2025/07/28

SPARX Asset Management ("SPARX") conducted a self-assessment of its stewardship activities in fiscal 2024 (April 2024-March 2025). The following report covers the results of this assessment.

Principle 1: Institutional investors should formulate and publish a clear policy on fulfilling their stewardship responsibilities.

The Company created a responsible investment policy to clarify our approach which is available on the SPARX Group website. (Link: https://www.sparxgroup.com/sustainability/pri.html )
To promote responsible investment practices across the group and ensure the long-term health and appropriateness of our operations from the perspective of climate-related risks and opportunities, the Board of Directors of SPARX Group holds the Responsible Investment Committee meetings quarterly. The committee, consisting of the representative directors, directors, group executive officers, and the head of the Legal & Compliance Office, is chaired by the Group CIO as of the end of March 2025, appointed by the Board of Directors. An external advisor attends the Committee meetings to provide advice on reports and deliberations from an independent perspective and to share the latest developments in responsible investment. During the fiscal year, the Responsible Investment Committee met four times. At these meetings, reports on the status of responsible investment implementation from each Investment Committee, a review of the Responsible Investment Policy, and the annual report were presented and approved.
SPARX Group's initiatives based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are disclosed on the SPARX Group website.(Link: https://www.sparxgroup.com/sustainability/tcfd.html )

Principle 2: Institutional investors should formulate and publish a clear policy on managing conflicts of interest, as required to fulfill their stewardship responsibilities.

In addition to managing funds that invest in listed stocks, the Company also manages funds that invest in renewable energy and venture companies, among others, by accepting capital from external clients, including business corporations. As a result, there are instances where a listed company, which is a client and beneficiary of one of our funds, is also an investment target of another fund managed by the Company. In such situations, there is a risk that voting rights may not be exercised appropriately due to excessive consideration of client relationships with the listed company, potentially harming the interests of our clients and beneficiaries. Therefore, recognizing the importance of managing such conflicts of interest appropriately, we have continued to perform our operations in accordance with our "Rules for Managing Conflicts of Interest" to prevent conflicts of interest transactions. To mitigate conflicts of interest in the exercise of voting rights, we ensure that any investment targets with potential conflicts undergo thorough deliberation by the Committee for Managing Conflicts of Interest before voting rights are exercised.

Principle 3: To fulfill their stewardship responsibilities, institutional investors should accurately assess the circumstances of portfolio companies so that these investments can achieve sustainable growth.

During the fiscal year, the Company continued its bottom-up approach to conducting company research. We held a total of 2,687 meetings, visits, and dialogues, including interactions with both investee companies and other entities. Specifically, we engaged in dialogue with 335 investee companies and carried out 442 engagements. In addition to utilizing publicly disclosed information from these companies, we also drew on data provided by external information vendors. For companies with limited disclosure or unclear data, we sought to understand their actual conditions through dialogue, using this information to identify new investment opportunities and potential risks.

Furthermore, the Responsible Investment Committee shares engagement case studies across various asset classes and works to enhance the quality of activities within SPARX Group.

Principle 4: Institutional investors should seek to share perspectives with portfolio companies and work to remedy problems through constructive, purposeful engagement.

The Company has always placed a high priority on individual meetings with companies, engaging in dialogue aimed at sustainable growth and enhancing corporate value. If concerns arise regarding the management situation or business environment of a company, we seek to address these issues through meetings. During these discussions, we strive not only to express opinions or concerns but also to create value in collaboration with companies. This year, as in the previous year, we have focused on enhancing and improving communication with companies. We have had in-depth discussions on improving investor relations (IR), enhancing ESG disclosures, optimizing financial strategies, and strengthening management structures (see below for dialogue examples). Additionally, through seminar presentations and articles on social media, we have communicated our expectations for management improvements to listed companies. We believe that these information dissemination activities contribute to the realization of management practices that are conscious of capital costs and stock prices, not only for our investee companies but also for a wide range of companies.We believe that our activities contribute not only to our investee companies but also to a broader range of companies in promoting management that is conscious of capital costs and share prices.

Engagement Examples:

• We engaged with Company A, a mid-sized real estate company that offers a wide range of services. Its operations are based on strict property procurement criteria, underpinning its sound financial position. Since the financial crisis, the company has steadily expanded its business and now has a market capitalization of over JPY 100 billion.Our engagement centered on the following three points. First, we emphasized the need to present a continuous and clear growth strategy to the stock market that would dispel concerns about a potential downturn in the company's growth rate. Second, with its market capitalization exceeding JPY 100 billion and increased attention from new institutional investors, we requested that the company clearly and concisely disclose information on its diverse business activities. Third, we communicated the importance of clearly disclosing ESG-related policies and initiatives to garner support from a broader range of investors. Regarding an environmental issue that pertains specifically to the third point, the company's improvement in acquiring green certifications for its mainstay real estate liquidation business should contribute to the long-term enhancement of corporate value.
  While it is not currently actively pursuing green certification for its buildings, we discussed the possibility that certification would boost the added value of properties, leading to a corresponding increase in rents. The company generally agrees with the significance of green certification. Still, it recognizes that acquiring certification will take some time, given that most of its tenants are small to mid-sized companies with limited rent-bearing capacity. We will continue to engage in ongoing dialogue with the company and support its sustainable improvement in corporate value.
• We engaged in dialogue with Company B, an independent systems integrator (SIer) whose strength lies in its solid customer base, including leading manufacturers such as Toyota. In the past, Company B suffered from a high employee turnover rate due to its traditional corporate culture and relatively low compensation, which resulted in a decline in the number of employees over the past decade. Recently, however, the company has been working to reverse this trend and secure sustainable growth by expanding its hiring capacity and improving working conditions, including implementing base salary increases.
  At the same time, given the current labor shortage and rising industry-average wages, as well as Company B's sound financial position--an equity ratio of 80% and cash accounting for half of its assets--we have encouraged the company to pursue further enhancements to employee compensation beyond the industry average in order to achieve sustainable growth. In addition, taking into account the industry-specific issue of multilayered subcontracting, we requested that the company also make persistent efforts to improve pricing practices with its customers. We intend to continue this engagement through ongoing IR meetings.
• We engaged in dialogue with Company C, a major player in the apparel retail industry. The company's business has remained stable over many years, generating substantial free cash flow annually. However, shareholder returns have been insufficient, leading to an accumulation of shareholder capital beyond what is necessary. A review of the balance sheet shows net cash equivalent to roughly half of the company's market capitalization. We discussed with the company that this excessive cash holding is undesirable, as it lowers ROE and erodes the value of cash under inflationary conditions. As potential measures for improvement, we suggested that the company could enhance capital efficiency through higher dividend payout ratios, share buybacks, or allocating funds to growth investments.
  Company C explained that its new medium-term management plan aims to strengthen capital policy by raising dividend payout ratios and DOE, as well as improving ROE. While we consider these steps a positive development, we believe there remains significant room for further improvement. We intend to continue engagement with Company C to support initiatives that enhance capital efficiency and, in turn, increase corporate value.

Principle 5: Institutional investors should have clear policies on publishing their exercise of voting rights and the outcomes of their votes. They should also design policies on exercising voting rights that go beyond merely outlining decision-making criteria and that contribute to sustainable growth in their portfolio companies.

In principle, the Company conducts a fundamental analysis of all its equity holdings, a process that includes interviews before and during the investment period, to understand the entire picture of a company. When exercising voting rights, the fund managers who conduct company research and investment assessments, make individual decisions on each proposal based on their research and meetings. We have established a process where our fund managers evaluate the rationale of each proposal based on basic criteria, considering the circumstances of each company after reviewing previous research and meeting discussions, rather than relying on detailed formal standards or advisory firms.
This year, our fund managers exercised voting rights based on individual judgments in line with this policy. Additionally, we strive to engage in dialogue with companies and consider their requests before exercising voting rights on significant proposals, aiming for better decision-making. We also encourage companies to consider detailed management improvements.
We publish aggregated voting results by proposal type on our website. For individual proposals, we disclose the company name and proposal details only when we oppose company proposals or support shareholder proposals. Our voting policy and results are available on our website: https://www.sparx.co.jp/ins/ourfirm/sustainability/proxy.html (in Japanese).

Principle 6: Institutional investors should periodically report to their clients and beneficiaries on how they are fulfilling their stewardship responsibilities, including on how they exercise their voting rights.

The Company continued to uphold stewardship responsibilities by publicly disclosing our self-assessment of stewardship responsibilities and voting results on our website. Through making disclosure on climate change via website, we aimed to communicate information not only to our clients and beneficiaries but also to a wide range of stakeholders, ensuring transparency in our activities. We report our activities to clients and beneficiaries through written materials and meetings, responding to increased requests for disclosure by enhancing our disclosures, similar to last year.

Principle 7: Institutional investors should be capable of making appropriate decisions about their engagement and stewardship activities with their portfolio companies. These decisions should be based on a deep understanding of the portfolio companies and their business environments to ensure that institutional investors help these companies achieve sustainable growth.

To enhance organizational effectiveness in engaging with corporations and stewardship activities, the following initiatives were undertaken during the fiscal year:

• The Investment Committee, which serves as an advisory body for managing client assets, has monitored implementation of responsible investment. These efforts include revising policies that address climate change-related risks and opportunities, as well as monitoring the implementation of responsible investment practices. Within the organization, the committee has introduced proprietary ESG ratings in internal reports. They also monitor factors such as restricted investment lists, greenhouse gas emissions by fund, TCFD alignment ratios, and coverage of ESG risk scores from external vendors. Furthermore, fund managers and analysts actively participate in seminars and events organized by various groups and securities firms. This ongoing engagement helps enhance their knowledge of ESG matters. Additionally, SPARX Group's Responsible Investment Committee promotes information sharing across departments by showcasing initiatives and working collaboratively to improve the overall quality of responsible investment activities.
• The Company exchanged information among its overseas branches in Hong Kong and South Korea.
• To enhance the quality of discussions, fund managers and analysts engaged in exchanges not only among themselves but also with other internal departments and external stakeholders.
• To enhance overall knowledge about ESG, SPARX Group organized internal workshops with ESG as the central theme.