ESG

• If the ISS ROE criteria, which seems somewhat slow, were to be resumed, many companies would still be below 5%. However, how many companies are feeling threatened?
• About 40% of the companies have large shareholders holding more than 20% of their shares, which is one reason why many companies do not feel a sense of threat.
• Domestic institutional investors should apply the Proxy Voting Guidelines more strictly to companies that do not make maximum efforts to increase their ROE.

• Looking at BOJ’s fund flows for private non-financial corporations for 4 cumulative quarters, Cash and Deposits have increased, and Outward Direct Investment has increased steadily as a destination for cash.
• The average dividend payout ratio for listed companies has remained flat, while both ROE and DOE have declined slightly, which may reinforce the view that shareholder returns are not sufficient.
• With cash on hand still increasing while capital expenditures have not grown much, the use of cash is expected to remain a focus of discussion next fiscal year.

• It will be useful for investors if timely disclosure information, which has large market impact but is still disclosed in English by half of companies, is disclosed in English simultaneously.
• By limiting the TSE policy to documents that are already disclosed in English by many companies, there is concern that other high-demand documents may not be disclosed in English.
• An analysis of English disclosure status and value creation indicators shows that many companies, even those with high profitability and high stock valuation, are not ready for disclosure in English.

• It is premature to start discussions on stopping raising the hurdles of the Corporate Governance Code when Japan’s boards are not dominated by a majority of independent directors.
• If listed companies are left to voluntarily improve their corporate governance practices, differences in corporate governance practice efforts among listed companies are expected to widen.
• Companies with high percentage of foreign shareholders, primarily those with large market capitalization, are expected to continue to improve their corporate governance practices through engagement by overseas investors. vice versa

• Government ministries, agencies and the TSE want to raise the value of the Tokyo market, even if it means using the opinions of overseas investors, including activist investors.
• Companies with high foreign ownership and large market capitalization are proactive in corporate governance efforts, while many other companies are passive, indicating that differences in efforts among companies are significant.
• Thanks to the revision of the Corporate Governance Code, corporate governance practices have improved mainly in terms of formal criteria, and now substantive improvements are required.

• It’s no surprise that some companies consider the dissolution of parent-subsidiary listings as a swift and effective measure to raise ROE. However, not every listed subsidiary will be TOB.
• TOB of a high-profitability subsidiary can have significant impact on both the denominator and numerator of the parent company’s ROE because it uses more cash and will improve profit margins.
• Even if the “significance of parent-subsidiary listings” is disclosed, few investors believe that the listed subsidiary’s independence is fully ensured, and the dissolution of parent-subsidiary listings will eventually follow.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).

We view Travelodge’s ESG as “Adequate”, in line with its Environmental, Social and Governance scores. Controversies are “Immaterial” and Disclosure is “Adequate”.

Travelodge is the second-largest hotel chain in the UK, based on the number of hotels and rooms operated.

• While disclosure of committee activities in annual securities report provides clues to the independence of committee, this might create higher hurdle for moving to Company with US type 3 Committees.
• Based on the premise that disclosure of committee activities can change management’s mindset and enable committees to function, more specific details should need to be disclosed to all listed companies.
• Many companies have nominating committees that meet 1-2 times a year before the AGM. Few companies have a Succession Plan, which is of great interest to investors.

• Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
• We assess Axactor’s ESG as “Adequate”, in line with its “Adequate” Social and Governance scores. The company has a “Weak” score for the Environmental pillar. Controversies are “Material” and Disclosure is “Weak”. 
• Axactor is a Norway-headquartered debt purchaser and servicer founded in 2015. Its core business is the purchase of non-performing debt in the Nordics, Spain, Germany and Italy.

• Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
• We assess Upfield’s ESG as “Adequate”, in line with its Environmental, Social and Governance scores. Controversies are “Immaterial” and Disclosure is “Adequate”.
• Upfield (formerly Flora Food Group) is the world’s leading producer of margarine and other spreads.

• Reforms Drive Improvement: Japan’s corporate reforms, catalyzed by governance codes and TSE pressure, are fostering capital efficiency, shareholder value, and long-term equity gains.
• “Name and Shame” Initiative Impact: TSE’s disclosure initiative reveals 54% of Topix 500 companies enhancing capital efficiency, with early indications suggesting positive longer-term performance trends.
• Future Alpha Opportunities: Expectation of increased disclosure in the coming months, particularly from proactive companies; potential for market surprises from obstructive firms trading below book value.

• Axis Capital is a 100% subsidiary of Axis Bank Ltd (AXSB IN) and one of its businesses is structured finance
• The Sojo Infotel is a high-risk transaction undertaken by Axis Capital which was underwritten by the company with the implicit support of the bank as per the credit rating agency
• When the transaction was done it was 50% of Axis Capital’s equity and default risk is high as the redemption date is on March 25, 2024

• Although there’s range in the cost of capital, a sense of level is shared among investors, so even if a company estimates lower, it will be found to be incorrect.
• The essential problem isn’t scrutiny of the cost of capital, but rather that many companies produce low returns. Investors are skeptical that companies produce returns above their cost of capital.
• If stock prices do not rise, investors will continue to demand that companies improve their management, attributing this to the negative gap between the cost of capital and return.

• The TSE’s new efforts to encourage companies to disclose measures to improve their capital efficiency and stock prices correlate closely with general indicators of good governance.
• Over 60% of companies that we classify as “Proactive” have already disclosed their status, while only around one third of “Obstructive” companies have done so.
• Companies with higher levels of Board Independence and that are more aligned with shareholders are more likely to be better allocators of capital for long-term growth.

• Wouldn’t the shareholders of Mitsubishi Chemical want to either TOB for the growth of the subsidiary or invest the cash from the sale of shares in a value-generating business?
• It’s difficult to exclude the influence of the parent company in business decisions that impact significantly on the parent’s earnings and shareholding. Is continued parent-subsidiary listing desirable for subsidiary’s shareholders?
• The management of Nippon Sanso wants to continue the parent-subsidiary listing, but their small shareholding may make it difficult to manage the company from the same perspective as the shareholders.