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Japan and ESG-focused M&A

12 July 2022. Published by Nigel Collins, Partner, Head of Japan Desk

ESG has become a hot topic in the Corporate world and is now a priority for many corporates.

Japan has a long history with the idea of businesses looking beyond profits. Shuchu kiyaku (code of ethics) is contained in a Japanese document from the early 17th Century and influenced by the ideals of Confucianism, it encouraged corporations to think beyond profits. Commercial activity should not be carried out for the sole benefit of a business but also for the benefit of society.i

As noted in an interesting article on the topic by McKinseyii,  Japan’s corporate culture has been underpinned by a robust network of multistakeholder relationships for centuries. Today, many Japanese companies make commitments to their surrounding communities and wider society, promising “lifelong employment, environmentally conscious production processes, customer-oriented products and services, and product safety.” 

McKinsey, however, went on to note that Japanese companies’ overall performance on ESG lags behind that of companies in North America and Europe. Large players outperform smaller players as they generally have greater global exposure, making them naturally more attuned to changes in international norms and more inclined to adapt their brand messaging and business activities accordingly. Consumer-goods companies in Japan tend to do better than companies in the extractive industries, manufacturing, or technology. 

Like others, many Japanese corporates are on a journey to improve their ESG performance, and over time we will see ESG come to the fore as item of influence when assessing an M&A target. According to a recent survey by Bainiii some dealmakers in North America and Europe are now including a focus on ESG in their M&A processes:

  • 11% of M&A Executives surveyed say they extensively assess ESG in the deal-making process on a regular basis today, but 65% expect their company’s focus on ESG to increase.
  • Some companies are ahead of this curve. By incorporating ESG into their M&A process, they have set themselves up with an advantage in pursuing value creation opportunities and gained a head start in meeting their ESG imperatives.
  • By making sustainability a part of each deal thesis and using corporate priorities as a benchmark to assess each potential deal, the best companies find assets that will advance existing ESG initiatives and create economic value.

Japanese corporates have a long association with the principles behind ESG and going forward will need to link their overarching corporate ESG strategy to their M&A strategy, and they will need to find assets that will not only create economic value, but further existing ESG initiatives as well.

i - Calvin M. Boardman and Hideaki Kiyoshi Kato, “The Confucian roots of business kyosei,” Journal of Business Ethics, December 2003, Volume 48
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