19 October 2023

Japanese regulator readies guidance to spur impact investment in start-ups

From Michael Hurley in Tokyo

Japan's financial markets regulator is preparing to finalise a voluntary framework to catalyse investment in small- and medium-sized 'start-up' companies that have a positive impact on society or the environment.

Satoshi IkedaThe Financial Services Agency (FSA) plans to finalise the 'Draft Basic Guidelines on Impact Investment' this autumn, Satoshi Ikeda, chief sustainable finance officer at the Financial Services Agency (FSA), told Environmental Finance.

It will also create an international forum to boost impact investing, he added. This would look to collect and promote case studies on successful impact investments, provide evidence of outcomes and "derive lessons" for those new to the practice, Ikeda said.

The 'principles-based' guidelines, which were designed for various asset classes, were developed by an FSA working group, to summarise "the basic ideas and process of impact investment" and ward off concerns about so-called 'impact washing', or false claims of impact. A consultation on the draft closed on 10 October.

The guidelines include that the financial institution explain the intended impact and financial return, "which would not otherwise be foreseen without the investment", that it measure and manage the impact, and conduct follow-up engagement with the investee to ensure impact is achieved.

Ikeda cited a speech this month by the country's prime minister, Fumio Kishida, at a sustainability conference in Tokyo as having a "huge impact on the perception of ESG" investing in Japan.

Kishida promoted "a new form of capitalism" whereby the financial assets of households can be redirected to investments that support social and environmental development, Ikeda said, and made clear that such investments were coherent with institutional investors' fiduciary duties to deliver financial returns.

Ikeda said the FSA's framework had been influenced by the Principles for Responsible Investment's (PRI) work to promote impact investing, including the PRI-commissioned report by law firm Freshfields, a Legal framework for impact.

While Japanese investors told Environmental Finance they broadly support the aims of the FSA framework, several interviewees expressed concern that, by focusing on smaller companies, it could contribute to impact investment being concentrated in a niche of the market and alienating larger institutional investors looking to commit larger amounts of money in individual deals and in funds.

The apparently narrow focus would have been better framed to more closely reflect the idea of 'investing for sustainability impact' (IFSI) identified by the PRI and the Freshfields paper, a less prescriptive concept which better lends itself to large-scale impact investment, one interviewee said, despite a footnote in the draft guidelines referring to the IFSI definition.

While impact investment has been adopted enthusiastically by large investors including MUFG, Nippon Life and Asset Management One, some Japanese investors struggle with reporting evidence of their contribution to investment outcomes, said the investor, who requested anonymity.