2023.10.23
Our Comments to the “Draft Basic Guidelines on Impact Investment” by the Financial Services Agency of Japan
On June 30, 2023, the Financial Services Agency of Japan released the "Draft Basic Guidelines on Impact Investment" for public comment.[1] Cadira Capital Management believes that these guidelines will greatly support the promotion of impact investment in Japan, and has submitted our comments to the Financial Services Agency.
In line with our mission "Connecting the Investment Chain and Beyond," Cadira Capital Management places great emphasis on dialogue with various stakeholders involved in the investment chain. As we believe that sharing the content of our dialogue with other stakeholders to the extent possible is essential to embodying our mission, we will disclose our comment submitted to the Financial Services Agency here.
Comment #1
Summary
We would like to propose an approach similar to the “comply-or-explain” approach.
Comment and Rationale
As this policy consists of four "requirements" (translator note: FSA’s translation actually uses the term “principles,” but the original Japanese version uses the term “requirements”), we are concerned that it could be interpreted to mean that investment strategies that do not meet all the requirements cannot be called impact investments. While the intent of the guidelines can be read to allow for unique approaches by investment managers, if the nuance of the word " requirements" puts pressure on managers to be more formal in order to avoid criticism of impact washing, this could be a factor that hinders the spread of impact investing as a result.
We believe that by replacing "requirements" with phrases such as "principles" and adopting a "comply-or-explain" approach, as in the Japanese version of the Stewardship Code, it may be possible to accommodate a variety of approaches. In this case, the content presented by asset management companies with their own approaches could be an idea to elevate impact investing as a new methodology, leading to innovation by asset management firms and thus elevating the industry.
Comment #2
Summary
The last bullet point in the detailed section of Requirement 1 (translator note: FSA’s translation actually uses the term “Principle 1,” but the original Japanese version uses the term “Requirement 1”), where it states that “When making investment decisions, consider secondary effects that differ from the ‘intention’ of the investment.” should be moved to Requirement 3.
Comment and Rationale
The last bullet point in the detailed section of Requirement 1 (translator note: FSA’s translation actually uses the term “Principle 1,” but the original Japanese version uses the term “Requirement 1”) states that “When making investment decisions, consider secondary effects that differ from the ‘intention’ of the investment.” We believe it is important that effects that differ from the intention (especially negative effects) are properly measured and managed, but the content of this is not "intention" in Principle 1, but is closely related to "identification, measurement and management of impact" in Principle 3. It may be easier therefore to understand if the location of the description is moved to Requirement 3.
Comment #3
Summary
It would be easier to understand if the description of Requirement 4 were revised to focus on "support".
Comment and Rationale
Requirement 4 seems to be about investors "supporting" investee companies. The word "novelty" catches our attention, but when we read the "Approach" above, we understand that it does not necessarily require novelty only. Therefore, it would be acceptable to write "to help bring about or accelerate changes in the market and customers" instead of the phrase "novelty, etc.".
Similarly, it would be less likely to cause misunderstanding and easier to understand if the English text were written as “acceleration / engagement” instead of “innovation / transformation / acceleration.” In the original text, the first two terms "innovation" and "transformation" could be read to mean that the investee is the main entity, while the third term "acceleration" could be read to mean that the investor is the main entity. However, if this is the case, there is a risk of confusion by conflating the concepts.
If "novelty" is required, it would be more consistent with the overall intent of the Guidelines to require investors, rather than investee companies, to demonstrate novelty in their valuation of and engagement with the company.
[1] https://www.fsa.go.jp/en/news/2023/20230731_4.html
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