Neuberger Berman, a US private equity firm, is creating a niche ESG fund focused on small Japanese firms.

Neuberger Berman is looking at small (also mid-sized) Japanese companies because they have a lot of ESG catch-up to do.

Compared to similarly-sized companies in the US or Europe, smaller Japanese companies are lagging at ESG practice and reporting.

To extend ESG help to small Japanese companies

The new fund will filter investment candidates by size. Japanese companies valued at less than 500 billion yen, or about $4.58 billion, will qualify. The fund is looking at 20-30 targets for initial due diligence. Neuberger will market the new fund to global pensions.

According to Neuberger, there is scope for appreciation in these companies once they improve their ESG compliance and reporting.

ESG: Neuberger should know

Neuberger Berman has $304 billion in AUM. Of this, around 60% goes through ESG filters during portfolio construction and security analysis.

Jonathan Bailey, head of ESG investing at Neuberger Berman, says: “Two portfolio managers at our own firm may have different views of the same ESG issuer,” he said. “What’s important is we represent the specific interest of a specific client in the ESG strategy.”

Deep data sets and better sources of information would make ESG assessment easier, but these are currently not available. “At the present time, this is an imprecise task because of the patchy level of information [among] companies,” says Bailey.

ESG evaluation is, therefore, likely to be a problem at smaller Japanese companies.

The Japanese ESG fund

To solve this problem, the fund’s team will engage directly with targets to improve their ESG performance.

The team currently comprises a new portfolio manager and an ESG-familiar analyst.

They will be responsible for pushing governance and sustainability reforms at the target companies.

[Related Story: Japanese ESG Investments Outperforming Benchmarks ]