The fourth meeting of the Phase 2 of the “Impact Investing Roundtable”, which has been held since June 2020, was held online on Thursday, January 12, 2023. The purpose of the Roundtable is to deepen the understanding of impact investing among leaders involved in the financial market and the government administration, to clarify the roles and challenges of impact investing in solving domestic and global social issues, and to discuss approaches to promote impact investing that will contribute to the sustainable development of Japan’s financial industry.

The theme of the 4th meeting was "Developing a Market Environment for Impact Investing", and participants discussed issues and necessary improvements in the environment for the development of impact investing.

At the beginning of the meeting, Dr Takeshi Mizuguchi, Chair of the Roundtable and President of Takasaki City University of Economics, and Mr Satoshi Ikeda, Vice Chair of the Roundtable and Chief Sustainable Finance Officer of the Financial Services Agency (FSA) of Japan, gave opening remarks.  Chairman Mizuguchi noted that the government as a whole has set a trend to promote impact investment. He said that he would like to discuss with Roundtable members involved in impact investing what they would like the government and the FSA to do or not do, and to reflect this in the "Working Group on Impact Investment" established under the FSA. Mr Ikeda expressed his expectation that there would be synergy with this roundtable in considering how to promote impact investment as a government policy.

Four speakers then gave presentations on the issues, outlook and market environment for impact investment: Fumi Sugeno, Director of the Impact Economy Lab at the Social Innovation and Investment Foundation (SIIF), which serves as the Roundtable's secretariat; Minoru Matsubara, Executive Officer of Responsible Investment Division, Resona Asset Management; Yuki Isogai, Partner at PwC Sustainability; and Takeshi Kimura, Executive Officer of Nippon Life Insurance Company, who serves on the PRI Board of Directors.

First, Ms Sugeno gave a comprehensive presentation on the current state of impact investment, as well as future issues and actions to be taken. The five actions identified were (1) developing data and evidence on impact, (2) certifying and promoting impact companies for their growth and visibility, (3) expanding catalytic capital funding, (4) promoting the education, training and dissemination of impact professionals, and (5) establishing a public-private/private-private partnership platform. She also presented a proposal for the role of government, citing examples from overseas. She also explained that the discussion has recently evolved beyond impact investment to the "impact economy", and pointed out the importance of promoting the development of a market environment at the global level.

Mr Matsubara then gave a presentation on expectations for impact investing and environmental improvement. He presented his experience in impact measurement and management at Resona Asset Management and the activities of the Impact-Driven Financing Initiative, and also mentioned the following two points on the environment that he believes are necessary to accelerate impact investment in the future. The first is the promotion of blended finance, and he introduced the approach of providing concessional finance as catalytic capital and expressed his expectations for its deployment in Japan. The second point he mentioned was the accumulation of evidence. In order to create logic models for impact investment, he suggested that it is necessary to accumulate evidence and data, and to develop tools and frameworks that can be used openly, while also using the knowledge of EBPM.

Next, Ms Isogai gave a presentation on the expectations and challenges of impact investment. First, she shared her own experience in Africa as her first encounter with impact investment, noting that while there were start-ups with great business ideas and the potential for steady growth and returns, there was a lack of capital flow. In such a situation, she mentioned that impact investment can both solve problems and generate returns, and expressed her expectation to connect Japan's liquid assets with growth opportunities in developing countries. Barriers to impact investment in developing countries, particularly in Africa, include the immaturity of the market and the information gap, which are considered high risks for private financial institutions. She also pointed out that the private sector in Japan as a whole tends to be risk-averse and raised the issue of the need to increase risk tolerance.

Finally, Mr Kimura gave a presentation on outcome-oriented responsible investment and future issues. He explained that responsible investment can be divided into two approaches based on the relationship between investors and the real world: "defensive responsible investment: future taker", which integrates ESG issues, and "aggressive responsible investment: future maker", which creates sustainability outcomes. After presenting the reports that form the basis of each, he introduced the concept of "Investing for Sustainability Impact" (IFSI), which is the basis of "offensive responsible investment", and mentioned the possibility of outcomes becoming the central theme of the dialogue between companies and investors as a future trend. He also shared his impressions that the IFSI concept and outcomes orientation are becoming more prevalent in the development of responsible investment, based on PRI's consultations with signatory institutions from last summer though this year, as well as discussions at PRI in Person 2022 in Barcelona. He also explained that the scope of engagement differs depending on the "rationale" for outcomes orientation, including corporate engagement, policy engagement and beneficiary engagement. He also noted that the number of PRI signatories in Japan has been surpassed by Brazil and China, and expressed his expectations for the expansion of outcome- and impact-oriented investing in Japan.

The above presentations were followed by a four-person panel discussion moderated by Chair Mizuguchi. Firstly, the panel discussed the role expected of governments in consolidating impact data and evidence and accumulating information. Mr. Matsubara, based on his experience of difficulties in analysing causality of impact and organising logic models, suggested that in order to scale up impact investment, it would be good to share information on "pathways to impact" through platforms and public-private partnerships. He also suggested that in cases where practitioners are driving the effort, as in the case of the Impact-Driven Financing Initiative, the government does not need to do anything specific, but only lend a hand when there is a problem.

Asked what Japan should do about the immaturity of markets and lack of information that are problems in developing countries, Ms. Isogai said that basically the private sector should take appropriate risks and deal with the problems on its own. If there are still problems, government support would be helpful, but basically policies should be such that the private sector can maximise its capabilities, she said. She also pointed out that there are two types of data: data for the private sector to be competitive and differentiated, and data as a shared asset, and that the majority of data on impact investing is the latter, and that the latter is a public asset and needs to be created by everyone.
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In terms of expectations for the government, Mr. Kimura raised the following two points. First, from an ecosystem perspective, the government should expand the idea of "putting outcomes and impact at the heart of the dialogue between investors and companies" to the entire financial industry. To broaden the momentum of making responsible investment as a whole outcome-driven, beyond the narrow discussion of impact investment, the government should promote the 'outcomes campaign' as a common direction across asset classes, including large companies and start-ups. Secondly, he suggested that public pensions should be encouraged to become more outcome-oriented in order to broaden the base of responsible and impact investment, and that participation in the PRI should be encouraged. Chair Mizuguchi also suggested that the government should set KPIs to encourage this. Mr. Kimura highlighted the need to expand signatories, citing data showing that Japan accounts for 5% of global GDP but only 2% of the total number of PRI signatories.

Ms. Sugeno introduced the three roles of government proposed by GSG Global, which are market formation, market regulation and market participation, and expressed the view that government should be in a position to support the private sector from the perspective of how to facilitate private sector exploration activities, rather than regulating them. With regard to impact data, she highlighted the two categories mentioned by Ms. Isogai and pointed out that impact data platforms are truly public assets. She argued that if a mechanism is exclusively for the private sector, the disclosure of information may be limited and biased towards easily measurable impacts; therefore, it can become a public asset by working with government in setting the overall direction and linking to policy.

Summing up the discussions, Chairman Mizuguchi noted that the move to an impact economy is a "paradigm shift in finance", involving a shift to an outcome-based approach and a change in the interpretation of fiduciary duty, and that a paradigm shift is now taking place. He also raised the question of how to increase investment in developing countries, which offer both growth opportunities and social challenges. Finally, each panelist made comments.

Panelists expressed a desire to continue discussing the role of finance in the future, in line with the paradigm shift in finance; the number of Japanese entrepreneurs operating in Africa is increasing, so there is a need to understand their challenges and create a system to support their growth; in terms of overseas investment in Japan, there is a need to develop information and impact data on Japan's challenges, as there is an information gap; there is also a need to bring Japan's context into the global impact investment framework; and a new way of public-private partnerships is needed.

During the open discussion, which included members of the Roundtable, various views were expressed, including the following.
・　The discussion should be on the basis of an identification of the challenges for each type of fund provider. For example, among asset owners, life insurance and pensions have different issues and it depends on whether it is debt or equity. The FSA is expected to take measures to encourage financial institutions, and it is necessary for the public and private sectors to work together to develop the infrastructure, for example by standardising the IMM.
・　Since loans are the largest monetary component of impact finance, it would be biased not to also consider indirect finance. We recognise that positive impact finance, especially for SMEs, is very similar to venture capital investment, and the IMM methodology is basically the same, despite the difference between a start-up and a 50-year-old company. In the case of blended finance, the tranches are divided first into public funds, equity and then into debt, so it is important to create an impact economy ecosystem that includes both equity and debt financing.
・　The more impact performance is required, the more important the existence of data becomes, and the more important the role of governments in promoting open data, including data such as comparisons with/without investment interventions.
・　Thresholds are becoming more important than attribution discussions in seeking causality (a webinar will be held at SIMI to discuss the ABCs of impact).
・　Regarding catalytic capital, private foundations have played a role in the US, but there is no such incentive mechanism in Japan, so we hope that government officials will consider this.
・　It is also important to participate in norm-building as a global collaboration.
・　Building an ecosystem requires not only investors, companies and the government, but also intermediaries, and it is necessary to consider who should provide the funds for them. Government is also expected to play a role in building momentum.
・　There is a clear shift towards an impact economy, and impact is important when looking at asset management from a long-term perspective. We will encourage impact investing on the premise that risk and return are balanced, but it would be helpful to have more comprehensive information on outcomes. This would make it easier to invest in areas with greater impact. We would like to expand impact investing and increase the total amount of outcomes in the overall portfolio.
・　It is difficult to get an overall picture of which funds are investing in which types of investments. It would be good if it were easier to get access to this kind of information.
・　It is important to choose the outcomes that we want to achieve, to be clear about our intentions and investments, and to explore the links between SDGs and outcomes.
・　In implementing impact investments, there are situations where knowledge, skills and information are not enough for us alone. We feel the importance of public-private and private-private collaboration. It is important to achieve results through collaboration.
・　There may be a need to discuss investment timeframes in impact investing (it is particularly difficult in the short term).
・　As an aid agency, we expect the government to come up with a growth strategy that spans Japan and developing countries. In the past, development assistance has focused on improving the market environment, developing infrastructure and human resources to increase foreign direct investment, and promoting industrialisation, with the intention of expanding Japan's economic interests while making an impact in developing countries. However, as resource constraints and other factors become more apparent, an increasing number of developing countries are seeking to achieve sustainable growth without industrialisation, and a contradiction has emerged. Together with the government, we want to discuss a growth strategy that encompasses both domestic and international development.
・　The biggest challenge for impact investment in Japan is the overwhelming lack of investee companies. It can be said that there is a pre-IPO problem in the private market. An analysis of fundraising trends, including IPOs, in the US and Japan shows that there is a big gap between the two countries, with companies in the US raising funds based on terms that reflect an ideal society, such as fairness, financial inclusion and sustainability, and companies in Japan raising funds based on terms such as AI, technology, data and other corporate skills. There may be a need to develop an environment where companies are nurtured from the private equity stage (so that they are aligned with impact investing), and the pathway to IPOs and secondaries is developed.

After a lively discussion, Vice-Chair Ikeda thanked the participants for their frank opinions and suggestions and said that he would organise them at the FSA. Chairman Mizuguchi summarised the need for a two-way approach: expanding impact investing and moving towards an impact economy. He also mentioned that the discussion is not just about individual financial institutions, but requires the ability to shape the financial system as a whole, and by extension the social system as a whole, and expressed his expectation that the discussion will continue at the FSA Study Group and this Roundtable, as well as being discussed on various platforms.

The meeting was attended by 38 Roundtable members from the financial market, business, and industry sectors, and 144 people observers participated including related ministries and others.

The next meeting is scheduled to be held in May 2023.