On the Japanese Government's Support for Impact Investing

The Japanese government has been taking initiatives to promote impact investing. Following the release of the Impact Investment Guidelines in March 2024, it has launched a series of concrete measures, including the launch of a public-private partnership called the Impact Consortium in May 2024.

The amount of impact investing in Japan is estimated to be 11.5 trillion yen in FY2023. It is still a niche area, accounting for only 1.4% of the 833 trillion yen managed by Japanese asset management companies. However, this is almost double that of the previous year, suggesting that government encouragement is translating into changes in investment behavior.

So what is the difference between impact investing and more traditional investing? The "Basic Guidelines on Impact Investment (Impact Finance)" released by the Financial Services Agency (FSA) in March outlines the following four basic elements of impact investment.

(1) The intended "social or environmental impact" is clear. 

(2) Investment should contribute to the realization of the impact.

(3) Impacts should be "identified, measured and managed".

(4) Support transforming or accelerating transformations in markets and customers

(Translation of the original Japanese version by Cadira Capital Management)

Of these four elements, it is the wording of (2) "contribute" and (4) "support" that clearly distinguishes the definition from that of more traditional investments. Compared to more traditional investments that focus on returns, which are "investor benefits", (2) and (4) focus on "investor contributions".

What do we mean by "investor contribution"? The easiest way to understand it is to invest in companies that are short of funds. For example, start-ups and other companies that are in the process of developing their business models tend to be short of funds, so investing in them is directly related to the investor contribution.

On the other hand, what about investing in a publicly traded company through market transactions? Since the amount invested is not directly handed to the company, it must be said that the contribution of investing in the company is small. Therefore, in order for investors to contribute to a listed company, activities other than financial contributions, such as supporting through dialogue, are necessary.

The effects of dialogue are difficult to see, but efforts to make them visible have made progress in recent years. According to a recent study by the Government Pension Investment Fund (GPIF), dialogue by investment management companies "is likely to contribute not only to improving the corporate value of investee companies, but also to improving sustainability, such as efforts to decarbonize and improve diversity", a finding that confirms the contribution effect of investor dialogue.

With these points in mind, let us think about a world in which impact investing becomes widespread. One change that should occur is a situation in which managers compete for contributions through dialogue. In other words, in addition to investment returns, the superiority of investors' contributions will become a major area of competition. In such a world, the criteria for investment decisions will also change. There will be a shift in the perception that it makes more sense to invest in a company that has room for improvement than in a perfect company that has no room for improvement. In addition, the more open a company is to the opinions of investors, the easier it will be for the investment management company to contribute, and it is expected that a company's IR stance will have a greater impact on investment decisions.

Such a shift in societal perceptions will not happen overnight, but if the shift continues steadily over time, the capital market is expected to become a place that has a positive impact on society as a result.

At Cadira, we will continue our activities with an awareness of this scenario as a change that could occur over the long term.