Japan’s FSA issues national impact investing framework

Requests around additionality were toned down in the final guidance, which the regulator says is 'in principle compatible' with global guidance.

The Japanese Financial Services Agency (FSA) has published a governing framework for impact investing that sets out standardised definitions and best practices in the domestic market, reports affiliate title Responsible Investor.

The framework has been developed over the past year in a bid to establish norms in Japan’s relatively nascent impact investing sector. An earlier version of the framework was put to stakeholders for feedback last year.

Impact investing has traditionally centred on private markets where investors have more leverage. There has been a push to bring impact investing to listed equities in recent years, but fundamental challenges continue to exist, particularly on the key question of how impact should be measured and attributed.

Impact investing is seen as a priority by the Japanese government, together with transition finance, for its potential to finance decarbonisation within carbon-intensive industries and to support broader sustainability goals.

However, the FSA’s framework does not set any eligibility criteria, thresholds or KPIs for impact-focused investments.

In the guidance documents, the regulator said it did not intend to “set specific requirements for, or thereby reducing the ranges of, impact investment” and that the guidelines are not meant to “indicate the practical conditions that shall be satisfied to be qualified for impact investments”.

The FSA tabled four overarching principles that it says “are in principle compatible” with global guidance on the topic. These are: defining impact objectives, demonstrating contribution, measuring and managing impact and engagement and transformation support.

But there are key differences, particularly on transparency and disclosures, between the FSA’s framework and existing market standards, such as the operating principles for impact management, which is overseen by the Global Impact Investing Network (GIIN).

Under GIIN’s operating principles, investors are required to make public reports on their alignment with the principles and provide regular independent verification. The FSA’s guidance, however, does not have a single reference on best practices for public disclosures, other than stating that “a dialogue among the parties involved in the investment or project would be beneficial”.

The FSA also did not adopt, among other things, recommendations in the GIIN framework for investors to align staff remuneration packages with impact KPIs, to assess the likelihood of achieving stated impact goals in advance, and to consider how an exit could affect impact objectives.

The GIIN have been contacted for feedback on the Japanese framework.

The FSA has also toned down its guidance around additionality, or to show that positive impacts would not have been realised in the absence of an investment. While the guidance notes that “it is important to consider” additionality, it adds that additionality “is not necessarily easy… to rigorously demonstrate”.

In an earlier draft released last year, the guidance requested investors to “clarify in a concrete and easy-to-understand manner [how ESG impacts will be achieved by the investments] including cases where they will be realised over the long term”, and to “confirm social or environmental impact and profitability that have been ‘additionally’ generated”.

Both references have now been removed from the final guidance.

The FSA said that it will use the guidance as a basis for discussions conducted by Japan’s Impact Consortium, a forum for impact investors and other stakeholders launched by the regulator last year. The body was described at the time as “an interactive communication platform where impact-driven stakeholders could join in and share their expertise and experiences”.

In 2022, questions were raised over a survey of impact investing assets in Japan which did not assess investor contributions to company impacts but was based on self-reported “avoided emissions” for listed stocks. The analysis, which was conducted by Japan SIF, reported a 403 percent growth in domestic impact assets in 2022.