with the board;althoughshareholders are entitled(via the companys articles)can enable theboard to delegate decisions to certain representative and otherdirectors.5.DelegatingCorporate auditor.Cert

51、ain and generally standard day to day operationalmatters are delegated to representatives and other directors;however suchdelegation is unlikely to extend to the buying/selling of significant assets,the taking on of material debt,issuing shares and signing off on auditedfinancial statements.Committe

52、e.The nominating,audit and compensation committee all fallunder the remit of the Companies Act and cannot be further delegated.Separate to the responsibility of the committees,the board has overarchingdecision-making authority with respect to management policy and theexecution of the audit committee

53、s duties;amongst other matters.Audit committee.Similar in respect to a committee.Corporate Governance In JapanDavid Blennerhassett9In Japan,the board normally appoints the CEO(or its equivalent)fromamong its representative directors(for companies with a corporate auditorand a board of directors,or a

54、 company with an audit committee)orrepresentative executive officers.That CEO will chair the board meeting.6.Remuneration of DirectorsCorporate auditor/audit committee:the aggregate amount of thedirectors remuneration is decided at a shareholders meeting,and theboard determines each directors salary

55、 within the parameters of thisaggregate amount.Committee.No shareholder approval is required.The compensationcommittee decides each directors remuneration.In addition,a listed company must disclose in its securities report abreakdown of the payment(salary,bonus,stock options etc)for eachdirector/cor

56、porate auditor/executive officer if the remuneration for the fiscalyear is 100mn or more.How this remuneration is determined must also bedisclosed.7.Precaution-type Anti-takeoverMeasures(with assistance from Travis Lundy)Typically in a takeover process,a bidder must furnish adequate informationto th

57、e targets board as to the background of the bidder and the deal terms ofthe bid.The bidder must desist from acquiring shares in the target until suchtime as the targets board has reached a conclusion on the deal terms,whichis required to be completed within 60 days.If the bidder does not comply(i.e.

58、it does buy shares)and/or the boardconcludes the takeover will damage the company,or that the takeoverwill limit the value of the company,anti-takeover measure may beimplemented.This may take the form of using warrants(free of chargeor perhaps 1/share)to shareholders,which the bidder cannot exercise

59、.(Such measures cannot,however,cannot be taken with the goal ofentrenching the management or the board.)In Japan,the Bull-Dog Sauce case in 2007 was not the first instancewhere warrants were issued to shareholders to thwart a takeover,but itwas the most famous.The Supreme Court decided that if thesh

60、areholders(who actually hold the companys corporate value)deemed the takeover to be damaging or likely to harm the value of thecompany and recommended the issuance of warrants,the issuancewould be deemed valid.The warrants in that case were approved by83%of shareholders.Corporate Governance In Japan

61、David Blennerhassett10Subsequent to this case,there have been fewer hostile acquisitionattempts.PGM Holdings launched a hostile takeover bid againstAccordia Golf in November 2012,however,the tender offer failed.Similarly,in March 2013,Cerberus Capital Managements hostilebid for Seibu Holdings Inc on

62、ly resulted in Cerberus increasing itsstake to 35.48%from 32.22%.Prospect Cos hostile tilt for YutakaShoji in December 2014 failed to acquire 51%of shares out.Furthermore,FIELs tender offer regulations were amended aroundthe time of the Bulldog case,such that the Offeror was required toprovide more

63、detailed information on its offer.In turn,the targethad the right to submit a questionnaire to the bidder.The effect ofthese amendments was a reduction in companies issuing oradopting anti-takeover measures subsequent to that,and poisonpill measures have declined in popularity since then.The Takeove

64、r Defense Measures in Light of Recent EnvironmentalChanges report by METIs Corporate Value Study Group,published insummer 2008,included the phrasing:“corporate value and the shareholders common interests”is referred to as“shareholder interests”.and this report will follow this usage of the term.In r

65、elation to this,“corporate value”appearing in the“Guidelines”and inthis report is conceptually assumed to be“the discounted present value offuture cash flow of the company”.This concept should not be arbitrarilystretched in the interpretation of the“Guidelines”or this report.That tells you that if c

66、orporate value is deemed to be the DCFvalue of the company,it is up to the company to explain how theDCF of the company would be impaired to the detriment ofshareholders through such a takeover event.It should be notedthat if there IS a takeover event,the shareholders hurt by such atakeover would be

67、 the shareholders doing the takeover.This should make the entire process a very tricky one legally,butthis being Japan,it is clear the arguments will get muddied.If you,as an institutional investor,would sell to the TenderOffer at that cash price if it were friendly,but would not sellat the same cas

68、h price if it is not friendly,you are not doingthe right thing by your own investors.If you sell when it is friendly,you only sell if the price isabove what you think it is worth.And then you let go becauseyou no longer own it.You have chosen cash over the potentialfuture of that company for the rig

69、ht reason.It is nowsomeone elses problem.And management and the boardworks for the new owner.If you would sell at that price,but would not do so if hostilebecause management asks you not to sell,you are choosingcompany management over your own investors.You are makinga different economic decision.Of

70、 course,if you would not selleven if it were friendly,that is a different story,but be honestwith yourself(far too many tender offers go through at too-low prices in Japan because the tender offers havemanagement support or board recommendation).Corporate Governance In JapanDavid Blennerhassett11If

71、there were a friendly takeover with exactly the same termsexcept for the fact that the cash price were 5%lower than thehostile takeover attempt,would you accept the lower bid?Ineither case,you are out,and no longer own shares,andmanagement and the directors and employees owe younothing in either cas

72、e.If it is a cash offer against scrip,or scrip vs scrip,thecalculus changes,and that is OK.But if it is cash deal vscash deal or cash deal vs no deal,you as investmentmanager have a fiduciary duty to do the right thing by yourown investors-a duty unaffected by the opinion ofmanagements opinion of th

73、e would-be buyer of yourshares.While the 2008 METI Guidelines are a strong document in support ofshareholder rights and the importance of directors doing the right thingby shareholders,there is one element that is short-sighted.Therequirement for adequate information and time for shareholders tomake

74、 a decision does not ONLY come in the case of a hostile large scaleacquirer.If it is appropriate for investors to have the extensiveinformation to make a decision to sell based on a Price and an Offer,ifthe only difference is information about the post-sale disposition of thecompany,then that should

75、 be required of all deals-not just hostiledeals.Furthermore,investor decisions to sell are made with informationabout the companys prospects and financials,and price.Information about the companys financials,and prospects areprovided by the Company itself-that is part of the BoardsGovernance Code ob

76、ligations.This should take care of allinformation about the company and its future that would berequired by selling shareholders.Every investor can make adecision about whether to sell in the market every day,based onthat information provided by the company which is adequatelyfulfilling its governan

77、ce obligations.If someone bids for the wholecompany,they can make that decision as well.While it may sound insensitive,if I am being asked to sell myshares,I do not need to know what the buyer is going to do withthem.The effect of the Cash Buyers purchase on corporate valueis not my problem.Suggesti

78、ng an investor should accept a lowerconsideration so that the board is happier with the outcome istantamount to a request by the board for board and managemententrenchment.A Tender Offer is,if for more than 50%of the shares outstanding,functionally equivalent to a Shareholder Meeting agenda item toa

79、pprove the purchase of 50+%of the shares and transfer controlover major board decisions to that Buyer.If 51%of shareholdersdo not agree,the Tender Offer will not succeed.If a Buyer who buys a number of shares which is lower than all ofthe shares but does so at a premium has plans which includeaction

80、s which may lower the Corporate Value of the target,theCorporate Governance In JapanDavid Blennerhassett12first to be injured will be the Tender Offeror.Other shareholderscan make their decision.The Company can attempt to provide amore attractive alternative.It will be very easy for the Company topr

81、ovide such an alternative in this case.If a friendly buyer were to purchase the shares with boardrecommendation,based on future synergies and whatnot,the newowner would absolutely have the right to decide the disposition ofthe companys cash and high-value assets.That is one of thepoints of taking ov

82、er a company.For a board to decide that it isagainst such is a sign of an effort to entrench itself.A good example of this fallacy showed up in the case ofAlpine and Alps.Alpine said it needed a large amount of cash-materially all of it-in order to conduct its business when itdid not differentiate t

83、he source of that cash(equity or debt)and the joining of Alpine and Alps was going to beimplemented,and followed immediately thereafter with thedistribution of materially all of Alpines cash to shareholdersof the combined group through a buyback of post-mergershares.This cash was somehow not availab

84、le pre-merger tothe owners of that cash.The Bull-Dog Sauce SituationIn the early-mid-Noughties,US-based activist fund purchased sharesin Bull Dog Sauce(2804 JP)with their ownership becoming knownamong professionals when the share price passed about 1000-1200/share in 2004.In May of 2007,Steel Partne

85、rs went over a 10%holding,and later in the month announced a Tender Offer to takeover the company for 1584/share.In the first week of June,the company announced that the takeoverwould harm corporate interests and proposed a 3:1 warrant issuance,which would not allow Steel Partners to convert their w

86、arrants.Thiswould have the effect of lowering Steel Partners stake from 10.25%to 2.6%.The decision was put to the Shareholders Meetingscheduled for June 24th,which was just four days before the end ofthe Tender Offer.Steel Partners sought an injunction on the warrant issuance,andraised the Tender Of

87、fer Price to 1700/share.At the AGM,shareholders voted 83%in favour of the change in the Articles ofIncorporation,and warrant issuance(i.e.more than 90%of non-SteelPartners shareholders voted against Steel Partners).Steel Partners sought an injunction and extended the Tender Offerclose date to 10 Aug

88、ust.The Tokyo District Court rejected theinjunction,as did the Tokyo High Court two weeks later in early July,with the High Court saying that discrimination against certainshareholders was allowed if the shareholder discriminated againsthad abusive motive(which it determined Steel Partners had).Corp

89、orate Governance In JapanDavid Blennerhassett13Four weeks later(and on 7 August,just a few days before the end ofthe Tender Offer on 10 Aug),the Supreme Court upheld the rejectionof the injunction and the principle of board discrimination of certainshareholders,calling Steel Partners an abusive acqu

90、irer(濫用的買収者).The warrants were issued on 9 August and Steel Partners waspaid 396/share for every share they did not get as a result of warrantissuance(that 396/share was one-quarter of their original TenderOffer Price).The important parts of the Supreme Court Decision were:Article 109 Para 1 of the

91、Companies Act guarantees equal rightsfor all shareholders,but the so-called Unocal Test enshrinedin precedent since Unocal vs Mesa Petroleum in the US in 1985indicated that discriminatory treatment was allowable as longas the resulting discrimination was not unreasonable to theeconomic rights of the

92、 shareholder.A takeover defense does not need to exist in advance of atakeover attempt in order for it to be valid.The decision of whether or not control by the purchasingshareholder should be decided by shareholders themselves,notthe board or management.Discriminatory warrant issuance is unfair if

93、the effort isdesigned to entrench management or the board,but it was notthe case in Steel Partners and Bulldog.Steel Partners was ableto defend itself both in public and at the AGM.Receiving compensation in the form of cash was fairrecompense for Steel Partners.While the Unocal decision is famous as

94、 the underlying precedent forpoison pill cases subsequent,the Delaware Courts would likely neverhave decided the way the Supreme Court did in Japan.The key point for Steel Partners is that they were able to receive396/warrant of the shares for the warrants they were not allowedto exercise.That meant

95、 that the day the warrants were executed,every other shareholder got three more shares for 1 each and SteelPartners got 1,188 yen of cash and kept their 1 share.In the chart below,the price adjusted for the price at the time of theTender Offer.Since then,there has been a 1:10 reverse stock split,and

96、 a 2:1 stock split,making for a 1:5 net reverse stock split.Corporate Governance In JapanDavid Blennerhassett14source:capital IQ,company filings,After the AGM when the shareholders overwhelmingly agreed toreject the Tender Offer and enable the warrants,the shares stilltraded much too high.There was

97、not a lot of stock borrow.It was alsoa small-cap.The entire market cap was on the order of$250mm atthe Steel Partners Tender Offer.The shares fell sharply,then rebounded to the 800 level-which wason a post-rights issuance basis effectively twice the Steel PartnersTOB price-then it fell to about 500

98、around the Supreme Courtdecision date,then fell to the mid-low 400s.From there,it dribbledto 400 by later in August,then below 400 in September and below300 in October,before heading to near 200 by year-end beforeCorporate Governance In JapanDavid Blennerhassett15rebounding in mid-year when the Comp

99、any renewed its poison pilldefense.Steel Partners sold out in Q2 2008 having cashed out three-quarters of its position at 1188 on a pre-tender basis or 396/shareon a post-rights issuance basis.Everyone else ended up owning something which halved from thetender offer price within several months-and n

100、ever came back.8.Directors-Appointments,Nominations,DismissalsThe board typically nominates directors for a two-year period.For a company with committees,a nominating committee nominatesdirectors with a maximum one-year term of office.For a company with an audit committee,a director of the auditcomm

101、ittee must be separately nominated from other directors.Themaximum term of office for a director who is a member of an auditcommittee is two years,and one year for other directors.Directors can be dismissed by a resolution at a shareholders meeting.9.Directors LiabilityDirectors are required to perf

102、orm their duties with a duty of care and adhereto all laws and regulations,and the companys articles and resolutions.The business judgement rule(BJR).Provided a decision wasundertaken without careless mistakes,via reasonable and proper dueprocess,even if that decision resulted in damage to the compa

103、ny,Japans BJR would conclude the director acted with adequate duty ofcare.Such a rule would not be used in a court of law if a conflict ofinterest was in place.In June 2006,Apamanshop Holdings acquired the remainingshares of a partially-owned subsidiary at Y50,000/share afterApamanshop had previousl

104、y set the value of the shares atY10,000/share for the share-for-share exchange.The SupremeCourt upheld the BJR as it ensured a smooth process of the shareacquisition,the maintenance of cordial relations and the valueof the subsidiary may increase as a result of businessrestructuring.Corporate Govern

105、ance In JapanDavid Blennerhassett1610.The Role and Involvement ofOutside DirectorsOutside directors excludes directors who have previously been appointed asexecutive directors,executive officers or employees of the company,itssubsidiaries,its parent companies or related companies.For a company with

106、committees,a majority of each committee must beoutside directors,while each committee should consist of at least threemembers.For a company with an audit committee,the audit committee musthave more than three directors as members,the majority of whichmust be outside directors.There are no such outsi

107、de director rules concerning the boardcomposition of a company with a corporate auditor.Following the submission of the Company Act reform bill,the TSErevised its SLRs such that listed companies endeavour to elect at leasttwo independent directors.The Code enunciates that if a company with a corpora

108、te auditor and aboard of directors OR a company with an audit committee,andindependent directors do not comprise a majority of the board,anoptional advisory committees under the board,to which independentdirectors make significant contributions is to be established tostrengthen the independence,obje

109、ctivity and accountability of boardfunctions.11.Legal Duties for DirectorsTypically the legal duties for outside directors mirror that of other directorsor executive officers,although a companys articles limit a companysliability to its outside directors.Outside directors should evaluate/appraise ma

110、nagements performance,issues arising from conflicts of interest,and managements decisionprocess-all with a view towards improving and progressing acompanys culture.Indeed,all directors should take on a similar role,just that outside directors are expected or perceived to do soimpartially.In recent t

111、imes,when a significant event takes places,such an offer,anti-takeover measures or an internal investigation,a third-partycommittee is formed to oversee any possible conflict of interest issues.These committees generally include an outside director.If a director seeks to carry out a transaction invo

112、lving a conflict ofinterest,board approval must first be sought.Although the director inquestion is not entitled to participate at such a board meeting,he/shemust still furnish all necessary information inveigled in the transaction.Corporate Governance In JapanDavid Blennerhassett1712.AuditorsThe co

113、rporate auditor audits the directors duties,including the preparationof a companys financial statements.To uphold a corporate auditors independence,its term of office mustcontinue at least until the conclusion of the annual shareholdersmeeting for the prior fiscal year.For a company with committees

114、that does not have a corporateauditor,the audit committee comprises directors(with amaximum one year term)that audits the directors duties,including the preparation of a companys finances.For a company with an audit committee,the audit committeecomprises directors(with a maximum two-year term)which

115、auditsthe directors duties,including the preparation of a companysfinances.Furthermore,a large company(i.e.with balance sheet capital of in itsmost recent fiscal year of 500mn or more;or total liabilities in itsmost recent fiscal year of 20bn or more)and a company withcommittees are required to have

116、 either a certified public accountant oran audit firm.An accounting auditors terms of office will continueuntil the annual shareholders meeting(for the last fiscal year),andends within one year after their election.Whether a company has a corporate auditor,an audit committee or is acompany with comm

117、ittees,proposals regarding the election anddismissal of accounting auditors are submitted at a shareholdersmeeting.13.Financial Reporting andAccountabilityFIEL requires all listed companies to prepare a securities report,within threemonths of the end of each business year,which includes consolidated

118、financial statements;as well quarterly reports.Furthermore,arepresentative director or representative executive officer of a listedcompany must confirm the securities report or other reports conform withthe FIEL.14.Communications with ShareholdersIf an enquiry is asked by a shareholder,directors,cor

119、porate auditors andexecutive officers are required by the Companies Act to adequately explainthe agenda of the shareholders meeting.Corporate Governance In JapanDavid Blennerhassett18The code states that the listed company should proactively promoteconstructive dialogue with shareholders to support

120、sustainable growthand increase corporate value.Q&A sessions during shareholdersmeetings are now actively encouraged in Japan.15.Internal ControlBoards of large companies must develop internal control systems thatensure that directors comply with laws and the articles,and that companyoperations are a

121、ppropriate.A listed company must develop internal control systems-such thatdirectors comply with the relevant laws and articles-and submitinternal control reports that describe such systems are in place tocertify the financial reports of the company are made in compliancewith the necessary laws.The

122、composition of the internal control systems and thecompliance programmes may be decided at the companysdiscretion.The Whistle-blower Protection Act.An employer of a whistle-blower is prohibited from treating said whistle-blower in adisadvantageous manner.Furthermore,a point of contact that isindepen

123、dent of management should be established for whistle-blowers.16.Shareholder Rights and PowersVoting rightsEach voting share has the same voting right,therefore a company must treatits shareholders equally with respect to the class and number of sharesowned.Minority shareholders rights may extend to

124、proposing a resolution/agenda at a shareholders meeting,to inspecting accounting booksthrough to applying to a court for the dissolution of a company.Under the Companies Act,shareholders approval is required for thefollowing:amending the companys articles;mergers,corporate demergers,share exchanges

125、and transfers,share capital changes;appointment/election or dismissal of directors and corporateauditors;anddecisions regarding dividends.Corporate Governance In JapanDavid Blennerhassett19This would generally suggest shareholders have an influence on theboard.Shareholders who do speak up,may be vie

126、wed as activists-andactivism often comes with a negative tilt.A Goldman survey found 40%of proposals received 10%of shareholder support in 2017,a large stepup from 24%in 2017.Source:The Diplomat17.Rights of Dissenting ShareholdersShareholders may demand a company purchase their shares at a fair pric

127、eif they object to a proposed agenda(specifically listed under the CompaniesAct),such as amendments to the articles or a specific merger/acquisitions.This price is determined via negotiation between the company and thedissenting shareholder,or failing that,a court.If an agreement isreached,the disse

128、nting shareholder will receive payment within 60days from the effective date in the initial proposal that the shareholderdissented on.If the two parties are not able to reach an agreement within 30days of the effective date,either the dissenting shareholder or thecompany file a court petition to det

129、ermine a fair price.In the Supreme Courts decision in the Tecmo case,an appraisal caseinvolving a share transfer between unrelated independent parties,itfound that:where there is no synergy or other increase in the enterprise valueof corporation arising from the transfer,the fair price should bethe

130、value the shares had on the date on which the shareholderCorporate Governance In JapanDavid Blennerhassett20made a demand to the company for the repurchase of its share,onthe assumption the share transfer ratio in the share transfer planis fair;andif the share transfer comes into effect through a du

131、e process that isitself deemed to be fair,the share transfer ratio should be seen asfair-unless special circumstances prevail inhibit a shareholderfrom making rational decisions at a shareholders meeting.This is quite obviously unsuitable in the real world because thereis no third party verification

132、 required,and Business JudgmentRule can override any and all third party input and as long asthe boxes are ticked,there are no repercussions on directors.Appraisal rights in Japan are not straightforward.The takeaway is.best to get your own legal advice,and even then it is not easy.18.Major Sharehol

133、ders Duties andPracticeUnder the Companies Act,shareholders do not owe a duty of care to acompany,other than paying for the shares in which they have subscribed.The exception under the SLRs is when a listed company undertakesspecific transactions with its controlling/substantial shareholder.Inthis i

134、nstance,am opinion from an independent third party must besought to determine whether the transaction is in the minorityshareholders best interests.As an aside,controlling shareholders have no legal duty of care to thecompany or minority shareholders except in exceptional cases,such asa squeeze-out

135、at low price.Such an act may be pursued under the CivilCode or other laws and pursuing such a case is straightforward.19.Shareholder ActivismUnder the Companies Act,provided a shareholder has held shares for at leastsix consecutive months,it can demand a company file an action to pursue adirector or

136、 corporate auditors liability to a company.If a company does notrespond to such a filing within 60 days,the shareholder can proceed to filesuch action on behalf of the company.A shareholder may also sue a director or corporate auditor of acompany should that shareholder own at last 1%in the parent o

137、f thecompany in which the senior personal are being pursued;AND,theholding in the company equates to at last 20%of the total assets of theultimate parent company.Corporate Governance In JapanDavid Blennerhassett21Proxy battlesUnder the FIEL,a shareholder(or the company)that solicits a proxy mustprov

138、ide the other shareholders with a certain set of documents(such as aproxy and reference materials that table the agenda).It is difficult for a shareholder to be successful in proxy fights,as theshareholder wont know the shareholders meeting agenda until thenotice is sent by the company.Moreover,the

139、company may refrain fromproviding the information of other shareholders to a shareholder whowishes to solicit the proxy,however,most shareholders who wish toundertake a proxy effort usually prepare a position(large enough andfor a long enough period of time)to have the right to inspect the booksand

140、records of the company and can thereby obtain a shareholderslist.20.The Stewardship Code(with assistance from Travis Lundy)To further improve corporate governance,a group affiliated with the FSApublished the Principles for Responsible Institutional Investors-JapansStewardship Code in February 2014 a

141、s a prelude to the introduction of theJapan Corporate Governance Code,which had been in the works for years.The aim of this code is to push institutional investors to fulfill theirown fiduciary responsibilities by upholding higher standards for themanagement of companies in which they own stock via

142、promotingsustainable growth of companies through investment and dialogue.Basically,get investors more immersed/involved in companiesinvested by increased dialogue,with a view to increasedtransparency,and in turn better-run companies.The TSE had,on its own,done a bit to promote better corporategovern

143、ance.It created its own Governance Code in 2004 called ThePrinciples of Corporate Governance for Listed Companies,and theTSE institutionalised Corporate Governance Reports two yearslater,and in 2009 introduced the independent directors/kansayakusystem(albeit this came far behind the rest of the worl

144、d,and withextremely weak follow-through).However,the TSE-built Corporate Governance Code wassomething of an afterthought and few companies even paid lipservice to it.It was entirely voluntary and the TSE as much asadmitted it had no teeth.After the GFC,there were more political efforts to create aGo

145、vernance Code with some teeth-an effort which had to be ledby the government-in order to make sure Japan did not get leftbehind because of perceptions by international investors thatJapan was not a good place to invest after a series of hostileCorporate Governance In JapanDavid Blennerhassett22activ

146、ist attempts in the five years prior to the GFC laid bare therelatively naked efforts at entrenchment by Japanesemanagement.Because any Governance Code was going to be somewhat alien tothe way most Japanese companies had traditionally treatedshareholders,the introduction of the Stewardship Code wasd

147、esigned to create expectations about how investors were tobehave in order to be Good Investors(which the hostile activistsclearly were not).If the government defined what the goal of good stewardship wasin its interaction with companies,it could define what the goal ofgood governance was.That became

148、 the mantra of the ideato promote sustainable growth of companies and improvecorporate value over the medium to long term.Seen in a slightly cynical way,the Corporate Governance Codewould effectively give Japanese companies a guidebook on whatthey had to say in order to tick the boxes.The Stewardshi

149、p Codewould give investors the boxes they needed to tick to be GoodInvestors.Seen more opportunistically,it gave investors a stick to use onrecalcitrant companies,and all they had to do was say Im doingmy part!because they had signed up to the Stewardship Code.However,back to 2014 with the introduct

150、ion of the StewardshipCode,in its formulation,much was made of the fact that Japanneeded one to be like other markets.Its clear basis was the UKStewardship Code,and it is also quite clear that the JapaneseCouncil working to create a Japanese version borrowed quiteliberally from the UK Code.But the J

151、apanese version was different.In unsubtle ways.Comparison Between The Seven Basic Principles ofUK vs Japanese Stewardship CodeUK 2010 VersionJapan 2014 VersionInstitutional investors should:So as to promote sustainable growth of the investeecompany and enhance the medium-and long-terminvestment retu

152、rn of clients and beneficiaries,institutionalinvestors should.1.publicly disclose their policy onhow they will dischargetheir stewardship responsibilities.1.have a clear policy on how they fulfilltheir stewardship responsibilities,and publicly disclose it2.have a robust policy onmanaging conflicts o

153、f interest inrelation to stewardship and thispolicy should be publiclydisclosed.2.have a clear policy on how they manage conflicts ofinterest in fulfilling their stewardship responsibilities andpublicly disclose it.3.monitor their investeecompanies3.monitor investee companies so that they canappropr

154、iately fulfill their stewardship responsibilities withan orientation towards the sustainable growth of thecompanies.4.establish clear guidelines onwhen and how they will escalatetheir activities as a method ofprotecting and enhancingshareholder valueno direct analog.instead,a much watered-down versi

155、onbelow seeking consensus rather than assertion ofstewards obligation to fight for shareholder rights.Corporate Governance In JapanDavid Blennerhassett234.seek to arrive at an understanding in common withinvestee companies and work to solve problems throughconstructive engagement with investee compa

156、nies.5.be willing to act collectivelywith other investors whereappropriateno analog6.have a clear policy on votingand disclosure of voting activity5.have a clear policy on voting and disclosure of votingactivity.The policy on voting should not be comprisedonly of a mechanical checklist;it should be

157、designed tocontribute to the sustainable growth of investeecompanies.7.report periodically ontheir stewardship and votingactivities6.report periodically on how they fulfilltheir stewardship responsibilities,including their votingresponsibilities,to their clients and beneficiaries.7.To contribute pos

158、itively to the sustainable growth ofinvestee companies,institutional investors should havein-depth knowledge of the investee companies and theirbusiness environment and skills and resources needed toappropriately engage with the companies and makeproper judgments in fulfilling their stewardship acti

159、vities.The Codes of each have been amended since then,with theJapanese Stewardship Code amended in 2017 ahead of anamendment to the Corporate Governance Code in 2019.Effectiveness?Fostering good stewardship is a good thing.Nevertheless,the Code is not legally binding.Institutional investorscan opt-i

160、n or opt-out.And even if they opt in,they are not bound tostrictly adhere to the provisions of the Code.All they have to do isexplain why they are not abiding by the provisions.A key concern was the Code may flounder without a critical mass ofsupport from institutional investors,especially conservat

161、ive corporatepension funds.As at 30 April last year,246 institutions have signed up,including sixtrust banks,23 insurance companies,33 pension funds and 177investment managers.This includes Panasonics employee pension fund,leaving theemployee pension fund of Japans largest company,Toyota,as akey hol

162、dout towards signing the code.GPIF.the Government Pension Investment Fund,or GPIF,is the largestfund-pension or otherwise-in the world.Last December,theGPIF announced a revised Policy to Fulfill Stewardship Responsibilities.An ever-increasing emphasis on strong stewardship policy at theGPIF is a goo

163、d thing for both the GPIF and its beneficiaries and forthe role of stewardship at Japanese investors.Still,the GPIF does not actually execute the stewardship of themanagement of its portfolio.It has a stewardship policy withregard to the investment managers to which it allocates,and thoseinvestors-s

164、uch as Blackrock,State Street etc.-have their ownstewardship policy,which is probably somewhat affected by theinteraction they have with the GPIF,but is distinctly their own.Corporate Governance In JapanDavid Blennerhassett2421.Recent Consultation PapersTowards a New Market StructureFour documents w

165、ere posted on the FSA website last November,divided intothe issues,the basic concept of the New Market Structure;and towards anew TOPIX Index.The aim of the New Market Structure is to get rid of thecurrent five or more venues and establish a three-part market structure:A Prime market,comprising larg

166、e-cap,liquid blue chips,which wouldadopt a high standard of governance,etc.A Growth Market to replace MOTHERS and JASDAQ Growth;thedesignation of being on this market would indicate that a)thecompanies were in the capital-raising phase rather than the money-earning phase,and b)that these companies m

167、ight be riskier than otherlisted companies.And a market tranche for everyone else-companies neither growthyenough to be given a pass on lower-quality disclosure or profits norblue-chip enough to be deemed suitable for Prime.The basic outline appears to be a watered-down version of the leaststringent

168、 possibility mooted after the first meeting of the TSE-sponsored in2018.And changes wont take place for years.For the vast majority ofinvestors there will be nothing to do.22.Toshibas GiftLast November,the Nikkei had an article(Japanese,English)saying that theTSE will amend its Listing Regulations t

169、o require only two years of auditor-approved financial reports to go from TSE2 to TSE1.It would do this,apparently and bizarrely,to correct disparities between the requirements forthe several boards of the TSE.The FSA and TSE have just spent a full year in the process ofreviewing the market structur

170、e in order to further incentivize listedcompanies to proactively improve their overall value as corporation,inaddition to further attracting diverse global and domestic investors byproviding attractive investment opportunities.A featured proposed measure is to create a step-up market-a TSEPrime-whic

171、h would highlight higher governance and standards forthe bluest of the blue chips,separating them from the multiplethousands of less well-regarded companies which make up the lowerhalf of TSE1,almost all of TSE2,and JASDAQ Standard.The goal is togain further credibility for the exchange and its majo

172、r listings bydifferentiating the new rules from the old rules and old standards.This audit change to unify the standards to the lowest commondenominator is an odd way of asserting that credibility.It also providesa gift to Toshiba and its investors,and a return to TOPIX.Corporate Governance In Japan

173、David Blennerhassett25Smartkarma insights referenced in this insight:Nikkei TSE Rule Change to Allow Toshiba An Early Return to TOPIXGPIFWorlds Largest Fund To Suspend Global Stock LendingTSE&FSA ThinkPrime-The World Yawns.Murakami Vs Toshiba Machine:A Question ofShareholder Rights or Rights for Sha

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184、isposal or holding of securities,whether as principal or agent.Distribution or publication of this report in any other placesto persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited.I/We have no position(s)in the any of securities referenced i

185、n this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the

186、views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this ins

187、ight does not violate any of the terms specified therein.David Blennerhassett(06 Feb 2019)Corporate Governance In JapanDavid Blennerhassett26Kyle RuddenAlpha-Centric ESG ResearchBnp Paribas|ESGTheyre Here:ESG ShortSellersBy Kyle Rudden|31 Jan 2020EXECUTIVE SUMMARYESG short selling i.e.,shorting base

188、d on ESG metrics and catalysts isntnew,but is undergoing a radical evolution.Short-term ESG tradingopportunities are a new reality.Traditional ESG funds are breaking etiquetteand mimicking hedge fund long/short strategies.Hedge fund heavyweightsare here,some betting against ESG itself,as if ESG is o

189、vervalued or ripe for acatalytic correction.Originally,my plan was to address ESG short selling in different report,onanother topic.However,a recent decision by Japans Government PensionInvestment Fund sparked a firestorm around the age-old ESG short-sellingdebate whether shorting is ideologically a

190、t odds with ESG,responsible,sustainable,social,ethical,green,moral,or whatever-you-want-to-call-itinvesting.I feel the ESG community(and media)shot a wooden duck by sprinting downthe same tired ethics path with blinders on,re-hashing increasinglyantiquated arguments and ignoring more important trend

191、s in ESG shortselling.The ethics of short selling still matter,but such a myopic focus isnave to,or perhaps in denial of,fundamental changes to the ESG landscapeover the last few years.Thus,I wanted to share my thoughts sooner rather than later.This was to bea brief critique of the recent ruckus ove

192、r ESG short selling.Clearly,itsnowballed.I stopped before descending the rabbit hole from which Id neveremerge(ESG long/short back tests and walk forwards).Still,this evolved intoa deeper dive into ESG short selling and hedge funds.There are sevensections,which:1.Articulate my rationale for having a

193、 contrarian(bullish)imperative onan innately bearish topic2.Summarise GPIFs decision to suspend stock lending and opine on itsbroader ESG implications3.Explain why and how I think securities lending,shorting selling,andESG can peacefully coexist4.Highlight three broad trends that are enabling and dr

194、iving changes inESG-driven short selling5.Note how ESG mutual funds are shorting as a turbocharged ESG screen(long virtue,short sin)Theyre Here:ESG Short SellersKyle Rudden276.Discuss the recent influx of hedge fund assets into the ESG arena,including several key nuances7.Illustrate how hedge funds

195、are shorting ESG greenwashing and/orarbitraging dodgy ESG dataConventional wisdom is that ESG investing is a long-term,long-only,buy-and-hold game.That is still largely the case,but the range of potential ESGinvestment horizons is widening.For the first time in my eleven years of ESGinvestment resea

196、rch,I can envision shorter-term,trading-oriented ESGopinions as a complement to long-term biased ESG research.Well see wherethis leads.DETAILWhy a Bullish Imperative on anInherently Bearish Topic?I will start with my rationale for having a contrarian(bullish)imperative onan intuitively negative subj

197、ect.After all,short selling in general is innatelybearish,ESG short selling is sheer blasphemy,and those some are bettingagainst the sanctity of ESG,the basis of my career.Shouldnt I be morebearish?No,and the reasons,in a somewhat decreasing order ofsignificance,are as follows:Opportunity:To make mo

198、ney.My ESG mantra is alpha first and shortselling,though not for everyone,is a valid alpha-generating(and risk-reducing)strategy;another tool in the toolbox.Intelligence:Short sellers have a knack for uncovering what othersdont(or refuse to)see,and ESG short selling can lead to informationdiscovery

199、and even flush out a black swan or two.Motivation:More pervasive ESG short selling could serve as a powerfulexternal motivator for issuers to improve ESG performance(we all knowhow managements fret over short interest).Affirmation:The fact that ESG short selling is being embraced bysmart money hedge

200、 funds is a testament to ESGs alpha value,andcould further insight into the ESG-alpha connection.A quick word on vernacular.I use ESG short selling as a convenient catch-all,but where it is more nuanced I will qualify that phrase(ESG-driven orESG-related).Also,unless stated,I am usually referring to

201、 shorting vis-vis long/short equity strategies(versus a hedge or opportunistic trade).ESG-Driven Short Selling:This includes all short selling formallydriven by ESG criteria and/or catalysts.It is a broad category,but theunifier is that short selling is explicitly ESG-driven,not merelyESG-related.Mo

202、st of what this report discusses is ESG-driven shortselling.Theyre Here:ESG Short SellersKyle Rudden28ESG-Related Short Selling:Sometimes,short selling isnt ostensiblytied to the ESG acronym,but for all intents and purposes it is related toESG.An example is thematic funds(e.g.,climate change).If a f

203、undssole focus is E(not S or G),it isnt strictly ESG,but it isESG-related.GPIF Re-Ignited Ethical Debate OverESG Lending/ShortingPeople think I have two horns and spread syphilis.Jim Chanos,Kynikos AssociatesGPIFs decision to suspend stock lending is the spark that re-ignited a recentfirestorm aroun

204、d ESG,and both lending and short selling.Reaction varied,from effusive praise to accusations of fiduciary irresponsibility andgreenwashing.Sporadic talk of lending took a back seat to the absoluteruckus over ESG short selling,but all of it fixated on ethical argumentsagainst ESG lending/shorting.The

205、 overall view is that securities lending facilitates short selling,andshort selling is anti-ESGSome of that sentiment is rooted in ethereal conceptions of moralityand common ESG decencyA common claim is that short selling reaps benefit for few from themisfortunes of many othersSome say ESG begets so

206、cial good over the long-term,but shorting hurtslong-term investmentsAnother belief is that one shouldnt profit from a bad company at all,even if via short sellingThe myopic focus on ethics is a mistake.Ethics do matter,but sprintingdown the same tired ethics path with blinders on is a bad idea.At le

207、astapproach it from the perspective of this decade,instead of using yesteryearsantediluvian arguments as if nave to,or in denial of,the current state ofESG.Nonetheless,that focus on ethics after the GPIF news is somewhatunderstandable since:Despite going mainstream,the ESG mindset is still grounded

208、inaltruism,ethics,ideology,etc.GPIFs rationale was based on doing the right thing,and GPIFs moveis what started all thisEthical concerns re:ESG lending and shorting are still highly relevant,notably for ESG puristsThat group,more traditional ESG investors,spoke loudest anddominated the recent discou

209、rse“Theyre Here:ESG Short SellersKyle Rudden29GPIF Feels Lending Conflicts With Stewardship and VotingYou would neverknow it by the media coverage,but the GPIF decision wasnt explicitly aboutshort selling.GPIFs explicit and primary rationale is about stewardship andvoting i.e.,the short-term nature

210、of lending conflicts with long-termstewardship and voting responsibilities.Short selling is a prominent subtext,however,and is of course inextricably related to stock lending.GPIF expressed specific concerns about transparency in lending;knowingwho borrowers are,what motivations they have,and how th

211、ey vote theshares.Hiro Mizuno,GPIFs CIO,said that GPIF tried working with brokersand custodian banks to improve transparency,but to no avail,and that GPIFwould consider reversing its decision if key transparency issues are resolvedin the future.Suggested Readings on GPIF and Governance in JapanThe G

212、PIFmove is an impetus for this report,but not its focus,so Im limitingthis section to a basic overview.For detail on GPIFs decision,JapansCorporate Governance Code,Japans Stewardship Code,etc.I suggeststarting with the following Smartkarma Insights:GPIF Worlds Largest Fund To Suspend Global Stock Le

213、nding byTravis LundyElon Musk Has a New Friend in the GPIF by Brian FreitasCorporate Governance In Japan,a Smartkarma Original by DavidBlennerhassettGPIF:Stewardship:GPIFs Active Managers Choose Stocks TheyLike!by Travis LundyPurely by the Numbers GPIFs Move is Not Very SignificantCorporate responsi

214、bility aside,from a purely numbers standpoint this justisnt that significant;for GPIF,or for markets.A limiting factor is that it onlyapplies to foreign stocks in GPIFs portfolio,or about 25%of assets(GPIFdoesnt lend Japanese shares,and will continue lending debt securities).Foregone Lending Fees ar

215、e MinimalGPIF is giving up US$125-150 million inannual fees(2.5 basis points as per Financial Times).Thats nothing to scoffat especially in times of negative interest rates,and since lending fees arelower-risk income but its still small.It seems even smaller when you takeinto account that a third ge

216、ts eaten by intermediaries fees.Or when youthink of it as just 1.0 basis points of the total portfolio.No Material Impact on Lending PoolIt wont reduce global lending by much.GPIF controls US$1.6 trillion in assets,or about 10%of the Japanese marketand 1%of global market cap.Foreign equities,the onl

217、y holdings affected,are just over 25%(US$400 million)of assets.GPIF likely didnt lend 100%offoreign stocks,so the impact on the global lending pool is less than US$400million(a half a percent of global market cap).Theyre Here:ESG Short SellersKyle Rudden30Source:GPIF,Financial Times.Allocation of Fo

218、reign Equities is 54%U.S.,5%U.K.,4%Hong Kong,37%spread over 40 countries.Unlikely GPIFs All-or-Nothing View is Adopted by OthersIts not the initialsplash of GPIFs announcement,but rather its outward ripples that couldmake it a more significant event.The big question is whether it signals otherinstit

219、utions to follow its lead.Im certain it has spurred dialogue,but Im lesssure it will have sweeping effects,for two reasons:1.This Isnt a New Issue:GPIF made waves because its huge and took anextreme approach,but others have been contemplating the lending/ESG relationship for a while and many(notably

220、 in Europe)have alreadyaddressed the issue with formal policies that strike a balance.2.GPIF Move is Extreme:As per above,other existing policies havefound a balance,and I expect that in the future most other institutionswill do the same.I am by no means disparaging GPIFs all-or-nothingapproach,but

221、I feel that there are ways for lending and ESG to coexist.Stock Lending,Short Selling,and ESGCan Peacefully CoexistI might ruffle some feathers by saying this,but here it goes.I believe that:1)securities lending and ESG need not be mutually exclusive,and 2)responsible short selling doesnt undermine

222、ESG ideals.Securities Lending and ESG Neednt Be Mutually ExclusiveWith diligentthought and execution,lending and ESG can coexist peacefully side-by-side at the very least,and possibly even symbiotically.Lending can beapproached in a way that is pragmatic for todays diverse ESG milieu,andstill faithf

223、ul to ESG principles and greater-good objectives.Theyre Here:ESG Short SellersKyle Rudden31Securities lending(and borrowing)engenders liquidity and efficiency,and isan integral element of well-functioning capital markets.and to thesustainability of global economic systems(economic stability is a Tri

224、pleBottom Line pillar).Securities lending policies can be designed to mitigatethe ethics arguments against it,including those about voting and shortselling.For example:Maintain a priority shareholder engagement list and restrict or recall allsecurities on that listHave the ad hoc ability to recall s

225、ecurities at any time(e.g.,to engagere:an unplanned event)Allow or restrict lending during specified time periods(e.g.,allow onlyafter shares are voted)Screen and monitor lending counterparties for compliance with ESGpolicies,preferences,etc.Apply ESG criteria to collateral(e.g.,if dont invest in to

226、bacco,notobacco stocks as collateral)Establish rules to avoid preferential tax treatment(e.g.,dont lend sameweek as record date)Lending,Taxation,and the Cum-ex ScandalThe last bullet pointabove warrants clarification,since preferential tax treatment wouldseem like a good thing.It could be in some ca

227、ses,but is unethical if itresults from lending transactions.For example,an unethical investormight try to use a short-term transaction with borrowed stock withina week of the stocks dividend date for tax manipulation.Similar to that generalization is the Cum-ex trading scandal,acolossal tax evasion

228、scheme that absconded with US$60 billion.Theincredibly complex swindle involved German tax law loopholes,rapidtrading around dividend dates,and differences in the taxation ofdividends for individuals(at a 25%capital gains rate)andcorporations(at a 15%corporate rate).Responsible Short Selling Doesnt

229、Undermine ESG IdealsAbusive practicesaside,short selling isnt intrinsically unethical.Opinions make markets,andthat includes opinions that stock prices should be lower.Shorting is alegitimate investing and hedging strategy(most of the time anyway),and itplays a key role in liquidity,price discovery,

230、and market efficiency.Thatapplies to ESG short selling as well.The operative word,however,isresponsible.The real issue for me is behavioural,not whether shorting is or is notcategorically unethical.What is far more critical is why investors sell short,and how they conduct themselves in the process.L

231、ike the one bad apple thatspoils the bunch,it takes just a few naked shorts running around spreadingtheir nasty bits of misinformation in public short and distort toreinforce the case against it.Theyre Here:ESG Short SellersKyle Rudden32Evolution in ESG Short Selling is Drivenby Three Big TrendsHist

232、orically,when ESG was still an obscure niche,short selling wasexceedingly rare.If it occurred,it was trivial in size and impact,donewithout fanfare,and for reasons that didnt overly offend the ESG psyche e.g.,as a risk management tool(hedging)or as a kind of turbochargednegative ESG screen.There are

233、 numerous reasons for the above,a few of themore noteworthy being:In the formative days,ESG motivations were at their holiest and shortselling was just sacrilegeEarly ESG AUM was dominated by fund types(e.g.,mutual funds)thatgenerally dont sell shortLinks between ESG and alpha/beta werent well under

234、stood(kind ofimportant for short selling)ESG data was available for a small fraction of issuers,leading to lowESG information dispersionThe market wasnt yet saturated with long-only ESG investmentproducts(more on this shortly)Today,things are different.ESG-driven short selling is more accepted,preva

235、lent,and varied.There is modest yet palpable shift in dispositionamong traditional ESG investors;theyre more accepting of short selling.Also,the influx of investors new to ESG notably hedge funds brings amarkedly new disposition to ESG short selling.The latter has a greater netinfluence on ESG short

236、 selling.Three broad and interrelated trends/forces are behind the changes in ESGshort selling.In a quasi-chronological(and perhaps semi-causal)order,those three interrelated trends/forces are:1.Mainstreaming of ESG:The over-arching and enabling trend is ESGstransition from niche to mainstream,which

237、 has dramatically alteredthe ESG landscape in favor of ESG short selling.2.Irrational Exuberance:ESGs bull run in popularity gave rise toexuberance,including some of the irrational kind i.e.,over-promisingand under-delivering on ESG(aka greenwashing).3.Information Asymmetry:Despite ongoing improveme

238、nts,ESG data isnotoriously unreliable,and that often creates high levels of ESGintelligence dispersion,which can aid short selling.Mainstreaming of ESG is the Overarching Driver of ChangeThemainstreaming of ESG its meteoric rise from obscure do-good investingniche to widespread global acceptance is

239、the force behind everything else.I already discussed this in ESG Alpha:Fluff or Stuff?,but to summarizeseveral key points relevant to this report,the mainstreaming of ESG:Theyre Here:ESG Short SellersKyle Rudden33Increased global ESG-related AUM to just over US$30 trillion in 2019(a10-year CAGR of 2

240、00%)Diversified ESG thinking,motives,and strategies beyond the purealtruism of ESGs earlier daysBroadened the range of investors/assets to include alternativeinvestments such as hedge fundsLoosened attitudes re:ESG short selling,mainly due to the influx ofnon-traditional ESG moneyFueled ESGs bull ru

241、n and issuers over-exuberance in the form ofgreenwashing and missellingExacerbated some of the big systemic problems with ESG data such as alack of standardizationOver-Exuberance Can Lead to Greenwashing and MissellingThere isnothing wrong with a little enthusiasm,particularly after years of ESGadvo

242、cacy falling on deaf ears.Everything in moderation,though.It seems asif almost everybody has been drinking the ESG Kool-Aid,and inevitably afew issuers went full-on bottoms up and trousered.ESG has become as mucha marketing device as it is the acronym for a serious sustainability/investment framewor

243、k.Issuers are constantly being assessed,ranked,rated,scored,and added ordropped to/from the ESG index du jour,so its understandable(though notexcusable)that many companies got carried away with greenwashing andmisselling i.e.,bragging about token ESG programs or exaggerating ESGachievements.This is

244、a problem(and opportunity for some)when it affectsissuers securities.ESG Data Asymmetries Create Short Selling OpportunitiesI discuss thissubject in more detail later.For now,suffice it to say that ESG data isinfamous for its multiplicity of shortcomings.The underlying issue is a lackof standardizat

245、ion in reporting(who,what,when,etc.).That engenders highESG information dispersion which,for smart money,can create shortopportunities or aid in making an existing short position thesis work out asplanned.Traditional ESG Investors:Going LongVirtue and Short SinDefining a traditional ESG investor is

246、more ambiguous by the day,but I amgenerally referring to firms,strategies,and funds(e.g.,mutual and pensionfunds)that approach ESG investing in more conventional ways.Commontraits are:1)ESG is central to their identity,2)theres a greater-good motive,3)they employ some form of ESG screening,and 4)the

247、y are long-only forequities.Theyre Here:ESG Short SellersKyle Rudden34Traditional ESG investors are increasingly embracing short selling,but it isstill a small percentage that do,and an even smaller fraction that do so as analpha strategy(most use it to hedge).For the more adventurous mainlymutual f

248、unds mimicking hedge fund tactics the most common use of shortselling is as a more direct and proactive kind of negative ESG screen.Short Selling as a Kind of Turbocharged Negative ESG ScreenFor example,a fund might begin by screening out poor ESG performers(or other types ofexclusion criteria such

249、as sin stocks)from a pool of potential longpositions.Thus far,that is a typical long-only strategy,but now they alsoallow a limited short position(e.g.,-30%of assets).It avoids being long badESG stocks(as previously),but now also allows active shorting,if the risk/reward is right.Assuming the ration

250、ale for the long exclusion(the initial negative screen)reflects expectations for stock performance,versus a purely ethics-basedexclusion,then this kind of strategy is a chance to generate additional alpha,reduce risk,increase diversification and invest in a way that integrates thefunds ESG values mo

251、re directly and effectually.Its a relatively ESG-friendlyway of shorting.Clearly,this approach doesnt work as an alpha strategy if expectations forstock performance isnt a major criterion among the initial exclusioncriteria.For example,if long exclusion screens are mainly based on ethicalcriteria(e.

252、g.,for faith-based or ethical investors)and less on financialcriteria,this strategy becomes moot.I suppose shorting on ethics couldachieve activist goals(Take that,you dirty coal stock!),but thats not whatI am talking about here.That is an over-simplified example.Presumably an investor would haveadd

253、itional criteria,beyond those of the initial negative ESG screen,to assessthe appropriateness of actually entering into the short positions suggestedby the screening process.Some additional criteria could be ESG-related,butothers should be more customary to short-selling.Its case-specific,butbelow a

254、re examples.ESGNon-ESG Quality,transparency of corporate governancepractices Cash flows,balance sheet strength,ROA,ROC,ROE,etc.History of self-dealing,sexual harassment,andlitigation Level of investment banking activity(e.g.,M&A,ECM)Social benefits or detriments of products andservices Short interes

255、t,trend and momentum,liquidity,float,etc.Write-offs,one-time charges,changes inaccountants Management ownership,recent insider sellingactivity Executive/Board compensation,tenure,turnoverrates Timing of short-thesis catalysts,over/undervaluationAppleseed is a Case Study in Traditional ESG and Short

256、SellingIn myopinion,a quintessential example of a traditional ESG investor successfullybalancing time-honored ESG values with the evolving ESG landscape and aclear forerunner in traditional ESGs integration of short selling isTheyre Here:ESG Short SellersKyle Rudden35Appleseed Capital.Appleseed is t

257、he ESG/impact investing arm of U.S.assetmanager Pekin Hardy Strauss Wealth Management(just under US$1 billionin AUM).Appleseed is small in terms of AUM(its flagship Appleseed Fund is US$150million in net assets),but it is a giant in progressive thinking vis-vis ESGlong/short.It has advocated ESG sho

258、rt selling for years,such as in ESGIntegration in Short Selling from 2017 and later A Sustainability-FocusedInvestors Guide to Short Selling:Creating Long/Short Strategies with ESGCriteria.If youre curious,but not curious enough to spend time reading thosedocuments,this video is a time-friendly summ

259、ary courtesy of AppleseedsCEO and Portfolio Manager Joshua Strauss(as well as the video editors atSkytop Strategies).Another interesting,albeit long,video on ESG shortselling(including Appleseeds Matthew Blume)is Long Short ESG Strategiesfor Endowments.Hedge Funds are Leading ESG AUMGrowth Rates,How

260、everThis Insight is about emergent trends in ESG short selling,especiallyshorting ESG greenwashing,which is largely the purview of hedge funds.Itis not an exhaustive discussion of hedge funds and ESG in general.Still,Iwant to briefly outline the growing role hedge funds are playing in the ESGecosyst

261、em.Ill start by getting a few randomish points out of the way,thenmove into detail.ESG investing by hedge funds can take different forms,and is notalways clearly labeled as ESGEspecially hard to identify are those that only occasionally(andopportunistically)consider ESGThe ESG-opportunist group incl

262、udes the funds that are shorting ESGgreenwashing/missellingESG short selling by hedge funds is not limited to greenwashing,orlong/short equity strategiesAnother big area for hedge fund/ESG activity(including shorting)issustainability/ESG activismHedge funds affect ESG in other ways(e.g.,as signatori

263、es to responsibleinvestment initiatives)Most important,though,is the recent growth in hedge fund ESG AUM.In theearly days,ESG AUM was dominated by mutual,pension,and endowmentfunds.With one exception impact-oriented private equity and venturecapital there was almost no ESG capital from alternative i

264、nvestments,especially hedge funds.Today,alternative vehicles(and especially hedgefunds)are a driving force behind ESG AUM growth rates.There are twoimportant and related caveats to note,however:Theyre Here:ESG Short SellersKyle Rudden361.ESG AUM growth rates are high for hedge funds,but hedge funds

265、trailin absolute dollar terms2.Genuine hedge fund ESG AUM is likely overstated,partly because ESGadoption is often forcedHedge Fund ESG AUM Growth Rates Belie Absolute DollarsIt is importantto differentiate between growth rates and growth in absolute dollars.Whencoming off a near-zero base,its not t

266、hat difficult to post impressive year-over-year ESG AUM growth rates.However,in absolute dollars,hedge fundESG-related(see remark below)AUM is still rather small,and is still trailingother alternative investment vehicles(e.g.,VC,PW,and real estate funds).For this section,Im not being overly-specific

267、 regarding definitions.ESG-related AUM includes ESG proper,and all other closely-related conceptssuch as sustainable investing,socially-responsible investing,and the like.ESG Incorporation by Alternative Investment Vehicles 2010-2018(Note:Absolute numbers are U.S.-only but relative growth is indicat

268、ive of global trends)Source:Forum for Sustainable and Responsible Investment AlternativeInvestment Highlights.Estimates for hedge fund ESG AUM are all over the place,since publicdisclosure is limited and ESG investing by hedge funds often happenswithout being branded as ESG.My simple extrapolation o

269、f data from theAlternative Investment Management Association suggests up to 10%ofglobal hedge fund AUM could be allocated to responsible investments.Other estimates range from 5-20%.Whatever the percentage,hedge fund AUM in responsible investments issmall in absolute terms.Using a mean percentage(of

270、 the 5-20%range),which is generous,implies US$450 billion based on all hedge fund AUM ofUS$3.6 trillion(2019 Preqin Global Hedge Fund Report).That is 1.5%of theUS$30.7 trillion in global sustainable/ESG AUM as per the Global SustainableInvestment Alliance.Theyre Here:ESG Short SellersKyle Rudden37Ba

271、rclayHedge Survey is Even More OptimisticA recent survey byhedge fund industry researcher BarclayHedge draws the mostoptimistic conclusions about hedge fund ESG growth.Its based on asample size of just 70 funds,so I wouldnt over-generalize itsfindings,but they are still quite interesting and worth n

272、oting.Of the 70 respondents,41%take ESG factors into consideration.Forthose,ESG applies to an average of 52%of assets.Making the wildassumption that respondent funds are average for the hedge fundindustry,this would roughly equate to about US$750 billion in ESGAUM.I think whats more relevant than an

273、y wild inferences is the year-over-year growth indicated by respondents.In last years survey,forthose applying ESG,only 42%of assets were subject to ESG versus52%this year.Moreover,they expect that 52%to jump to 58%nextyear.Were talking about hedge funds here,so it isnt surprising that most(62%)use

274、ESG ratings for long/short screening,versus long-only(38%).Of those using ESG to screen short ideas,61%say they weighGovernance most heavily,followed by Environmental(28%)thenSocial(11%).When screening for long ideas,its 56%Governance,26%Social,18%Environmental.I should point out two things.First,re

275、spondents are indicatingwhether/to what extent they use ESG ratings.That might interesting,but from an ESG short selling perspective,its going to be the hedgefunds NOT using ESG ratings that are likely to perform best.Second,other surveys indicate that Environmental(not Governance)isbehind hedge fun

276、d ESG shorting.Hedge Fund ESG AUM Statistics are Probably OverstatedThe second caveatis that ESG AUM statistics in general are often based on surveys,and thingslike takes ESG into account dont necessary mean formal ESG integration.One common question is Which if any ESG factors do you take intoaccou

277、nt?Since almost every investor takes governance into account,thatmight get a 100%positive response,but is it truly ESG-indicative?Probablynot.Theyre Here:ESG Short SellersKyle Rudden38Determining ESG-related AUM for hedge funds is further complicated by theprimary driver of ESG adoption by hedge fun

278、ds i.e.,investor demand.Putbluntly,some percentage of what is classified as ESG-related AUM is beingforced on hedge funds by their investors.Thus,a smaller percentage ofestimated hedge fund ESG AUM is actually from voluntary,committed ESGinvesting strategies.ESG-minded pensions and endowments big so

279、urces of capital for hedgefunds are pressuring hedge funds to get on board the ESG train.This canmanifest in different ways,from assessing the ESGness of hedge funds andfund managers before investing,to imposing ESG constraints after havinginvested.A survey by Preqin illustrates a disconnect between

280、 investors andhedge funds.Source:Preqin(Will Hedge Funds Ever Truly Embrace ESG Principles?).My point is simply that not all hedge fund ESG AUM is genuine ESG AUM.Ido,however,recognize that many hedge funds have a real commitment toESG.They include informal(the quasi-negative screen)and formal long/

281、short strategies,sustainability and ESG activism,ESG thematic strategies(e.g.,climate change),ESG integration into other strategies,andopportunistic ESG approaches.Some Hedge Funds are ShortingGreenwashing as a StrategyThe GPIF news is an impetus for this report in that it re-started the debateabout

282、 ESG short selling,but there is something specific within the ensuingdebate conversation that grabbed my attention.It is a small group of hedgefunds,mostly ESG outsiders,that smell an opportunity in shorting the ESGbull run and all the marketing hype aka greenwashing and misselling that comes with i

283、t.Theoretically,any investor employing some form of ESG shorting strategycould,intentionally or unwittingly,wind up shorting ESG greenwashing.However,there is a big difference between incidentally shortinggreenwashing,and shorting greenwashing as a core strategy.The end resultsmight be similar,but t

284、he latter is far more fascinating.Theyre Here:ESG Short SellersKyle Rudden39I conceive of this group as part real,and part abstract.There are real names(i.e.,hedge fund firms,funds,and managers)that have communicated anESG greenwashing short strategy,a few of which are listed below.I alsoinclude,abs

285、tractly,firms unknown in name but of kindred spirit.For me,theintrigue doesnt lie in specific names,but in their ESG outsider status andcontrarian views.Morphic Asset Management:Morphic is Ellerston Capitals(bothAustralia-based)long-short specialist arm.Morphic is dedicated to ESG(and thus not entir

286、ely ESG-opportunistic),but CIO and PM Chad Slaterruns the Trium Morphic ESG Long-Short Fund,which fits with thisgroup.Muddy Waters Capital:Renowned short-seller Carson Block is reallyskeptical of ESG and he labels his ESG greenwashing strategy amorality short.He says Muddy Waters is branching out fr

287、om its focuson governance to target issuers which are harming society,but claimotherwise.UBS Group:The hedge fund business of UBS Group AG(UBSG SW)plans to launch a long-short fund to in part bet against ESG hypemainly in environmental areas such as carbon footprinting andregulatory reform.CIO Kevin

288、 Russell noted that UBS will not rely onthird-party ESG data.Etho Capital:Etho is an advisor to hedge funds,not a fund itself,but itdeserves mention.Etho CEO and CIO Conor Platt sees ESGs strongestcontribution to alpha as being,unequivocally,on the short-side andspecifically greenwashing-related to

289、ESG data/informationinefficiencies.Various Others:Although slightly less vocal about their ESGgreenwashing strategies,but still connected to the idea,are otherseveral firms including Man Group plc(EMG LN),BNP Paribas(BNPFP),Acadian Asset Management,Caxton Associates,and CrossbowPartners.Shorting ESG

290、 Greenwashing Can Make Sense for Hedge FundsESGinvesting,in any traditional sense,simply doesnt work well for hedge funds.Absolute returns and ESG ideals are often at odds;ESG loves convention,constraints,benchmarks,and other things that hedge funds hate;and mostimportantly ESG investing is a long-t

291、erm buy-and-hold endeavor.So why would hedge funds even bother with ESG greenwashing?I see threebroad reasons why an ESG greenwashing short strategy(specifically)wouldbe an attractive ESG angle for hedge funds,and for some even moreattractive than any other conceivable ESG-related investing angle.1.

292、Non-Committal:This is a purely opportunistic ESG strategy anddoesnt involve any long-term commitments to ESG in spirit,publicperception,or practical investment of resources.2.Skills-Consistent:It relies on short-term ESG data/intelligenceasymmetries in ways that favor hedge funds strengths in exploi

293、tinginformation gaps,especially vs.long-side competition.Theyre Here:ESG Short SellersKyle Rudden403.Trading-Biased:Related to the last point,shorting ESG greenwashinghas a pronounced short-term trading bias;a true rarity in ESG investingwhich leans toward long-term buy-and-hold.Lets Be More Specifi

294、c Regarding What ESG Greenwashing IsIssuers areincreasingly touting(its always positive,otherwise they keep their mouthsshut)their ESG stuff in shiny sustainability reports,in special websitesections,and on earnings calls.Alas,merely talking about ESG doesnt willthe talk into reality.When words and

295、actions dont reconcile especiallywhen theres intent behind the disconnect its greenwashing(akamisselling).Greenwashing takes different forms,and varies in severity in terms ofmoral egregiousness,level of deception,and materiality to investing.Putting a minor tree-planting program on the cover of a g

296、lossy sustainabilityreport is one thing.Wholesale lying about ESG performance in areasmaterial to investing is another thing.A few general examples,in increasingorder of inexcusability,are:Over-selling of a minor(but very real)ESG achievement for its publicrelations/marketing valueExaggerating the i

297、mpacts of minor ESG achievements in order to comeacross more sustainableTalking up the anticipated benefits of ESG programs before theyre areality,and with clarifyingFlagrant falsification or exaggeration of ESG performance,especially inhigh-materiality areasAs I keep saying,financial considerations

298、 must accompany ESG factors andcatalysts in screening for ESG greenwashing short candidates.So Im notgoing to put Saudi Aramco(ARAMCO AB)on a short list per se,but it is agood ESG case study for the third bullet point above hyping the future as ifTheyre Here:ESG Short SellersKyle Rudden41it is today

299、s reality(to be fair,while Aramco is overly-optimistic about futureESG performance it doesnt try to mislead).More in Saudi Aramco and ESG:When Assets Become Liabilities.Greenwashing:The Amazon ExampleBusiness Roundtable is anassociation of U.S.CEOs.It promotes ethical governance,amongother things.In

300、 August,it released Statement on the Purpose of aCorporation,a standard for corporate responsibility that reflects amarked shift away from shareholder primacy.It was signed by 181CEOs committing to running their firms to benefit of allstakeholders.One of those signatory CEOs was Jeff Bezos of A(AMZN

301、US).Just after signing and agreeing to invest in employees andprovide important benefits Amazon slashed benefits for 1,900part-time workers at Amazon-owned Whole Foods.Thats only 2%ofits workforce,but thats not the point.It was diametrical to whatBezos agreed to.Amazon stands out because of timing(a

302、 mere month betweensigning and cutting benefits),but other ESG offenders signed on aswell.Several of them are associated with major ESG events covered inESG and Stock Prices:Fat-Tail Events.Johnson&Johnson(JNJ US)re:the opioid crisis,Wells Fargo(WFC US)re:account fraud,andBoeing(BA US)re:the 737 MAX

303、.Granted,it isnt greenwashing if it represents a genuine change inways,but caveat emptor!Just How Might an ESG Greenwashing Short Strategy Work?Getting backto ESG greenwashing and short selling strategies.As it usually goes withhedge funds,the aforementioned firms dont exactly provide an over-abunda

304、nce of detail regarding the specifics of their greenwashing short-selling modus operandi.The conversation is always very theoretically.However,its easy enough to make some educated guesses and generalizedobservations.Basically,the premise is that certain kinds of ESGmisrepresentation inflate the val

305、ue of a stock,or obfuscate downside risks,and that a catalyst event(or multiple)will lead to a correction in ESG-valuation.A viable greenwashing short candidate requires threefundamental ESG-related characteristics:1.Extreme Greenwashing:Gross misrepresentations of ESG issues thatare material to inv

306、esting for a specific sector,industry,and issuer.White lies are bad,but not necessary good short ideas.2.Information Asymmetry:Dodgy data engenders ESG informationdispersion,and that is what makes this strategy work(and why hedgefunds are well-positioned to make it work for them).3.Unique Insights/C

307、atalysts:Lastly,one needs ESG data andintelligence that others dont have plus a good sense for the catalyst orcatalysts that will make the short thesis work as intended.Theyre Here:ESG Short SellersKyle Rudden42As with the negative screening example earlier,more traditional(non-ESG)criteria are also

308、 needed to judge the sensibility of actually taking on theshort position.Those are investor-specific,and not the focus here,butthings like company and industry fundamentals,liquidity,short interest,trends and momentum,catalysts other than short-thesis catalysts,valuation,etc.Oh,an exit strategy too.

309、Extreme GreenwashingAs stated earlier,ESG greenwashing comes in manyflavors.As morally offensive as they all might be,being morally offensivealone doesnt make a good short candidate.For an ESG greenwashing shortstrategy to work,the greenwashing at hand must be:1)substantial(notminor)and 2)affect ESG

310、 metrics of high investing-materiality for a specificsector,industry,and issuer.For example:Product safety is highly-material for consumer products and healthcare,but less for financialsGreenhouse gas emissions are material for energy,utilities,transportation;less so for servicesData security(breach

311、es)can crush technology or financial stocks whilebarely affecting othersLabor practices/human rights are big for textiles and retailing,butelsewhere are a lesser issueNote:The Sustainability Accounting Standards Boards(SASB)MaterialityMap is an excellent resource for sector-and industry-level ESG me

312、trics andmateriality(investing materiality).Click on a sector to expand its industries.Information AsymmetryESG data is infamous for its many inherentshortcomings.The ESG data issue is improving,but it is still enough of atrain wreck to generate high levels of ESG information dispersion,essentially

313、big disparities in the perceived ESG-value of a stock.While theseasymmetries in ESG intelligence can be a long-only investors worstnightmare,they are an ESG short sellers sweet dream.I said perceived ESG-value of a stock because ESG ratings are highlyquestionable and often very conflicting.The conce

314、pt of informationasymmetry and overlaps with the next section,and I will continue to fleshthis out below.Think ESG information asymmetry,which ultimately boils down to ESG-value and ESG-returns,as akin to stock dispersion in non-ESG long/shortstrategies the more of it,the greater the potential for a

315、lpha generation.Certain sectors and industries are sustainability/ESG disruptors,and thus bigdrivers of ESG dispersion,lending themselves well to ESG short selling(especially greenwashing).A prime example is Energy and Utilities in the context of climate change.Even if ESG ratings were accurate,ther

316、e would be significant dispersion;mainly between clean energy companies and fossil fuel firms.If you takeESG data issues into account,you would expect to see more disparity withineach of the groups.The long/short is,in theory,the best of clean energy/theworst of fossil fuel.Theyre Here:ESG Short Sel

317、lersKyle Rudden43Major of ESG Data ShortcomingsDiscretionary:ESG disclosure is still mostly optional.Thus,notall issuers provide ESG data and for those that do,its self-reported,highly-selective,and has pronounced rosy-bias(issuers tend to disclose when things are good,not stay quietwhen they arent)

318、.Inconsistent:Organizations like SASB are moving ESG towardsmore standardization,but were not quite there yet.ESGinformation is neither standardized nor normalized,making itpainfully difficult to perform meaningful fruit-to-fruitcomparisons.Qualitative:ESG data is very qualitative and subjective.Add

319、the lack of standardization as described above,and that makes asubstantial portion available ESG data exceedingly difficult toquantify for analysis;almost to the point of being worthless.Sluggish:ESG disclosure isnt regulated,so ESG data updatecycles are at best monthly,often just annually,and somet

320、imesnot even consistently one or the other.Thats utterlyunconscionable when global capital markets move quickly,andin real time.Retrospective:Source ESG data reported by issuers whichforms the basis for all third-party ESG ratings is woefullybackward-looking.Thats a big problem for ESG-relatedinvest

321、ing.When was the last time you invested based onhistorical EPS alone?Exactly.Insights and CatalystsThird-party ESG ratings have value,to a point.Theyare mainly useful for exploratory analysis and cursory screening.However,they offer little or no value for short trades where original intelligence isn

322、eeded.Ratings providers repackage source data,push it through their blackboxes,then sell the same ratings and data to thousands of investors.Everyone has the same intelligence.Leading providers are doing more to source original data,including fromalternative sources,and they do offer bespoke product

323、s.But still,they aretrying to sell the same product as many times over as is possible.Period.Winners in ESG short trading will be the ones getting their own original ESGdata and insights,and those data/insights will be at the long-tail end of theESG information curve.Not from the rating of the month

324、 club,from miningalternative data,deriving new quantitative metrics from qualitative data(e.g.,unstructured text).This is where hedge fund intellect and skill setsshine.Theyre Here:ESG Short SellersKyle Rudden44TruValue Labs is a stand-out exception regarding my overall feelingsabout the value of ES

325、G data providers.I forgive them for their liberaluse of AI but TruValue Labs is an innovator in applying machinelearning,natural language processing,and other data science to ESG.New Investment Horizons and ESGResearch PossibilitiesIn my opinion,the single most fascinating aspect of all of this is a

326、 clear shiftin the ESG investment horizon.Conventional wisdom is that ESG investingis a long-term,long-only,buy-and-hold game.That maxim holds for mostESG investing,but the range of ESG investment horizons is widening.For the first time in my eleven years of ESG investment research,I can seeformulat

327、ing and sharing shorter-term trading-oriented ESG opinions,as acomplement to long-term biased ESG research.A more rounded voice onESG-related investing,and a hearkening back to my squawk box days.Well see where this leads.Ideas are always welcome.Disclosure&CertificationI/We have no position(s)in th

328、e any of securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To t

329、he best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight

330、 Provider Agreement and this insight does not violate any of the terms specified therein.Kyle Rudden(19 Dec 2019)Theyre Here:ESG Short SellersKyle Rudden45Travis LundyPan-Asia Catalysts/EventsQuantitative AnalysisThe GPIFs New PolicyMixBy Travis Lundy|01 Apr 2020EXECUTIVE SUMMARYYesterday,the GPIF a

331、nnounced its new policy mix in Adoption of New PolicyProfile.This was the quinquennial policy review andThe big change was moving domestic bonds to 25%x%from 35%10%andmoving foreign bonds from 15%4%to 25%6%,then because the mix nowhas its central policy points at 25%each for domestic bonds,domestice

332、quity,foreign bonds and foreign equity,each with somewhat wide marginsfor slippage,there are additional limits requiring that equities stay within50%11%(while bonds can be 50%13%).This was basically flagged last week,and discussed in GPIF Policy MixChanges Ride to Global Risk Rescue.The GPIF also am

333、ended its Q2 and Q3 investment results announcements toinclude the allocations of each asset(see below).That is somewhatimportant because it could suggest that the GPIF is finished with any largescale movement of assets across the various asset buckets(because thespecific reason mentioned last fall as to why they had stopped publishing theasset breakdowns was so that there wouldnt be speculation a