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May 07, 2004
Daiwa Launches Japan's Newest Socially Responsible Investment Fund
    by William Baue

The new Daiwa SRI Fund will focus not only social and environmental issues, but also corporate integrity, ethics compliance, and transparency.

On Monday, Tokyo-based Daiwa Securities will begin sales of the new Daiwa Socially Responsible Investment (SRI) Fund. The fund will draw from the largest domestic investment universe of the 10 existing Japanese SRI funds. In addition to focusing on social and environmental issues as these other SRI funds do, the Daiwa SRI Fund will also assess companies' transparency and ethics compliance management systems, representing a next-generation development for Japanese SRI.

"Currently, the SRI market in Japan is seeing the second stage of expansion after several years of calmness since the first SRI boom in 1999 and 2000," said Sho Ikeda, president and CEO of Sunrise Advisors. Before launching a Tokyo-based SRI and corporate social responsibility (CSR) consulting firm in March, Mr. Ikeda was head of research at Nikko Asset Management and then at the Good Bankers, which jointly launched the first Japanese SRI fund in 1999. "Last year, UBS Global Asset Management and Sumitomo Trust successfully launched their SRI funds, and Daiwa and Nomura follow this year."

Integrex, a Tokyo-based independent SRI and CSR research firm founded in 2001, will provide SRI screening and CSR ranking services for the Daiwa SRI Fund. Integrex, whose name fuses the term "integrity" with "x," which stands for screening, evaluates companies' CSR performance using the "R-bec001" questionnaire series, specifically focusing on corporate integrity, ethics compliance, and transparency. R-bec001 is based on the "ECS2000" ethics compliance management system standard developed by a team headed by Professor Iwao Taka at the Business Ethics and Compliance Research Center of Reitaku University.

The R-bec001 questionnaires are sent annually to approximately 3,600 listed companies in Japan, of which 877 have qualified for Integrex's quantitative CSR evaluation, as of the end of March 2004. Daiwa selects stock from this universe, which is wider than that of other Japanese SRI funds that invest in domestic stocks, allowing it to diversify more broadly than them, according to Daiwa. Modern Portfolio Theory holds that broad diversification lowers volatility

"R-bec001 is essentially measuring the integrity of researched companies as a basic management philosophy and management system to ensure healthy business behavior," Mr. Ikeda told "Investors are aware of the importance of compliance and business ethics, looking at the recent corporate scandals such as those at Mitsubishi Motors, Takefuji, and Snow Brand, where the stock prices were hard hit in the wake of the respective scandals."

"Beyond these significant cases, however, it is not clear how much the compliance and business ethics elements would affect companies' performance and their stock prices," Mr. Ikeda added.

Correlating corporate integrity, ethics compliance, and transparency to market value may prove key to marketing the fund.

"Analysis of these elements will be necessary to persuade institutional investors, such as pension funds, to buy into the fund," said Mr. Ikeda. "Due to the simplicity of the fund's criteria, however, it may attract many individual investors."

These individual investors may not need quantitative evidence to convince them of the link between shareowner value and corporate integrity, ethics compliance, and transparency.

Daiwa is giving a boost to the institutional market by including the Daiwa SRI Fund in its own group's defined-contribution pension scheme, the Japanese equivalent of the US 401k plan. Mr. Ikeda also points out that Japanese institutional investors are following the example of US- and UK-based pension funds, which have led the way in addressing corporate governance issues, including transparency and corporate ethics.


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