Four ‘unknowns’ for Japanese LPs considering impact

Speaking in a teaser for PEI’s inaugural Responsible Investment Forum: Tokyo, Sayaka Takatsuka, senior director at impact firm Shinsei, said domestic LPs were still getting to grips with the strategy.

Japanese limited partners have four priorities to address before fully embracing impact investing, a digital conference has heard.

Speaking in a teaser session for Private Equity International’s inaugural Responsible Investment Forum: Tokyo on Monday, Sayaka Takatsuka, senior director at impact manager Shinsei Corporate Investment, said domestic investors were still getting to grips with the strategy.

Sayaka Takatsuka, Shinsei Investment Corporation
Takatsuka: certain impact processes are unknowns for Japanese LPs

The Tokyo-headquartered firm’s LPs are looking to define impact and environmental, social and governance internally, as well as how to source deals that fit these briefs, Takatsuka said. Other steps include ascertaining how to measure impact in their investee companies and how to disclose these results to the public.

“All these processes are unknown for the LPs yet,” she added. “[The] GP has to have high literacy in order to, not educate, but share the cases with the LPs so that the level of impact investment will be higher.”

Shinsei is deploying its second impact fund, the 2019-vintage Japan Impact Investment II, which held a first close on ¥2.2 billion ($21 million; €17 million) in June last year and targets childcare, nursing care and new work style-related businesses. It includes commitments from Mizuho Bank, Bank of Yokohama and Sumitomo Mitsui Trust Bank, according to PEI data.

ESG and impact investing are climbing the agenda in Japanese financial services. Takatsuka is an advisor to both the Global Steering Group’s Japan Impact Investment Task Force and an impact investing study group run by Japan’s Financial Services Agency.

“FSA has gathered all financial institutions, including mega-banks and local banks and insurance companies etc, and they’re starting to share the knowledge and the process of impact investment,” Takatsuka added. “The FSA is more interested in this area so that the financial institutions can incorporate that idea into their daily financial businesses.”

Development Bank of Japan is among those planning to embrace impact funds, PEI reported in March. Its decision was partly influenced by the Japanese government and a desire to promote the strategy among domestic financial institutions.

The ¥169 trillion Government Pension Investment Fund of Japan became a major proponent of ESG under the stewardship of former chief investment officer Hiromichi Mizuno. It partnered with fellow investment giants the California State Teachers’ Retirement System and the UK’s USS Investment Management in March to warn ESG sceptics of “potentially catastrophic systemic risks”.

Japan’s government is not alone in promoting ESG. In June, the European Parliament adopted a regulation imposing transparency obligations and reporting requirements on investment management firms from March next year.

“What’s happened here in Europe, which has been probably one of the more advanced regions in the world with regards to ESG reporting, we’ve seen a little bit of greenwashing as they call it – a little bit of exaggeration with regards to overall capabilities and performance,” Jeffrey Altman, senior advisor at Finadvance and founder of sustainable energy technology firm e2T Capital, said on the RIF Tokyo teaser.

“So, that’s [the European Parliament] now trying to set a precedence that allows investors and LPs to really understand and qualify, and make decisions as to how GPs are making investments and their overall capabilities in ESG and the SDGs [Sustainable Development Goals], the UNPRI [Principles for Responsible Investment] etc.”

The social aspect of ESG in particular could gain new meaning during covid-19 as businesses and employers grapple with the fallout of global lockdowns and travel bans.

“It’s very critical timing for private equity GPs,” Shunsuke Tanahashi, head of Partners Group’s Tokyo office and former chair of the PRI Japan Private Equity Working Group, added on the panel. The firm’s top executives are rerouting their salaries into a fund to support portfolio company employees in response to the coronavirus crisis.

“For a short period of time, especially retail companies or a restaurant or department store or boutique, they are suffering from lockdown. As a GP we have a responsibility to make them be sustainable.”

The Responsible Investment Forum: Tokyo will be held virtually from 5 to 9 October.