2024.3.29
Our Comments to the "Capital Markets Disclosure and Dialogue Guidance for Impact Companies
The Japan National Advisory Board of the Global Steering Group for Impact Investment (GSG-NAB Japan), which aims to expand impact investing in Japan, has released draft guidance on disclosure of information about impact companies and invited public comment. Cadira Capital Management has submitted our comments as follows (Note: this is a summary translation of the original comments in Japanese):
Suggestion: Objective should include "increasing the impact orientation of capital market participants"
We believe the dialogue among impact practitioners should become more sophisticated as a result of these guidelines.
On the other hand, if only part of the capital market becomes sophisticated, those who are not familiar with impact may feel excluded and avoid getting involved. This can have a negative impact on flow of capital and dialogue towards impact-oriented companies.
We assume that the purpose of this guideline is to prevent a misalignment of opinions when those who are highly impact-oriented engage in dialogue with those who are not interested in impact. If this is the case, it would be better to include the objective of "increasing the impact orientation of capital market participants in general through educational activities and promote impact investing.
Ideally, there should be a pathway to "increase the number of impact-oriented investors" as a way to create a space for impact companies to flourish, but if we omit this pathway and encourage "people who are not interested in impact to invest in impact companies," it will lead to a temporary boom and encourage impact washing.
Moreover, companies that are inherently interested in pursuing impact are those that publicly state that they have corporate goals other than profit. When such a company goes public, the ideal form would be for people who share their management philosophy to invest in it. Care should be taken to avoid disclosures that are designed to improve the appearance of the impact company or to persuade those who do not share the company's philosophy.
Proposal to change the phrase "elements that should be disclosed" to "points for investors to consider"
We are concerned that including the content of impact-related disclosures as "elements that should be disclosed" (as stated on page 17 of the draft guidance) may implicitly create pressure to disclose such information.
If companies begin to disclose information in excessive detail, it will create an undue burden for both companies and investors and will be frowned upon. If the voluntary disclosure mechanism is frowned upon, there is a concern that it will not be used.
Rather, it would be better to encourage disclosure that focuses on information that companies voluntarily "want to disclose" and that investors consider "meaningful" to understanding the company. In other words, rather than following a framework, it would be better to let companies disclose information in a way that best expresses their mission and purpose, so that the right information is communicated.
The "elements that should be disclosed" itself can be read from another perspective as "a thought process for investors when reading disclosure documents". Therefore, if the guidance is written as "points for investors to consider", it may provide a clue for companies to get the hang of disclosure. If companies can learn about investors' thought processes without feeling unnecessary pressure, it will be possible for them to disclose their own unique and lively content, including consideration of investors' thought processes.
To add another perspective, it would be useful for the guidance to provide an exhaustive framework in the sense of making capital market participants involved in the listing (lead managers, listing examiners, institutional investors) aware of the possibility that impact companies may make disclosures that differ from those of conventional listed companies (e.g. logic models, etc.). It would be useful for the guideline to provide a comprehensive framework.
It is hoped that the guidance will play an effective role in preventing a misalignment of opinions where those involved in the listing process exclude information, based solely on past experience, that impact companies disclose because they believe it is important to their business.
Proposal to require disclosure of a statement that "the pursuit of impact should be given the highest priority (or the same priority as economic return)".
If impact companies invest the effort to make additional disclosures, they may seek in return "the ability to track impact post-listing. Support from capital market participants for a company's passion to pursue its philosophy first and foremost, even after going public and building relationships with an indeterminate number of investors, will be essential to creating an environment that enables listed companies to create impact.
To this end, it will be important to clearly state that the pursuit of impact is as important or more important than economic return. By clearly stating its corporate stance, a company can attract investors who share its pursuit of impact.
If the company is a true impact company, I suspect it will want to make a high-profile statement about "making impact a top priority" when it goes public. Conversely, if they are reluctant to do so, it could be said that there is a concern about impact washing.
Expectations as an investor in listed equities
We hope that this guideline will start a trend that will lead many existing listed companies that are not classified as "impact companies" to increase their impact orientation. Almost all companies should be making an impact to the world in some way. As a listed equity investor, we want to look also for large companies that are nurturing the seeds of impact businesses that exist within their companies.
For example, we believe that there is not much difference in the benefit to the world if, say, a company with 1 trillion yen in sales generates 10% of its sales from impact-oriented businesses, or if an impact startup grows to 100 billion yen in sales.
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