A working group convened by the Japanese Financial Services Agency (FSA) has developed a set of guidelines for impact investing which it hopes will establish global norms in the space.
Together with transition finance, impact investing is seen as a priority by the Japanese government for its potential to finance decarbonisation within carbon-intensive industries and to support broader sustainability goals.
The country led discussions on the importance of impact investments at the recent G7 meeting in Hiroshima, which also saw the launch of an impact investment initiative on global health.
Impact investing, which targets positive social and environmental impacts alongside a financial return, has traditionally centred on private markets where investors have more influence over company management. There has been a push to bring impact investing to listed equities in recent years but fundamental challenges continue to exist, particularly on the key question of how impact should be measured and attributed.
For example, questions were raised over a survey of impact investing assets in Japan last year which did not assess whether investors had personally contributed to a positive outcome but was based on self-reported “avoided emissions”. The analysis, which was conducted by Japan SIF, reported a 403 percent growth in domestic impact assets in 2022.
The FSA’s framework sets out four governing principles for impact investing. The first, intentionality, requires investors to specify the positive impacts they are hoping to achieve and identify the strategies they will use. Investors must also identify potential negative impacts and remedial measures.
Next investors must prove “additionality”, or show that a reported impact would not have been realised otherwise. This covers engagement activities conducted with companies, in addition to financing.
Thirdly, investors need to measure and manage the impact of their investments. Appropriate KPIs and metrics are to be identified jointly with portfolio companies, particularly with regard to social or environment issues that are hard to quantify.
Finally, investors should prioritise investing in “innovative ideas and technologies” that have the potential to transform industries based on their individual impact goals.
The FSA’s framework shares common characteristics with existing market-led standards for impact investing such as the impact investing framework developed by the Global Impact Investing Network (GIIN) and the operating principles for impact management, which was created by the IFC and now hosted by GIIN as a secretariat.
GIIN has been contacted for feedback on the FSA’s proposals.
According to the FSA, the use of negative screening by ESG investors means that high-emitting companies that have plans in place to decarbonise, or climate start-ups that do not appear “to take special efforts to ensure diversity, working conditions (S), or governance (G), compared to other companies”, could lose out on ESG financing.
“In Japan, critics observe that it is sometimes difficult for companies and businesses which have social or environmental impacts but need a longer period of time to achieve financial return, to gain an understanding on their business potential and to receive financial and business supports,” the regulator said.
It committed to “actively disseminate the contents of this report to a wide range of market participants in Japan and overseas” before finalising the framework. The FSA has also laid out plans to create an international “Consortium” to bring together private and public stakeholders, and international organisations and initiatives across different regions.
The Consortium will develop data resources and metrics on impact investments, best practices and share case studies among members. It will also seek to clarify how investors can verify additionality and claim responsibility for impacts.
Further details on the Consortium’s creation and timeline were not provided.
The deadline for feedback on the FSA’s impact framework is 10 October.