Japan Adopts “Asset Owner Principles” Amid Growing Interests in Alternative Investments Among Japanese Pensions

By: Tsuguhito Omagari and Yuki Sako

On August 28, under the ongoing “Japan as a leading asset management center” policy initiative, the Japanese government adopted “Asset Owner Principles” (Principles), which are five “common principles” that are “useful” for asset owners in “fulfilling their responsibilities to manage assets (fiduciary duties) in consideration of the best interests of the beneficiaries.” Asset owners are described to include public pensions, benefit associations, corporate pensions, insurance companies and university funds. These Principles are:  

1. Clarify objectives of investment, and determine investment targets and policies consistent with such objectives;
2. Maintain necessary personnel in light of the investment targets and policies, and consider utilizing external knowledge or outsourcing where necessary;
3. Select investment methods and manage risks appropriately in consideration of the benefits of the beneficiaries, and, in particular, when engaging managers, select the most appropriate managers while managing conflicts of interests, and review such selection periodically;
4. To fulfill accountability to stakeholders, provide information relating to the status of investments to foster communications; and
5. Consider engaging in stewardship activities directly or through managers to contribute sustainable growth of investee companies, including jointly monitoring managers’ stewardship activities with other asset owners (joint monitoring).

Principles are further detailed by supplemental principles. Principles are not regulations per se, and take the “principles-based approach,” meaning that they only apply to asset owners who decide to accept. Further, they apply on a “comply or explain” basis, i.e., such asset owner will have to either adhere to, or explain why it does not adhere to, each of the Principles. 

As more Japanese pensions look to alternative investments, the government effectively set the standards that pension fiduciaries should consider in building their investment programs. The names of asset owners who accept the Principles will be published later in the year. Several large Japanese pension funds are reportedly expected to sign up their names in coming weeks.