The second meeting of Phase 2 of the “Impact Investing Roundtable”, which has been held since June 2020, was held online on Friday, June 17, 2022. The purpose of this study session was to deepen understanding of impact investing among leaders involved in the financial market and government administrations, to clarify the roles and challenges of impact investing that will contribute to the sustainable development of the financial industry in Japan. 

In the second meeting, participants shared information on trends among overseas asset owners regarding impact investing. They also exchanged opinions and discussed issues and promotion measures for asset owners in Japan to engage in impact investing.

At the beginning of the meeting, the chairperson, Dr. Takeshi Mizuguchi, the President of Takasaki City University of Economics, and the vice chairperson, Mr. Satoshi Ikeda, Chief Sustainable Finance Officer of the Financial Services Agency (FSA) of Japan, gave their opening remarks. Touching on the recent situation in Ukraine, he commented that the environment surrounding sustainable finance and impact investing has changed dramatically, and that if we cannot show that the new form of capitalism really works, we may be at a major turning point where the world is headed in an undesirable direction in the long run. They then mentioned the “Basic Policy on Economic and Fiscal Management and Reform 2022” compiled by the Japanese government in June of this year, which includes measures to promote sustainable finance. Furthermore, recognizing the need to strengthen the efforts of asset owners in order for Japan's financial markets to function more effectively, they expressed their hope that the discussions at the meeting would lead to further implementation by asset owners.

Next, Ms. Yuka Ogasawara, Impact Officer of Japan Social Innovation and Investment Foundation (SIIF), introduced the new members of the roundtable due to personnel changes.

Satoshi Oda, Knowledge Development Officer of SIIF, then introduced the trend of sustainable investment by pension funds in Europe. In Europe, the ratio of green investments by pension funds has been increasing in recent years, and according to a survey in the UK, 80% of pension plan members wish to withdraw from investments in fossil fuel projects, while in Japan, only 30% of pension plan members wish to make ESG investments with their pension funds (according to the Research Institute for Policies on Pension and Aging (RIPPA) research (2018)), and these data indicate that the sustainability preferences of Japanese individuals are not yet high.

After that, Mr. Masaaki Amma, Executive Advisor of SIIF and Ms. Yuka Ogasawara presented an overview of the three interview videos conducted for this meeting. First, the video interview with Mr. David Rouch, one of the authors of "A Legal Framework for Impact" (Freshfields Bruckhaus Deringer) released in July 2021, was introduced, including an explanation of the main points of the report, the difference between ESG investment and IFSI (investing for sustainability impact) was introduced. Next, they introduced a video interview with Mr. Piet Klop of PGGM, a not-for-profit cooperative pension fund service provider of the Netherlands, in which he explained that the pension fund invests in areas where financial returns and impact overlap, and that it has created a common taxonomy with other asset owners for measurement. Finally, they explained that they would soon release a video interview with Nuveen, a global investment manager that has been active in impact investing.

Next, Mr. Ryujiro Miki, CFA, Specially Appointed Researcher, the Research Institute for Policies on Pension and Aging (RIPPA), gave a presentation on " Consideration of the legal environment for the GPIF to engage in impact investing” as his personal opinion. He pointed out that there are overlaps between ESG investments and impact investing, and that some impact investing provide investors with market-competitive economic returns and social returns at the same time. In addition, he informed that "A Legal Framework for Impact" report concludes that institutional investors are more likely to be allowed to pursue impact if they are instrumental IFSI (where the achievement of sustainability impact goals is a means to achieve financial return goals), because they pursue impact to achieve financial return. Mr. Miki further noted that the Government Pension Investment Fund of Japan might recognize that ESG investments can make a significant contribution to achieving the SDGs, because GPIF already invests in equities, green bonds, social bonds, and sustainability bonds based on ESG indices. In other words, he stated that the GPIF could be interpreted as having the intention of solving social issues in order to obtain economic returns in ESG investments, and that if the GPIF conducts "impact measurement and disclosure," it may be equivalent to an "instrumental IFSI. Finally, he expressed his expectations as a citizen for the GPIF to measure and disclose the social impact of its investments and his opinion that if the GPIF's investments are recognized as equivalent to an instrumental IFSI, the legal environment should be improved by revising the "basic policy for reserves fund".

Next, Mr. Takeshi Kimura, Director of PRI, gave a presentation on "Responsible Investment and Stakeholder Capitalism - New Movements on the Investment Chain" as his personal opinion. First, he pointed out that while the number of PRI signatories has increased significantly in proportion to the increase in ESG investments, the growth in the number of signatories in Japan has been slower than in other developed and emerging countries, and that the thin layer of Japanese investors involved in ESG investments may lead to a decline in the vitality of the Japanese financial and capital markets. Next, he mentioned that one of the reasons why the number of PRI signatures by Japanese investors has not increased is that the number of signatures by pension funds has not increased. In particular, he explained that corporate pension funds continue to be weak in their commitment to responsible investment, even as their parent companies are strengthening their commitment to sustainability. Mr. Kimura also shared his opinion that stakeholder capitalism is realized when capital provided by ultimate beneficiaries circulates along the investment chain in a way that reflects their "values and preferences for sustainability," and that (1) pension funds need to understand the values and preferences of ultimate beneficiaries and communicate them to asset managers, and (2) putting this into practice will lead to the realization of the new form of capitalism and impact investing that listens to the voice of the public. He also introduced some examples of overseas initiatives, such as a campaign calling for responsible investment among corporate pension fund members, setting investment strategies based on pension plan members' intentions, the benefits of incorporating sustainability preferences of beneficiaries, and trends in European regulatory authorities.

After that, Mr. Hiroyuki Nomura, General Manager, Investment Planning Department, Japan Post Insurance Co., Ltd., gave a presentation on "JPI's Impact "K" Project". He explained that (1) it intends to create impact and has set outputs and other factors that lead to impact as KPIs, and (2) it is aiming to expand impact-oriented investments and loans by taking a flexible approach to IMM requirements for pure impact investments, and (3) it has established an internal certification process for its Impact "K" Project. He then introduced other specific examples of impact investing initiatives, including a ¥10 billion commitment to the Commons Impact Fund, which invests in listed domestic equities, and the fund's KPI measurement and disclosure structure. Finally, he shared the company's responsible investment system, which was established to appropriately comply with Japan's Stewardship Code, and expressed the company's desire to fulfill its responsibilities as a universal owner.

After the presentations by the three speakers, a panel discussion was held under the facilitation of Chairperson Mizuguchi with Mr. Miki, Mr. Kimura, and Mr. Nomura as panelists.

First, Chairperson Mizuguchi asked how asset owners should act when individuals, the ultimate beneficiaries of Japanese pension funds, do not seek impact investment, and whether they think it is acceptable to promote impact investment if it is instrumental IFSI to secure investment returns even when the ultimate beneficiaries' preferences are not clearly confirmed, and each panelist made comments.

Mr. Kimura stated that (1) given the high level of awareness and interest in the SDGs among the Japanese public, the latent needs of individuals for ESG and sustainability impact may be high, (2) corporate pension funds may not be able to understand the preferences of beneficiaries because they have not conducted engagement to uncover such potential needs of beneficiaries, (3) therefore, it is necessary to take an active approach rather than a passive stance of not making impact investments because the preferences of beneficiaries have not been confirmed. He also commented that although it is possible to proceed without confirming the preferences of beneficiaries if it is an instrumental IFSI, from the perspective of what the entire investment chain should be, it may be necessary to uncover the potential needs of beneficiaries for sustainability while also increasing the sustainability orientation of asset owners.

Next, Mr. Nomura stated that (1) while interest in the SDGs is growing in Japan, there is still a lack of awareness that sustainability can be improved through investment, (2) he hoped that JPI, as a universal owner, would lead the way in initiating the Impact "K" Project and other projects, thereby raising awareness of sustainability on a national basis, (3) visualizing the returns and actual impact of impact investing could lead to increased awareness among pension fund members.

Mr. Miki then (1) introduced the preliminary results of a survey conducted this year by the RIPPA on the attitudes of pension plan beneficiaries toward pensions and investments. In response to a question on whether they would be willing to use pension fund reserves to solve environmental and social problems, about 47% of the respondents answered that they would be willing, would rather want to see it used, or would be willing to use it if it would ensure a return on their investment. And the younger generation is more aware of impact investing than the older generation. (2) From the standpoint of the GPIF, it is important to clearly indicate that it will implement only instrumental IFSI, not ultimate ends IFSI, and (3) The corporate pension funds have a background of being established as part of the welfare program, and it may take time to build their awareness as asset owners.

Lastly, Prof. Yasuyuki Kato of Kyoto University of Advanced Science shared his personal view, as a participant, that it is more difficult for Japanese pension funds to start impact investing because in Europe, it is recognized as obvious that social impact leads to economic performance, but in Japan, such recognition is not yet widespread. Regarding performance evaluation, he stated that the J-curve effect is widely recognized in venture investments and the accumulation of track records makes it possible for pension funds to invest, and that it is necessary to accumulate research on the relationship between impact and economic performance for impact investments as well.

After the panel discussion, a breakout session was held to discuss "What is needed to promote impact investing by asset owners, especially pension funds, in Japan? and "What is needed to increase the sustainability preferences of individuals in Japan? The participants were divided into several groups to discuss these issues.

Regarding the former, the initiatives on the part of asset managers include diversification of products in which asset owners may wish to invest, classification and mapping of social issues, accumulation and visualization of data on the relationship between social and economic returns, strengthening peer pressure to generate social and economic returns through information disclosure, and efforts to engage in impact investing even in passive management by narrowing down investment themes to a certain extent. Regarding asset owners (especially pension funds), the participants also raised the following opinions: the involvement of the parent companies of corporate pension funds in fostering awareness of sustainability; reform of the governance structure of pension funds; reconsideration from the perspective of fiduciary duty; incentivizing the pursuit of impact by adding it to investment policies and articles of incorporation; and for public pension funds, the need for a government-led review of "basic policy for reserves fund".

For the latter, the following were mentioned: cross-industry activities to broaden the base so that the younger generation will be interested; awareness-raising for seniors with large assets; awareness-raising and financial education to convey the connection between the SDGs, ESG and investment in an easy-to-understand manner; employee education on the investor side; product design based on recognition of differences in wage growth rates between Japan and the Western countries; and increasing impact investment options through defined contribution pension plans and other means.

The meeting was attended by 35 committee members from the financial and market, businesses, and industry sectors, and about 130 observers participated including related ministries, agencies.

The next meeting is scheduled to be held on September 12, 2022.

Document 3: Video link of interview with Mr. David Rouch

Document 4-1 Video link of interview with Mr. Piet Klop, PGGM

Document 4-2 Document of Mr. Piet Klop, PGGM

Document 4-3: Video link to interview with Nuveen Ms. Amanda Kizer