In the wake of the Japanese translation of A Legal Framework for Impact (LFI), the Japan policy team of the Principles for Responsible Investment (PRI) held a webinar in which speakers shared unique perspectives on the legal analysis it contains. Four speakers representing Kanagawa International Law Office, the Financial Services Agency, Dai-ichi Life Insurance Company and the PRI spoke at the webinar.
The Report: A Legal Framework for Impact
Building on previous landmark work on Fiduciary Duty in the 21st Century, the LFI report provides a first-of-its-kind legal analysis on the extent to which investors are permitted, or required, to consider sustainability impact goals in their activities. The report, which covers 11 jurisdictions, was commissioned by the PRI, UNEP FI and the Generation Foundation, and authored by international law firm Freshfields Bruckhaus Deringer.
While there are differences across jurisdictions and investor groups, the report found that investors will likely be required to consider investing for sustainability impact where doing so can be effective in achieving the investors’ financial goals. Cases where investors can pursue sustainability goals for their own sake in parallel with financial goals are more limited, but there are instances in most jurisdictions where this is possible – for example if the objectives of the financial product commit an investor to do so. Based on the legal analysis, the report also identifies policy options that policymakers can consider to better enable investors to invest for sustainability impact.
Sustainability impact in investment decision-making: Japan’s legal framework
Shinsuke Kobayashi, partner of the Kanagawa International Law Office and contributing author to the LFI report, presented the LFI findings relating to Japan. He explained that in Japanese law, the concept of “mandatary’s duty” (jutakusha sekinin) codifies a duty of care and loyalty in a similar manner to fiduciary duties in common law countries. Under the mandatary’s duty, an asset owner or investment manager owes beneficiaries or clients the duty to seek to achieve a positive investment return during the term of the mandate using the care and skill expected of the profession. Mr. Kobayashi highlighted that because the assumed purpose of a mandate is to achieve positive investment returns, investors are not explicitly required to use their investment powers to invest for sustainability impact and cannot do so in a manner that disregards financial returns.
However, as set out in the LFI report, he also emphasised that investing for sustainability impact would be permissible if the investor reasonably believes it will lead to higher investment returns in the middle to long term by maintaining or enhancing the market value of investee companies, even if it compromises investment return in the short term. Moreover, the case to require investors to invest for sustainability impact is clear if the risks and opportunities associated with the relevant sustainability outcomes can be seen as financially material. On this point, Mr. Kobayashi noted that there is currently a lack of legal guidance on which sustainability outcomes can be considered as financially material and there is also a need for more standardised methodologies to assess and measure sustainability impacts.
Regulatory perspectives on integrating sustainability impacts into investment decision-making
Satoshi Ikeda, chief sustainable finance officer of the Financial Services Agency (FSA), offered his perspective on three policy approaches regulators can consider to facilitate the integration of sustainability impact assessments into mainstream investing.
First, he suggested that regulators could help investors integrate environmental and social impacts into the investment decision-making process by supporting the development of asset-class-specific impact measurement and management methodologies. Secondly, regulators could support creation of a pricing system that reflects environmental and social impacts. Such an approach would require regulators to lead in the development of standardised pricing schemes for environmental and social resources, for example carbon pricing. Finally, regulators can classify economic activities that have positive environmental and social impacts to reduce the analysis burden for investors – such as through developing sustainable taxonomies.
Mr. Ikeda also introduced the FSA’s flagship Impact Investing Roundtable, co-hosted with the Global Steering Group for Impact Investment’s Japan National Advisory Board. This initiative aims to deepen the understanding of impact investing among financial market stakeholders and government officials. He emphasised that concerted, multi-stakeholder efforts such as these are key to addressing systematic barriers to investing for sustainability impact.
Leading investors are already investing for sustainability impact
Kazuyuki Shigemoto, executive officer and general manager of the investment division at Dai-ichi Life Insurance Company, concluded the webinar by discussing leading practices for investing for sustainability impact. He explained that as a universal asset owner with clients throughout Japan, Dai-ichi Life aims to achieve its corporate purpose to “protect and improve the well-being of all” by being mindful of its beneficiaries and other stakeholders relevant to its investment decisions. This has led to “creating positive social impacts” and “engagement with investee companies” becoming core components of Dai-ichi Life’s sustainable investment strategy.
Mr. Shigemoto noted that barriers such as a lack of methodologies and corporate data on impacts posed difficulties in the early stages of Dai-ichi Life’s sustainability impact investing. The company started its impact investment program in 2017 with a focus on private equity. Building upon its experiences and learnings, Dai-ichi Life expanded the scope to include listed equities in 2019. To date, Dai-ichi Life’s ESG-themed investments have totalled 1.1 trillion JPY, which broadly cover financing and investing in businesses committed to outcomes aligned with the UN Sustainable Development Goals. This also includes impact investments worth 40 billion JPY made to achieve both financial returns and social impacts.
Dai-ichi Life was also one of the founding partners of the Japan Impact-driven Financing Initiative. The initiative hosts a platform for cooperation and collaboration among financial institutions that see their purpose as investors is to actively address social and environmental issues, with a holistic understanding of impact.
Building on the legal analysis and identified areas for policy reform in the LFI report, PRI, UNEP FI, and the Generation Foundation are implementing a multi-year work programme to develop recommendations for policy reforms to further promote investing for sustainability impact. This initiative will include engaging with policymakers and supporting investors to advance their policies and practices, initially in five of the markets studied: the EU, Australia, Canada, Japan and the UK. In Japan, we plan to publish an LFI-focused policy briefing and continue to work with signatories on promoting financial policy reforms and investment practices for sustainable impact.