Allow investment trust with a double materiality approach
Responsible investment entails both seeking financial returns and contributing to addressing environmental and social issues. Granted that the priority between the two objectives can vary from one to another, reflecting its values. Still, the investor must determine an appropriate framework with suitable KPIs and time horizons to best achieve both. From a performance management perspective, the investor should be vigilant on issuers’ materiality on two dimensions, i.e., in a double materiality approach. One is financial materiality by asking how environmental and social issues affect issuers' financial performance. The other is environmental and social materiality by assessing the consequences of corporate economic activities on climate, people, and community. Then, the investor must allow a longer time before projects deliver a visible impact, such as GHG reductions, or transform a linear economy into a circular one. Non-financial practices of the issuers can translate into financial performance over time, and the markets would price it in as a dynamic materiality view advocates. ESG investing entails both seeking financial returns and contributing to addressing environmental and social issues. Whereas the statutory set-up of the publicly placed investment trust solely contemplates the former, i.e., the long-term growth of trusted assets. The “ESG integration” product may argue the importance of factoring financial materiality in aspects of ESG. Impact investing, however, can find no appropriate positioning in the Japanese market because its primary objective is to deliver measurable outcomes in non-financial matters such as climate, people, and community by assessing the consequences of corporate economic activities to them. The present system, therefore, could prevent asset managers from launching “net-zero” products in the investment trust format despite the global industry trend or movement as GFANZ (Glasgow Financial Alliance for Net Zero) demonstrates.
- The FSA should allow flexibility for asset managers to take a double-materiality approach and incorporate an additional environmental/ societal objective in the investment trust.