Global Site
Displaying present location in the site.
Sustainability Strategies That Contribute to Corporate Value Enhancement
Note:The following dialogue was held on June, 2024.
The NEC Sustainability Advisory Committee, which started in 2022, holds regular dialogues with outside experts with the aim of confirming the direction of the Company's sustainability management and improving its initiatives. From this year, in order to foster a more concrete image of sustainability management in practice, we newly invited Mr. Hiroyuki Horii, Senior Managing Executive Officer of Sumitomo Mitsui Trust Asset Management Co. Ltd.
The sixth in the series was held under the theme of “Sustainability Strategies that Contribute to Corporate Value Enhancement,” and included NEC’s CFO and director in charge of sustainability promotion Osamu Fujikawa, CSCO (Chief Supply Chain Officer) and director in charge of risk Noritaka Taguma, CRO (Chief Risk Officer) Koji Tamesufusa, and others. They discussed with experts how to integrate sustainability, growth strategies and risk management into management.
How to establish a management system for promoting sustainability
Corporate Executive Vice President, CFO
Osamu Fujikawa
Fujikawa Today, I would like to consult on the following two issues. One is that the existing Corporate Planning Division will be renamed the Corporate Planning and Sustainability Promotion Division to promote sustainability and corporate strategy in an integrated manner. The new division will collaborate with business units and group companies in order to enhance initiatives for implementing growth strategies that take into account customers' sustainability issues.
Second, based on the results of our sustainability promotion efforts in FY2024(April 1, 2023 to March 31, 2024), there are still human rights-related issues that have not been addressed. Regarding the first point, NEC has organized the following structure and clarified that Hiroto Sugahara, the division head participating today, will lead the efforts.
Management Implementation Framework for Sustainability
Sustainability (NELIS)
Peter D. Pedersen
Pedersen (Chair) First, we would like to discuss the theme of how to establish a management system for promoting sustainability.
Executive Officer of
Sumitomo Mitsui Trust Asset Management
(SuMi TRUST AM*)
Horii Hiroyuki
Horii I greatly appreciate the integration of the sustainability and corporate planning division. Actually, I feel the importance of this integration as I am involved in management in the form of CSSO (Chief Sustainability and Strategy Officer). I also place importance on operating closely with human capital strategy and management strategy to achieve sustainability. There are two types of work in human resources and corporate planning: those that are indispensable and cannot afford to make mistakes, and those that will sprout five to ten years later through trials and challenges. In the case of human resources, labor management and human capital strategy fall into this category, and I believe that if human capital strategy can be merged with sustainability management planning, it will be possible to achieve integrated management in the true sense of the word.
Fujikawa NEC has addressed the topic of human resources as the topic of two consecutive Environmental, Social, and Governance (ESG) Days. NEC is also working on data-driven human capital analysis, and I would like to further promote collaboration with the People and Culture Division.
Horii I believe that corporate divisions have a reasonably high level of understanding of sustainability, but I am concerned about the extent to which NEC's concept of sustainability has penetrated business divisions, group companies, and business partners. If this concept is not firmly penetrated, there is a risk that activities that are well intentioned may go in a different direction. As an investor, I also think it is important to see how NEC gathers information on external changes in sustainability, how it is incorporated into its management, and how the flow of information is disseminated within the group and to its business partners.
Corporate Executive Vice President and CSCO
Noritaka Taguma
Taguma Regarding communication with suppliers, NEC encourages suppliers to promote initiatives in line with the Guidelines for Responsible Business Conduct in Supply Chains, which are based on the NEC Group Procurement Policy. NEC also asks its suppliers to cooperate with a self-assessment questionnaire (SAQ) to identify potential risks, and requests that they improve their initiatives after understanding the actual situation. In terms of group management, the Risk Compliance Committee, headed by the CRO, monitors the governance status of the group, including group companies, from a risk perspective.
Fujikawa From my experience in charge of new business development, I am aware of the importance of picking up external voices on both opportunities and risks. As part of this effort, in April of this year, we integrated the Corporate Planning and Market Intelligence Department which has the function of researching external information. I would like to incorporate outside knowledge into the process of picking up voices from the frontlines and formulating strategies and implement management strategies that can flexibly respond to external changes.
The required level of commitment to respect for human rights moves to the next phase
Pedersen Next, I would like to discuss human rights issues. Mr. Fujikawa mentioned that occupational safety and harassment are key countermeasure risks for NEC, what is the actual situation?
Employee Relation Department
Senior Director
Fumiko Harada
Harada Although the area of occupational safety is broad, NEC recognizes that long working hours are the most important issue in Japan. Although NEC has encouraged relatively free and autonomous work styles in the past, after the COVID-19 pandemic, overwork has been observed in a number of cases, especially at the managerial level, and control has become necessary. In addition, the number of reports of harassment is increasing. We understand that the increase in the number of calls is not in itself a bad thing. It is a sign that employees are finally able to speak up because of the establishment of whistle-blowing and the promotion of awareness of it. All reports are handled appropriately. In addition, disciplinary actions are taken in accordance with the employee employment regulations, and these matters are publicly announced within the company, in a manner that respects the privacy of the parties involved, to prevent recurrence. Although this may not lead to immediate improvements, we intend to strengthen efforts in the future, including those of group companies inside/outside Japan.
(Business for Social Responsibility)
Managing Director
Asako Nagai
Nagai Since FY2020, Business for Social Responsibility (BSR) has been supporting NEC's human rights impact assessment at the corporate level. We have also been talking to NEC regularly about human rights in the supply chain, and I highly appreciate its efforts to date. However, I would like to tell you today that if NEC continues to work at the same pace as before, it will no longer be able to say that it is committed to respecting human rights. There are two major reasons for this.
One is that customers' human rights requirements for NEC as a supplier and business partner have risen to an even more demanding level. To deal with a partner who does not meet the requirements would be a violation of compliance, and this will lead to the company being removed from the list of suppliers.
The second is the impact of the EU's Corporate Sustainability Due Diligence Directive (CSDDD), which was passed by the EU in April 2024 and is being prepared for legalization in EU countries. Application will start in 3-5 years, and although there is a preparation period, NEC headquarters will eventually need to address the issue on a group-wide basis. Since this is a sustainability regulation, the theme will cover not only human rights, but also climate change and other environmental areas. And according to the United Nations Guiding Principles on Business and Human Rights (UNGP) standards, the scope of efforts will be broad, covering the entire value chain, from the upstream supply chain to downstream customers. Furthermore, liability is also set quite strictly at this stage.
Human rights due diligence (HRDD) is not widely known. When looking at the entire value chain, identify where there are potential impacts and risks from a human rights perspective, and consider how these risks can be mitigated. Then, policies are formulated for implementation, actions are taken to reduce risks in the actual business process, progress is monitored, and information is disclosed. Continuing to implement this PDCA cycle is what HRDD is all about, and risk identification alone does not constitute HRDD. In addition, the UNGP requires effective grievance mechanisms and stakeholder engagement.
Until now, the thinking has been that it is a plus if you are positively engaged in “business and human rights,” but now we are entering a different phase, where if you do not engage in it, your business relationship will be cut off or you will be in violation of laws and regulations.
Therefore, from this point forward, I would like to propose that NEC takes stock of what it must do in the future and create a mid-term plan and action plan that reliably conforms to global standards such as UNGP and International Labour Organization (ILO). When actually tackling this issue, there must be many internal rules that do not meet international standards simply by complying with the laws of each country. It is also necessary to expand the boundaries (scope of application). For example, in the area of labor relations, the company will be asked what kind of measures it is taking with regard to non-regular employees. On-site assessments will also become necessary for monitoring.
Taguma With more than 10,000 suppliers in Tier 1 alone, it is difficult to visit all of them. NEC is also conducting third-party audits of suppliers with potential risks based on a risk-based approach, but is such an approach sufficient?
Nagai It is important to be able to logically explain the criteria and results of the evaluation when assessing where in the supply chain the greatest risk lies.
Harada Trying to comply with international standards will naturally lead to increased costs. There is also a wide range of things that need to be addressed, but how do we prioritize them?
Nagai It is preferable to start the evaluation by looking at the impact on those who are more vulnerable and more negatively affected. For example, you would look first at people in countries where wages are low because they are not directly employed and where they may have to work overtime to support their families. Next, you would look at outsourced system engineers who may be forced to work long hours for low wages, and so on. After clarifying the evaluation criteria, the efforts should be carried out in order.
How do investors evaluate ESG initiatives?
Pedersen ESG performance rarely appears to have any direct impact on a company’s share price, but what do you see as the significance of integrating sustainability into growth strategies?
Horii For us investors, our responsibility to our clients is to generate medium- and long-term investment returns, and to do so, we need to engage in initiatives that contribute to the medium- and long-term enhancement of the corporate value of the companies in which we invest. Sumitomo Mitsui Trust Asset Management haｓ identified “encouraging ESG initiatives,” “exercising voting rights to ensure that minimum standards of governance are met,” and “engagement in pursuit of best practices” as the three pillars of our activities. In particular, ESG initiatives are encouraged because there are limits to predicting and evaluating future corporate value based solely on financial information, which is a measure of past results. By analyzing how a portfolio company understands the downside risk and upside potential from an ESG perspective that could affect its future financial value, and how it is trying to link this to growth, I believe we can correctly assess the management capabilities of management, the company's organizational strength and business infrastructure, customer relationships, and various investment capabilities.
In addition, the reason why ESG initiatives do not directly show up in the stock price is because it is difficult to see how much benefit will result from reducing negative factors in the future. While it is understood that the stock price may fall as a result of negative factors manifesting themselves without addressing ESG issues, it is difficult to explain the value of maintaining ESG initiatives because by continually addressing ESG issues we prevent ESG risks from arising. This leads to the low linkage between ESG and stock prices and the difficulty in understanding.
Pedersen I think downside risk is easy to assess, but how should we view the relationship between upside potential and sustainability?
Horii One of the axes for evaluating upside potential that leads to sustainability is technology. I believe that analysts play this role, and therefore, analysts are expected to be familiar with the industry and sector to the point where they can have a solid understanding of the technologies that lead to growth. The other is governance, and I believe that the management approach is important as an axis for evaluating upside potential.
Pedersen It means that sustainability is more like an entry ticket to doing business.
In the past, sustainability has been viewed as a downside risk, but recently the impression is that the upside potential is increasing a bit. Is that also your impression? Are new markets seen to be emerging, and the upside growing with sustainability x technology?
Horii That is a good way to look at it, but on the other hand, ESG and sustainability-driven businesses are an area that everyone in the world is targeting, and there is the possibility of a “red ocean” effect. Investors want to know how far the companies they invest in can go in these areas, but companies usually do not reveal their hand before the battle. I believe that it is analysts who are familiar with the industry and the company who can mediate between the two. The analyst's role is to act as a liaison between the company and the investor, connecting the gap between what a company wants to say but cannot, and the areas that the investor wants to understand but does not.
Responding flexibly to change and growth
Corporate Strategy and Sustainability Promotion Division
Managing Director
Hiroto Sugahara
Sugahara There is a lot going on in sustainability, but the way it is addressed varies from company to company. We must have a policy that will become the core of what NEC is working on. Whether it is risk response or prioritization, you cannot overcome certain issues without a core idea. I want to tell an attractive story with NEC’s own policy.
Chief Risk Officer
Koji Tamefusa
Tamefusa There is value in stories of defense. I recognize that risk management is value for the future that did not happen. The key is whether there is a story that supports a stable management foundation and whether it can be communicated to the outside world so that they can understand what kind of structure is in place.
Pedersen Presenting your own story in a systematic way that is relevant to the time in which we live is essential. Investors are attentive to that story. Taking a progressive approach to market and stakeholder demands is a sustainability strategy that may contribute to the enhancement of corporate value.
Fujikawa Today’s discussion was very thought provoking and good.
For risk themes such as labor practices and human rights that have set deadlines for action, NEC will formulate plans and implement them. In addition, we would like to enhance our efforts by not only reducing risks but also turning them into opportunities.
I also believe that there is still room to work on growth themes, such as how NEC can continue to grow and what it can do to achieve this growth, in the areas of sustainability and non-financial issues. Even if NEC is doing the same thing, its reputation will change depending on how we communicate.
The road to turning sustainability initiatives into opportunities is a difficult one, but I believe that NEC will be able to see things as it proceeds with its activities. We ourselves are okay with changing. We want to have a policy, respond flexibly to change, reduce risk, and use that to grow.
(Front row, left to right) Nagai, Pedersen, and Horii.