Japanese Government and investors urge domestic uptake of ‘impact finance’ in new paper

The Japanese government and a taskforce of investors have released an “impact finance concept paper” and an initial roadmap for expanding what it calls the “evolution of ESG” among the country’s financial institutions. 

The likes of AXA Investment Managers, Sumitomo Mitsui, Nomura, Dai-ichi Life Insurance and Nissay Asset Management are represented on the Positive Impact Finance Task Force, alongside participation by the Ministry of Environment, the Ministry of Economy, Trade and Industry (METI) and the Ministry of Land, Infrastructure and Transport.

This is the first piece of work to come out of the group, which was set up in March on the recommendation of the earlier High Level Panel on ESG Finance.

The 20-page document summarises international practice around impact investment, and lays out a four-step framework for what should be considered “impact finance”. 

It lays the groundwork for a later “Green Impact Assessment Guide”, with the task force ultimately aiming for institutional investors and financial institutions to put impact finance into practice across all asset classes. 

In the foreword to the document, academic and task force Chair, Tsuyoshi Mizuguchi, writes: “This report does not reinvent the wheel. It's not about trying to set new standards or make rules. Instead, it is a compilation of the basic ideas that are relatively common to the various initiatives that have been taken up to now.”

With strong government backing and the leadership of the Government Pension Investment Fund (GPIF), ESG investment is seeing increasing interest in Japan, with figures suggesting it has now reached ¥336trn (€2.75trn). 

But while impact investment has seen some interest from the financial sector, with the Financial Services Agency and GSG Japan Advisory Committee organising study sessions on the matter, Japan is thought to account for only 2% of the world’s impact and community investment.

The new document, intended for voluntary use by interested market participants, says impact finance “is characterised by clearly intending impact and measuring impact, as compared to conventional ESG investment and financing. From this impact-oriented perspective, impact finance can be considered as a development of ESG investment and financing that seeks to deepen the practice of ESG integration, engagement, and sustainability-themed investment.”

Drawing from previous work on impact finance from the likes of UNEPFI and the Global Impact Investing Network (GIIN), it outlines four elements to impact finance:

• The intention to create a positive impact, with any negative environment, social and economic impacts appropriately managed
• Impact assessment and monitoring, using measurable KPIs and targets, evaluated quantitatively
• Disclosure of impact evaluation results
• An attempt to secure appropriate risk/return for individual financial institutions/investors from a medium- to long-term perspective

It gives the example of investments and loans to renewables to illustrate both positive and negative impacts: “The core positive impact is assumed to be mitigation of climate change, [and the] KPI is the amount of avoided greenhouse gas (tCO2/year), with a target for t-CO2/year or percentage reduction. Negative impacts, meanwhile, may include noise pollution and disruption to ecosystems.” 

Impact investment can help institutional investors contribute to the sustainability and stability of capital markets and society as a whole, the document says, explaining: “ For universal owners and large financial institutions that invest widely in listed companies, it is important to promote sustainable growth of society by reducing negative environmental, social and economic impacts and increasing positive impacts. It will lead to sustainable and stable growth of the entire market and contribute to strengthening the financial institutions/investors themselves.”

The document also recommends considering the impact’s ‘additionality’ (whether or not the impact would have been created without the project) during evaluation.

“To curb impact wash”, it advises, “it is desirable to ensure the objectivity of the monitoring results by receiving external evaluations by internal departments or third parties with specialized knowledge and certain independence”.

It notes that various views exist on the relationship between impact finance and fiduciary duty, and advises “continuous consideration…of global discussion”, but takes the existence of impact investment products both within Japan and abroad to mean it can “most likely be said that impact finance doesn’t violate fiduciary responsibility”.

Also in Japan this week, it was revealed that Japanese companies would draft new ESG standards taking into account local factors over the next two years.

The Bank of Japan, meanwhile, released a report summarising ESG trends among Japanese institutional investors.