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Jump in Japanese impact investment raises questions over methodology

Sustainable investments more broadly grew by 66% in 2021 year-on-year.

The value of impact investments in Japan ballooned by 403 percent in 2021 to ¥706.2 billion ($5.5 billion; €5.2 billion) on the previous year, according to Japan Sustainable Investment Forum’s (JSIF) annual ESG industry survey.

JSIF said this was based on a tally of funds focused on the “social impact of listed companies”. The funds measured their impact by contrasting their portfolio emissions with those associated with a similarly sized portfolio invested in market benchmarks – the difference was reported as evidence of investor impact.

This approach, which centres around the concept of “avoided emissions”, has been described by some climate experts as taking credit for something that happens independently from one’s own carbon footprint. Former Bank of England governor and head of impact at Brookfield Asset Management Mark Carney last year walked back claims that Brookfield had achieved net zero due to avoided emissions following widespread criticism.

SBTi senior manager Emma Watson said: “In order to achieve net zero that is aligned with science and 1.5C, companies must focus on cutting absolute emissions across all scopes. Our net zero standard does not count avoided emissions towards this abatement.”

However, Watson noted that SBTi is looking at how companies providing products that avoid emissions could be recognised as part of a broader project.

JSIF’s definition of impact finance is based on four conditions including mitigating environmental and social risks and positively impacting these elements, monitoring and reporting impacts, and pursuing an appropriate risk-return balance. These are based on a framework provided by the Japanese Ministry of the Environment.

JSIF was contacted but did not provide a comment by press time.

Impact investing has traditionally been a preserve of 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 impact measurement and attribution.

More broadly, JSIF reported that ¥514 trillion was allocated domestically to sustainable investments – an increase of 66 percent on the 2020 survey. The proportion of sustainable investments within portfolios was reported at 61.5 percent, an increase of close to 10 percentage points year-on-year.

These comprise investments that claim to integrate ESG considerations (which more than doubled to ¥422.1 trillion in 2021), negative screening (up 93 percent to ¥261 trillion), norms-based screening (up 111 percent to ¥59.6 trillion), engagement (up 40 percent to ¥261 trillion), voting rights (up 42 percent to ¥239 trillion), thematic investment (up 38 percent to ¥11 trillion) and impact investments.

However, the valuation of funds with ESG integration may be “overly high”, noted JSIF, “due to respondent institutions having a different definition and interpretation of ESG integration”. JSIF said it will ask respondents to explain whether their understanding of ESG integration is in line with those laid out by the Global Sustainable Investment Alliance or the Principles for Responsible Investment in the upcoming 2022 survey.

A total of 50 financial institutions reported portfolio data to the survey including Amundi, NNIP, PIMCO, Invesco and Comgest. Publicly available data for GPIF and Japanese local authority pension funds was also added to the figures.