E x e c u t i ve S u m m a r y

Figure 1.

Trend of the Japanese impact investing market size（USD Million）

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718

700600Japan's impact investing sector in a nutshell

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400

337300The Japanese impact investing sector is a product of its unprec edented super aging200demography, its advanced economy led by powerful corporates, and its nonproﬁt sector1000with strong expertise in disaster relief, elderly care, and healthcare. The key features ofthe demand and supply sides of the impact investing sector include the following:Demand side

1702014201620172017 highlights・ Japanese society faces major stru ctu ral issu es su ch as the worl d's fastest ageingdemographic, poverty among children, and shrinking regional economies. Thegovernment-led resource reallocation model from the post-war economic growthThree key achievements are worth highlighting from the Japanese impact investingperiod has its limit in addressing these social challenges. Developing a new ﬂow oflandscape in 2017.

private money to social challenges is critical.
❶ Enactment of the Dormant Accounts Utilization Bill・ Healthy growth in the number of nonproﬁt organizations especially in the periodA seminal law for the Japanese impact investing sector - utilization of dormant accountimmediately following the devastating earthquake and tsunami in eastern Japan in 2011.

funds for social causes - was enacted in December 2016. As a result, up to US$700 million・ Emergence of social enterprises in the recent past, leading to approximately 200,000ventures in number and employing 5.8 million people. Given the lack of a legal(after deducting refunds) annually will be channeled to the private sector in the form oforganization, many social enterprises operate as for-proﬁt entities.

grants, loans, and equity for the purpose of tackling social issues that are deemedchallenging to resolve by government eﬀorts alone2. This bill will come into eﬀect by mid・ Expansion of corporate engagement in social issues, particularly with the spreading of2018, within 1.5 years of enactment. In May 2017, the Cabinet Oﬃce set up a councilconcepts such as creating shared value (CSV) and base of the pyramid (BOP).

speciﬁcally for the utilization of dormant account funds. Subsequently, in SeptemberSupply side2017, the council published an interim report on some of the key issues such as the need・ Substantial role of crowdfunding platforms to mobilize individual donations andfor an optimal governance structure for the agency responsible for fund distribution andincorporating innovative methodologies from the private sector. This new ﬂow of fundsinvestments for impact investing projects.

from dormant accounts is expected to serve as a positive stimulus to the overall impact・ Involvement of mainstream ﬁnancial institutions, notably the largest pension fund ininvesting sector.

the world, Japan's Government Pension Investment Fund (GPIF), which has made acommitment to ESG investing.

❷ Emergence of social impact bonds (SIBs) in Japan・ Entrance of major private foundations that are willing to provi de risk capital thatThe Current StateCity Governments of Kobe and Hachioji decided to commit funds to SIBs in March 2017. Arange of investors from individual investors, private foundations, to major retail banksbacks these SIBs.
Apart from SIBs, national and local governments are currently exploring the use of otherMarket size of Japan's impact investing sectorPay For Success models. To realize them, regulatory adjustments allowing for multi-yearplanning, implementation, and payments, as well as the development of intermediaries,will be required.

The current size of the impact investing market in Japan is estimated to be at least US$20172 0 1 8 . 2 . 19Social impact bonds (SIBs) emerged as a full-ﬂedged social ﬁnancing mechanism when theenables other investors with lower risk appetite to participate in impact investingprojects.

of Impact Investing in Japan718 million 1. The two-fold increase from the 2016 ﬁgure of US$337 million can be❸ Participation of mainstream ﬁnancial institutionsattributed to two key factors: 1) the entrance of new market players; 2) the additionalThe research behind this report conﬁrmed the active participation of mainstream ﬁnancialcapital commitments by existing impacting investors. In terms of target sectors, healthinstitutions in the Japanese impact investing sector, including life insurance companies,and medical care attracted the most investments.

major commercial banks, and venture capital ﬁrms. Regional banks are also starting toenter the market, which point to a signiﬁcant potential segment.

12All monetary ﬁgures in this document are calculated at US $1 = 100 Japanese yen.

Source: Cabinet Oﬃce and Ministry of Finance (2017) 2013-2015 dataGlobal Social Impact Inv est ment St eer ing Gr oup（GSG）Progress on key recommendationsThe Japan National Advisory Board of the Global Social Impact Investment SteeringGroup (GSG)3 proposed seven key recommendations towards the expansion of theJapanese impact investing sector in 2015. Two years on, major progress has beenobserved in three of the seven areas:・Recommendation 1: Utilization of dormant account funds・Recommendation 2: Introduction of social impact bonds and development impact bonds・Recommendation 5: Promotion of social impact measurementGiven the increasing demand for investments in social and environmental initiatives,stakeholders are pushing for the establishment of legal entities and certiﬁcations forsocial purpose organizations (Recommendation 3). The following table summarizes theRecommendation 4: Establishment of tax beneﬁts for impact investing

Nomajorprogress

ProgressRecommendation 1:Latest activitiesBill enacted in December 2016Council established under theCabinet Oﬃce in May 2017● Interim report published by theCouncil in September 2017● Now that the supply side ofdormant account funds hasachieved progress, the demandside requires structure andcoordination. For this, promotionof innovative, successful cases is key.
to mobilize additional capital intothe impact investing market andachieve a more sustainable ﬂow
of money.

development in the social sector.
● Promote understanding of socialimpact measurement andrelevant frameworks.
Recommendation 2: Introduction of social impact bonds and development impact bondsKobe and Hachioji cities in July2017.
● Implementation of Pay ForMajorprogressachievedSuccess projects by two regionalcities.
● Launch of SIB pilot by theMinistry of Health, Labour, andWelfare in Sept 2017.

● Prioritize establishing legalentities and certiﬁcations relatedto social purpose organizations.

● Promote common understandingInitiative (SIMI) launched the"Social Impact MeasurementRoadmap 2017-2020" in Juneand a culture of measurementthrough SIMI's working groupson guiding principles and2017Majorprogressachieved● Impact measurement guidelinesguidelines.
● Develop a practical toolkitwere created and case studiescompiled by SIMI's eight workinggroups.

through SIMI's other workinggroups● Create capacity buildingopportunities for evaluators,implementers, investors, andintermediaries● Leverage dormant account funds● Create opportunities for talent● Implementation of SIBs by theEconomy published a report onventure philanthropy and impactinvesting in April 2017 andproposed recommendationsregarding public-interestorganizations and tax beneﬁts.

● The Social Impact MeasurementIssues and next stepsUtilization of dormant account funds● Dormant Account Utilization● Dormant Account UtilizationMajorprogressachieved● The Japan Association of NewRecommendation 5: Promotion of social impact measurementprogress against each recommendation since 2016 as well as the suggested next steps.

Recommendation 6: Clariﬁcation of ﬁduciary duties

Nomajorprogress● Individual investors participatedlocal government initiatives tobroader nation-wide scale.

in Kobe City's SIB project. In thiscase, private foundationsfurnished risk capital to lower riskfor individual investors.

● In order to enable multi-yearimplementation and payment,consider establishing a similarmechanism to the "Outcometo the implementation of Pay ForSuccess mechanisms.

made with regards to clarifyingthe relationship between impactinvesting and ﬁduciary duties,multiple examples of institutionalinvestor participation in impactinvesting emerged in 2017.

● Promote research on thecorrelation between impactinvesting and ﬁnancial returns.

Recommendation 7: Expansion of individual investors● Push Pay For Success beyondFund" by the UK Cabinet Oﬃce.
● Develop frameworks to providetechnical and ﬁnancial support tointermediaries that are necessary● While no major progress has beenSomeprogressmade● Explore match-making betweenprivate wealth management andimpact investing.

● Promote the development ofimpact-focused investment trustsoperated by asset managementﬁrms, speciﬁcally targetingindividual investors.

● Thanks in part to the growth ofequity-based and loan-basedcrowdfunding platforms, anincreasing number of individualsis involved in impact investing. Incomparison to European andNorth American markets,however, the menu of options forindividual investors is limited.

● Engage with crowdfundingplatforms to incorporate impactmeasurement into theirmechanisms.

● Work in synch with theabove-mentioned tax beneﬁts forimpact investing.

Recommendation 3: Establishment of legal entities and certiﬁcations for social purpose organizations● A special committee within the

Nomajorprogress3Liberal Democratic Partypublished a report on expansionof social venture initiatives in
May 2017.

● As part of the plans to reviveregional economies by the PrimeMinister's Oﬃce, an enablingenvironment for privatesector-led initiatives wasemphasized in June 2017.

Formerly known as the G8 Social Impact Investment Taskforce● Promote certiﬁcations throughprivate-public partnerships.
● Raise public awareness byrecognizing exemplary cases ofsocial innovation.

An overarching challenge across the recommendations is building the capacity of socialenterprises and developing intermediaries that can support these ventures. It isimperative to nurture entrepreneurs and business professionals who are capable ofrunning eﬀective social enterprises that not only meet the increasing supply of impactinvesting, but also learn and grow with impact investors.