A Conversation on Impact Companies’ Disclosure and Engagement in Capital Markets with Fumi Sugeno

As a member of Toniic, Fumi Sugeno (SIIF ) contributed to organizing GSG Impact Japan’s Impact IPO Working Group by inviting diverse capital market participants, including impact companies, private and public equity investors, security firms, stock exchange, and ministries, to create the "Guidance for Impact Companies on Disclosure and Engagement in Capital Markets" (currently available in Japanese & English ).?

This groundbreaking work has already influenced major players in Japan's financial sector—Mizuho Bank has integrated the guide's core concepts into its group-level impact strategies , and several of Japan's largest security firms are leveraging the guidance to approach impact companies for public listings.

In a brief conversation with Fumi, we explored her insights on the evolving role of impact investing in public markets and how these guides can help shape the landscape.

?? People often disagree on whether true impact can be achieved in public markets.? How do you support the potential for impactful investing in public markets?

I think there is significant potential for impact investing in public markets.?

First, more companies are utilizing public markets to scale their social and environmental impact. According to Dealroom, the number of so-called Impact Unicorns has risen dramatically from from 32 companies in 2017 to 256 companies in 2023, of which 21 companies are now publicly listed. I have been observing the same trend in Japan where the Impact Startup Association founded in 2022 with 23 companies now has 138 members, many of whom aim to go public. ?

However, these impact companies face challenges, such as the need for guidance for integrating Impact Measurement and Management (IMM) into their management processes and effective impact communication with diverse public market investors. It’s critical for investors to develop a deeper understanding of how impact companies can enhance their enterprise values by utilizing both financial and non-financial capital. ???

Secondly, public equities are a major part of the financial market, accounting for around 50% of total global AUM in 2022. Yet, according to GIIN, only about 14% of impact investing AUM is allocated to public equities in 2023. However, according to GSG Impact Japan, the number is higher in Japan (23%) driven by big banks and asset managers who have been driving the impact investing movement. Public equities are one of the fastest-growing asset classes in impact investing both globally and in Japan with huge potential to address specific social and environmental issues by going beyond mitigating ESG risks.???

Third, large public companies can not only create impact at scale but also have significant, influential power to transform their industries to be more impactful. Investors play a crucial role by engaging with these companies collectively to generate industry-level impact.?

If we truly want to drive scalable impact and transform industries and financial systems, public-equities impact investing is essential.

?? What are some common misconceptions about impact investing in public markets that your guide aims to clarify?

I think there are some misconceptions and real challenges to be tackled.??

One common misconception is that companies must sacrifice earnings to create impact. The reality is that most public equity investors are still primarily focused on financial returns and impact investors remain a minority.?

By recognizing this reality, the GSG Impact Japan’s Impact IPO Working Group aimed to develop guidance to help companies effectively disclose and engage with not just impact investors but also diverse types of investors and other capital market participants to realize synergies between creating impact, generating earnings, and enhancing enterprise value.?

We believe that by showcasing successful examples, more investors will start to see the synergies between impact creation and financial growth.

There is also a long-lasting debate about whether impact investing in public equities can contribute to companies’ impact creation. We believe investors can support the impact creation and growth, as well as by effectively engaging with companies for further impact creation. While some argue that most public equities investors cannot influence companies effectively due to their limited shareholdings, we’ve seen examples from our partner asset managers that using tools like their Theory of Change allows for more effective company engagement.

Finally, there is a misconception that only startups and ventures can drive impact-driven change. These large publicly listed companies, while slower to change, can create significant ripple effects when they do. Many critical social and environmental issues will require these large companies to transform their businesses and industries to achieve meaningful, large-scale impact.

?? What trends or regulatory changes do you believe will most influence the success of impact companies in capital markets?

I think the development of effective impact-transparency standards is a major trend that will influence the success of impact companies in public markets. With the International Sustainability Standards Board (ISSB) creating the global baseline for sustainability-related financial disclosures and each country developing their jurisdictional standards, the trend is inevitable for companies and investors to be increasingly required to report their sustainability related information. This trend presents a crucial opportunity to shape standards that highlight not just risks but also opportunities for solving social and environmental issues.

Although impact disclosure practices are still emerging, we issued the first version of the Guidance to encourage companies to disclose their impact practices and share their impact data. As examples and lessons are gathered, we hope to refine the Guidance and influence the broader standard development.??

I believe in developing effective impact transparency practices and mechanisms that foster continuous learning which will be essential for the growth of positive impact.

???? Have you encountered any region-specific considerations or observations since the guide was originally published for the Japanese market?

There was a Japan-specific context behind why we were able to bring forces together to develop this Guidance. A 2023 Nikkei survey revealed that around 80% of Japan’s “next Unicorn” ventures aim for IPOs, in contrast to the US and Europe, where M&A is the more common exit strategy. Additionally, many Japanese companies and investors share a sense of urgency to explore the potential of supporting companies to scale by enabling them to realize the positive feedback loop of creating impact, generating earnings, and enhancing enterprise value.?

However, this challenge isn't exclusive to Japan. I believe it is also relevant in global markets where we have a disconnect between private and public markets for developing a supportive environment for companies to create impact.??

Lastly, what are the next steps for this guide and are there any upcoming projects or initiatives you're working on to support impact companies in capital markets further?

After issuing the guidance by the Impact IPO Working Group, we followed up by interviewing impact companies. While many were excited to further introduce the IMM practices suggested by the guidance, they had nowhere to share practical challenges for implementing IMM, and engage in deep discussions with investors and IMM experts. They were also eager to have the opportunity to get feedback from global investors with deep impact expertise.?

That is why we are organizing a series of workshops in the coming months with impact companies, investors, and IMM experts.

Capital markets need impact companies' symbolic best practices and global impact investors, including TONIIC members, are capable of helping to promote these practices.?

Bio:

Fumi SUGENO

Chief of Impact Economy Lab, Japan Social Innovation and Investment Foundation?(SIIF)

Fumi currently develops strategies and oversees activities at SIIF's Impact Economy Lab, which creates empirical knowledge and empowers learning communities through global partnerships in promoting systems change investing and transitioning to the Impact Economy. Fumi is an investment committee member of an impact investment fund (HATARAKU Fund) focused on the future of work, childcare, and elderly care support, which was established with Shinsei Bank Group and Mizuho Bank.?

Prior to joining SIIF, Fumi was an ESG analyst and a business consultant at the Japan Research Institute supporting Japanese corporations to initiate impact businesses and impact investments. She started her career as an International NGO staff conducting impact evaluations and making policy recommendations for education in rural China. Fumi holds a BA from University of Tokyo and MA in International Affairs from Columbia University.