PRINCIPLES FOR IMPACT MEASUREMENT AND MANAGEMENT IN IMPACTINVESTING: A GUIDE FOR FUND MANAGERS (English Translation)

GSG Japan National Advisory Board
Working Group on Impact Measurement and Management (IMM)

May 2021

ABOUT THE PRINCIPLES
These principles have been prepared specifically for institutional investors1 in Japan
who practice impact investing.
For the purposes of this document, "impact investing" refers to investment activities
that are characterized by the intent to generate positive and measurable social andenvironmental impact2 in parallel with financial returns. The intent of theinstitutional investor is considered to be the most important element that
distinguishes impact investing from other forms of investing, and as a means ofrealizing that intent, institutional investors practice Impact Measurement &Management (IMM)3.
In practicing these principles, IMM provides a structured approach in which
institutional investors measure the impact of their investee's business andencourage improvement through engagement with the investee.
Based on the discussions in the GSG IMM Working Group, which are described
below, these principles capture the basic concepts that will contribute to therealization of effective IMM. It is hoped that each institutional investor will act inaccordance with these principles and take autonomous measures to increase theinvestee’s corporate value taking into account the generated impact.

1“Institutional investors” is a generic term for corporate investors that invest and manage funds
contributed by clients, including pension funds, life insurance companies, casualty/property insurancecompanies, trust banks, asset management companies, venture capital companies, and private equity
funds.
2“Impact” refers to “social and environmental changes and outcomes (both short term and longterm) that occur as a result of business or activities.” (GSG Japan National Advisory Committee,
Impact Investing in Japan: Current Status and Issues - FY2020 Survey)
3
As defined by the Global Impact Investing Network (GIIN), IMM "includes identifying and considering
the positive and negative effects one’s business actions have on people and the planet, and thenfiguring out ways to mitigate the negative and maximize the positive in alignment with one’s goals”
and “is iterative by nature.”

1

Backgrounds
•

•

•

•

•

The impact investing market in Japan has moved on from its infancy period
and is beginning to enter a period of growth. The impact investing balance inJapan is about 512.6 billion yen in FY2020, which is a significant increase from317.9 billion yen in the FY2019 survey.
Since 2018, major domestic institutional investors in Japan entered theimpact investing market, while many startups that have impact generation asa core part of their business have started to raise funds through the capital
market. The GSG Japan National Advisory Committee (NAB) deemed it timely
to establish the Social Equity Finance Subcommittee in August 2018, in order
to examine the key issues and look for solutions in using capital markets forsocial purposes. The Subcommittee found that one of the biggest challenges
was that there were few practical examples of IMM and its approaches were
fragmented and not systematic.
Looking at the global impact investing market, IMM approaches have become
increasingly sophisticated over the past 10 years, and as a result global
standards for IMM are being developed at a rapid pace. This is considered a
key to the future development of the “impact integrity” in the impact
investing market.
Based on this background, the GSG Japan NAB established the IMM Working
Group (the WG) in 2020, in order to create a shared understanding of IMM
among impact investors and to improve the quality of IMM practices. The
WG, comprised of practitioners of impact investing in public and private
equities from 17 companies (including observers), met six times between
September 2020 and March 2021 to share and discuss the global principles,
frameworks and tools of IMM, domestic and international case studies, andto identify issues and solutions for working on the IMM.
As a result, the WG produced two outputs in Japanese, the Principles
document and the "IMM Practice Guidebook," and the “Discussion Paper:
Refining the Global Standard of Impact Measurement and Management -Views from a Japanese Working Group” in English.

How these Principles should be Read•••

These principles are based on the contents of the "IMM Practice Guidebook"and are the points emphasized in the IMM practice that were agreed uponand highlighted by the IMM WG members.
These principles are intended to apply to impact investors in public andprivate equities, although many of the basic concepts outlined in theseprinciples are also useful for the IMM in other asset classes.
The WG believes that each institutional investor should devise its own way ofworking with the principles tailored to its own circumstances. This is because2•IMM practice may vary depending on the asset class and the end investor aswell as other factors. As we are witnessing a rapid development of IMM,
global norms may shift as well. In light of these factors, the principles should
not be viewed as detailed rules but precisely as principles with which each
institutional investor should navigate its own IMM practice appropriately.
The WG expects that domestic institutional investors in Japan who are
engaged in impact investing will accept the principles of "Responsible
Institutional Investor" (the so-called Japanese Stewardship Code). In addition
to the principles in the Code, the principles in this document should beconsidered for impact investing.

Expectations behind the Principles••

These principles are based on the discussion of the WG and summarize thecurrent global standards of IMM as well as practical knowledge from Japanand overseas. The WG deemed it appropriate to incorporate the global
approach because, by doing so, 1) institutional investors will be able tocommunicate with various stakeholders around the world using a common
language, and 2) by using the common language, fund managers will be able
to raise capital and access possible investees much more broadly. At thesame time, the WG felt that it was necessary to compile principles inJapanese based on the market environment and practices in Japan so thatthey could be widely shared with institutional investors in Japan. The WG
strongly hopes that IMM norms and practices in Japan will not become
isolated but rather will follow the front-runner practices in the world andproduce best practices from Japan.
The WG believes that it is important for institutional investors to practiceIMM by referring to the principles and the guidebook, and to share theirlearning with each other. This will serve as a foundation for building an
ecosystem in which risk money and necessary support are provided tobusinesses and entrepreneurs (including social entrepreneurs) who take on
the challenge of solving social issues through business activities.

3

The Principles
Institutional investors practicing impact investing should follow these principles intheir investments to achieve impact and to ensure its sustainable expansion.
Principle 1: Institutional investors should clearly articulate impact generation in theiroverall corporate strategy and formulate impact fund’s investment strategy based on
the overall strategy.
Principle 2: Institutional investors should design an appropriate IMM process, taking
into account globally adopted approaches and methods, to ensure that investments
are made in line with the impact fund’s investment strategy.
Principle 3: Institutional investors should develop a deep understanding of the
impact generated by the investees. This should be done by working closely toaccurately understand the external and internal environment of the investee(monitoring) and by conducting constructive and purposeful dialogue with them(engagement). This will thereby contribute to the sustainable augmentation of theinvestee’s corporate value.
Principle 4: When selling an equity stake of the investee, institutional investors
should consider the sustainability of the impact generation to ensure that the impact
created by the investee is not lost.
Principle 5: Institutional investors should regularly report to end investors on how
they are realizing their impact intentions and contributing to the sustainable
augmentation of the investee’s corporate value.

4Principle 1: Institutional investors should clearly articulate impact generation in
their overall corporate strategy and formulate impact fund’s investment strategy
based on the overall strategy.
With their intent to generate positive and measurable social and environmental
impact in parallel with financial returns, institutional investors facilitate theaugmentation of the corporate value of the investee through consideration of the
impact and promote its sustainable growth. By doing so, the institutional investors
seek to increase the medium- to long-term financial and social returns for theirclients and beneficiaries.
Based on this understanding, institutional investors should clearly articulate in theiroverall corporate strategy how to realize the intentions of impact investing as
entities that manage finance in the economy, bearing in mind their own position in
the investment chain from clients to investees to beneficiaries.
This strategy should incorporate fund management approaches that express value
proposition to society which includes the establishment of impact themes and theirintegration into the strategy, the degree of compatibility between economic andsocial returns, and the investment decision-making process utilizing IMM.
For more details on the above, refer to the IMM Practice Guidebook.

Principle 2: Institutional investors should design an appropriate IMM process,taking into account globally adopted approaches and methods, to ensure thatinvestments are made in line with the impact fund’s investment strategy.
To realize the intentions of impact investing in line with the impact fund’sinvestment strategy, institutional investors should design and implement an IMM
process, which is a systematic method, to measure the impact of the investee’sbusiness and to encourage improvement of the business through engagement. In
order to ensure a certain level of IMM quality of the impact fund, it is important toapply a consistent IMM process to all investments made by the impact fund.
The IMM process should include: identification and multi-faceted analysis of positive
and negative impacts of the investee’s business at the time of the investment
decision; setting of key impact KPIs and targets; post-investment monitoring andengagement (Principle 3); sell/exit decisions that take into account the ongoing
impact of the investee’s business (Principle 4); and impact performance reporting(Principle 5).
For more details on the above, refer to the IMM Practice Guidebook.

5

Principle 3: Institutional investors should develop a deep understanding of the
impact generated by the investees. This should be done by working closely toaccurately understand the external and internal environment of the investee(monitoring) and by conducting constructive and purposeful dialogue with them(engagement). This will thereby contribute to the sustainable augmentation of theinvestee’s corporate value.
After making an investment, institutional investors should keep track of the impact
being generated by the investee’s business in reference to the intended impact
analyzed at the time of investment decision by monitoring the progress of the
impact KPIs. At the same time, the engagement with the investee should be geared
toward augmenting its corporate value from a medium- to long-term perspective.
In the monitoring and engagement process, it is important to lay out its key
elements in accordance with the impact fund’s investment strategy, which may
include challenges surrounding the investee's progress toward the impact KPIs,
issues of negative impact and the response, etc., as well as the financial status.
Although the method and depth of engagement will vary depending on the asset
class and the business stage of the investee, it is important to conduct acollaborative dialogue in line with the impact fund's investment strategy. In the caseof private equities, it is suggested that the investor provide hands-on support so that
the IMM process becomes a common language with the investee's stakeholders.
For more details on the above, refer to the IMM Practice Guidebook.

Principle 4: When selling an equity stake of the investee, institutional investors
should consider the sustainability of the impact generation to ensure that the
impact created by the investee is not lost.
Institutional investors should consider when and how to sell their equity stakes inline with the intentions of the end investors. When making a decision to sell,institutional investors should give due consideration to ensuring that the impact
created by the investee will be sustained.
For example, in the case of private equities, when making an exit decision, in
addition to the sale price, it is important to understand the impact the investee isgenerating and to carefully consider how it can be further expanded.
In the case of public equities, although institutional investors may make a decision of
the sale based on the financial performance of the investee, it is important toestablish an investment process that makes it possible to work on a long-term
6

investment as well as an on-going engagement with the investee that seeks togenerate impact.
For more details on the above, refer to the IMM Practice Guidebook.

Principle 5: Institutional investors should regularly report to end investors on how
they are realizing their impact intentions and contributing to the sustainable
augmentation of the investee’s corporate value.
Institutional investors should regularly report to end investors on the extent towhich their impact intentions have been realized, as end investors invest in impact
funds with the intention of generating impact. In doing so, a combination ofquantitative and qualitative information should be reported to the end investor,
such as the comparison of the performance of the impact generated with the impact
KPI targets and the verification of the positive and negative impacts. By reviewing
the investment activities based on this information, the lessons learned can be used
to improve future impact investing and how best to conduct the IMM.
While the development of IMM is rapidly progressing in global impact investing
markets, there are few examples of IMM practice in Japan. Thus, it is important for
institutional investors in Japan to share the lessons learned with both the global
market and the Japanese investment industry in order to repeat the learning andimprove the IMM process by utilizing familiar business cycle approaches such as the
PDCA (Plan-Do-Check-Act).
For more details on the above, refer to the IMM Practice Guidebook.
[end]

7