On December 16, 2021, J-IIN hosted 15 impact investors, VC funds, entrepreneurs, executives, consultants at our 5th webinar: The Current Status and Prospects for Expanding Impact Investing. We started out with a presentation on key trends in impact investing seen over the past year and case studies of some stand-out funds and investments, followed by a lively hour-long discussion.
From 2020 to 2021, the pandemic highlighted social inequality globally, and the increased focus on climate change risks raised awareness of the climate crisis. According to the Global Sustainable Investment Alliance’s Investment Review 2020, sustainable investing has been expanding rapidly, especially on thepublic stock market, to over 30% of the world's total assets under management,or $35 trillion. The most common sustainable investment strategy is ESG integration, a strategy that incorporates ESG perspectives into investment decisions. ESG integration investment has reached $25 trillion, an increase of over 43% since 2018, with a compound annual growth of 25% since 2016. Impact investing is only $70 billion of the sustainable investing pie, according to the 2020Survey by Global Steering Group for Impact Investment (GSG-NAB).
J-IIN welcomes this growing interest in investment as a way to create a more sustainable environment and society and ESG integration is certainly a better approach than traditional investment which pays no attention to ESG aspects. However, at the same time, it is also important to recognize that ESG integration as an investment strategy alone does not necessarily reach the people who need funding the most. For example, the inflow of private sector funds into developing countries in 2020 was down by $700 billion. If the purpose of impact investing is to solve social and environmental issues and to fairly and evenly distribute the economic benefits generated in the process, then impact investing is an important tool for solving social and environmental issues. Our webinar reflected our sense that more attention needs to be paid, in Japan and globally, to impact investing as effective means of both addressing environmental and social issues and also insuring that funds will flow to those who need it most.
Unlike the previous webinars, we took a more bird's-eyeview, looking at several global issues that we feel impact investment can address and introduced related funds and companies. The presentation focused on three areas: Regenerative Agriculture, Circular Economy, and Gender/Empowerment, with a focus on climate change and equity of distribution.
The key case studies we highlighted are described below:
● Nepra is an Indian recycling company and an investee of Circulate Capital and other impact investing funds. Nepra also organizes garbage pickers, estimated to be 1.5-4 million people throughout India and aims to create social impact by providing higher stable income and training compared to others.
● Women of WorldEndowment (WoWE) is a permanent endowment that invests with a gender lens strategy for commercial returns and uses the capital gains to help create concrete solutions together with NPOs and research institutes. WoWE tackles not only inequality in the corporate world but alsoissues of socio-economic status and other social issues faced by women.
Our discussion then highlighted the fact that to raise more funds for businesses that are addressing these global challenges, there needs to be more investment from the private sector, especially institutional investors. However, to accelerate the inflow of funds, institutional investors need tools and standards to be able to make international comparisons between investment portfolios. Europe has been at the forefront of this push for standardization, creating investment definitions and regulatory frameworks for others to adopt and adapt. This movement towards standardization is also influencing impact investing.
Development finance institutions and the United Nations have already launched guidelines that cover the process from impact strategy development to impact measurement and management. The International Financial Reporting Standards (IFRS) Foundation announced the launch of the International Sustainable Standards Board (ISSB). Global Impact Investing Network (GIIN) also issued COMPASS to standardize the methodology for comparing and assessing impact.
In our group discussion, we asked the participants to reflect on their connection with these issues and their own business andinvesting aims. The discussion raised many excellent points and diverseopinions. One participant said that establishing a business model that sustainably creates impact towards solving global issues is not easy and requires significant trial and error. Others felt that they still need to deepen their own understanding of how their business has impact and to developskills to be able to explain their impact to investors.
Some participating entrepreneurs’ focus was on business/revenue growth, not impact. Nevertheless, by adding an impact perspective to their business model, they felt it is possible to enhance the business potential further. In addition, other concrete viewpoints based on practical experience were shared, including the need for external support to determine what kind of impact to focus on, how to actually make impact and how to even start this process of thinking and developing their business models. So where to start within our community in Japan? Sustainable investing is expanding rapidly in Japan, but according to the 2020 Survey of Global Steering Group for Impact Investing (GSG-NAB), it still stands at $3 trillion USD, less than 25% of the total assets under management. ESG integration accounts for 70% of this $3 trillion USD. Impact investing in Japan is an even smaller share - less than $5 billion USD.
Unfortunately, looking at this situation, finding investors in Japan who are interested in impact investing and equipped to take risks in emerging markets is challenging. Therefore, collaboration withdomestic/overseas investors who are willing to take risks in emerging markets and network with overseas impact investors is essential. Through collaboration with entrepreneurs aiming to expand into emerging markets, J-IIN will continue to disseminate information on how to create impact at thebusiness level, and through these activities, expand impact investing originating in Japan and reach people most in need.