Drugmaker Eisai secures ESG money by linking investments to value

You could be forgiven for expecting a former chief financial officer at Eisai, a conservative, family-run Japanese pharmaceutical company, to be a buttoned-up number-cruncher. You might imagine someone focused solely on obscure financial metrics, earnings reports, and margin calculations.

But, while Ryohei Yanagi’s job at Eisai certainly required an appetite for such dry fare, he is also something of a maverick. For 15 years, he has surveyed close to 200 leading investors about corporate governance, as well as social and environmental issues in Japan. He did this long before ESG became a buzzword repeated on every earnings call.

One finding that stands out in his research is that the number of investors wanting companies to explain better how their ESG activities contribute to the bottom line has nearly doubled in the past six years. At the same time, the proportion of respondents saying ESG does not matter has fallen from a quarter to nearly zero.

This is proof, Yanagi says, that Japanese companies have not been doing enough to show how intangible factors, such as employing workers with disabilities or promoting women to management positions, can help create value for shareholders.

“Many investors told me that the disclosure of ESG efforts by Japanese companies has always been vague and they could not factor them into the valuation,” Yanagi says, speaking at Eisai’s Tokyo headquarters. He left the CFO post in June but remains a senior adviser to the $13.3bn company, which employs 11,000 people.

To meet the investor need that he identified, he started work in 2016 on an analysis that is increasingly known as the “Yanagi model” in Japan’s corporate circles.

It breaks down and assigns a numerical value to 88 factors, ranging from the proportion of people taking maternity or paternity leave to the number of employees working outside Japan and expenditure on research and development.

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Yanagi applied those factors to Eisai, and ran 15,000 simulations, with different weightings, using the value of its stock over the past 28 years. The results, he argues, made it possible to ascribe “hard” numerical values to “soft” ESG issues and show how spending on employees and their development, in the form of pay and training, raises the value of a company over time.

For example, Yanagi found that boosting investment in people by 10 per cent would lift Eisai’s price-to-book value ratio — a measure of how highly valued a company is — by 13.8 per cent over five years. Similarly, boosting R&D spending by 10 per cent would improve the ratio by 8.2 per cent in 10 years.

Yanagi says his model “can help investors evaluate ESG efforts because the evidence is more convincing when presented through actual figures”.

His push comes at a time of increased scrutiny of ESG issues by regulators. When the Tokyo Stock Exchange changed its corporate governance code last year, it called on listed companies to promote more female executives and to tell shareholders how they are investing in employee development.

In addition, under the “new capitalism” agenda recently unveiled by prime minister Fumio Kishida, the government says it will require companies by year-end to include employee development policies, along with relevant indicators and targets, in their securities reports. The government also says it will implement a ¥400bn ($2.9bn) policy package for three years to promote investment in human resources.

Such moves come as ESG assets are booming globally. Bloomberg Intelligence said in January that these may surpass $41tn by 2022 and $50tn by 2025 — one-third of the projected total assets under management around the world.

Following Yanagi’s work, Eisai has made changes in its financial disclosures. It now shows in its earnings reports how the future value of the company could be increased through ESG activities.

Similarly, information technology company NEC, telecoms company KDDI, and instant noodle maker Nissin Foods have all adopted the “Yanagi model”. For example, NEC said in December that increasing employees’ training days by 1 per cent would boost its valuation by 7.2 per cent in five years.

Yanagi says such disclosures could help attract more investment from the likes of BlackRock and Nomura Asset Management. He notes that they have said they will use the model to identify opportunities to invest in undervalued Japanese equities, once companies supply enough information about their ESG efforts.

That would certainly be welcome. The Topix 500 index of the biggest Japanese companies rose by only 20 per cent between 2005 and 2021, well behind the US’s fourfold and Europe’s 57 per cent increases.

“Being able to better explain sustainability efforts could help save corporate Japan, as the hidden value of its workforce is far greater than in Europe and the US,” Yanagi argues.

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