On June 30, 2023, the Impact Investment Working Group (“Workgroup“), established under the Expert Panel on Sustainable Finance of the Financial Services Agency of Japan (“FSA“), published a report (“Report“) (in English And Japanese) which outlines domestic and international trends in impact investing and establishes basic guidelines consisting of four key principles, as discussed below (“Guidelines”). The report seeks to fill a gap in the lack of standards regulating “impact investing,” one of many sustainable financing methods, and noted that market practices for “impact investing” are still evolving. In contrast, other ESG investment methods such as ‘integration’ and ‘positive or negative screening’ appear to be more commonly used in the market.
The guidelines aim to encourage dialogue and align understanding of basic concepts and processes for “impact investing” among investors, financial institutions and companies in Japan and globally, and to develop knowledge and experience in this field. The guidelines further aim to create an environment where investors and financial institutions can invest with greater confidence without concerns about greenwashing, and to assist companies in obtaining financing and support.
What are impact investments?
The report describes “impact investment” as an investment “with core features of proactively identifying specific social or environmental ‘impact’ that should be achieved through an individual investment, and deploying strategies to actually realize this ‘impact’, as well as generating an impact investment. a certain level of ‘financial return’, in the same way as regular investments”.
The Guidelines apply to a wide range of investments and are not limited to particular investment objectives, investment entities (for example listed companies or start-ups) or asset classes. However, investments that are not aimed at generating financial returns (e.g. donations) and investments for which the intended impact is not clear are excluded from the scope.
Overview of the guidelines
In summary, the guidelines set out the following four key principles.
Clarify the social or environmental impact and financial return to be achieved from the investment. Specify how the investment will develop and cultivate the market and create social or environmental impact as well as financial returns. If impact and returns are achieved in the long term, demonstrate how these are achieved over that period.
Clearly explain the social or environmental impact and the financial return that would not have been achieved without the investment. It is important to demonstrate how the investment target develops its activities in the market and establish a link between the company and the social or environmental impact. If impact and returns will be realized in the long term, then, as with Intentionality, show how these will be realized over that period.
3) Identification, measurement and management of impact
Identify, measure and manage the impact and profitability of investments in quantitative or qualitative terms. Identify the market characteristics, size and potential that will have a social or environmental impact and generate financial returns, and continue to measure and manage such factors post-investment. Use internationally recognized frameworks to identify, manage and measure the indications.
4) Innovation, transformation and acceleration
Identify the novelty or benefits of the investment objective that will accelerate changes in the market, create a social or environmental impact and generate financial returns.
The FSA noted from previous roundtable events and sector developments in Japan that interest in ‘impact investing’ is growing. The Guidelines provide a “foundation” for discussions between Japanese and foreign stakeholders, which will help further improve and expand the Guidelines as the market develops. The invitation for public comments on the Report closes on October 10, 2023.