Selection criteria of investees of SDGs funds

Masami Komatsu
Music Securities, Inc.
CEO / Director of Sustainability Department

Masami Komatsu

Mission of SDGs funds

Sustainability Department is dealing with innovative financial schemes for corporate investors, especially institutional investors, to invest businesses which used to be out of scope. We take advantage of this great momentum of ESG investment and our mission is creating the large capital flow toward investment targets, which fit our belief, in order to explore new financial markets.
We believe our investment scheme centered on a silent partnership is the best way to fill the gap toward SDGs and archive both social returns and financial returns. It is because our scheme can raise funds directly from investors to solve social challenges and is different from indirect finance through existing financial markets. We understand that such financial scheme cannot be an option for institutional investors currently. However, we disclose selection criteria of investees in advance because we believe that disclosure of the criteria results in having more and more corporate investors agree with our scheme.
We are aiming to expand the boundaries of the financial system in the world.
We will achieve financial inclusion and diversity so that as many people as possible can attain access to this financial system and enjoy social returns to be generated.

Impression and outlook in 2020

First, as a big topic, we participate in a PFI project in a prefectural capital of Tohoku area, as one of the corporative members and will provide a blended finance scheme, in which funds from corporate and individual investors as well as public and corporate entities are blended. Also, a comprehensive cooperation agreement with Kamimine city in Saga Prefecture has been concluded under the great leadership of the town mayor. Our scheme will be involved for redeveloping the city center.
In addition, for a national university, we have kicked off a project about a research facility to create a sustainable society with a development plan, in which expense from a municipality and private investment are blended.
As a deal which will likely be launched soon, fund origination has begun for a project which has long term effects on CO2 reduction of the local transportation system in a rural area.
Based on these prospects, as an option of alternative investment, we will provide many opportunities for institutional investors in this year.

Haruko Sugai
Music Securities, Inc.
Sustainability Department

Haruko Sugai

Current situation of investment to achieve SDGs

According to the UN, there is $2.5 trillion annual investment gap for developing countries, to achieve the SDGs.
In addition, the SDGs are also related to developed countries and more investment are needed globally. It is said that total annual investment of more than $5 trillion is needed and expectations toward “investment to achieve the SDGs” with private funds are rising year after year.

Current situation of SDGs investment in developing countries

Main investment
requirements
   SDGs         Examples      Estimated annual
investment gaps
(Billion of dollars)
Overall investment
trends
International private sector
investment trends
Electricity Generation, transmission and distribution of electricity 370~690 Flat Flat
Transport infrastructure Road, airport, port and rail 50~47 Increase Decrease
Telecommunications Fixed line, mobile and internet 70~240 Increase Decrease
Water and sanitation Water and sewer treatment of industry and households 260 Decrease Decrease
Food and agriculture Agriculture, research, rural development 260 Increase Decrease
Climate change mitigation Relevant infrastructure, renewable energy 380~680 Increase Flat
Climate change adaptation Agriculture, infrastructure, water management, coastal zones 60~100 Flat N/A
Biodiversity Conservation and safeguarding ecosystems, marine resource, forestry N/A Increase N/A
Health Hospital construction, development of vaccine and Infrastructure, e.g. new hospitals, and R&D on vaccines and medicines 140 Increase Decrease
Education School construction 250 Decrease Flat

Source: UNCTAD (2020) World Investment Report 2020

Selection criteria of investees of SDGs funds

To show social returns of investment on SDGs funds to investors clearly, we evaluate social and environmental impacts caused by the business with specific and quantitative indicators.

1 Correspondence to SDGs’ 17 goals

  • Business corresponds to, at least, more than one of the 17 SDGs.
  • It is necessary to show quantitatively how much social impacts on such SDGs will be obtained.

2 Mid- and Long-term objective, mission, and plan

  • Social mission of the business is clear, and is stated publicly in such a manner as the web site. Or, a social mission of the business will be stated publicly when the investment is approved.
  • The mid- and long-term goals and plans of social returns on the business are indicated specifically and quantitatively.

3 Use of funds

  • Almost more than 90% of funds invested will be used for a business, which aims to solve social problems such as the SDGs.

Reference Our thought on social returns and social impacts

Social returns are specific indicators that shows “how much gap can be filled to achieve the SDGs, as a result of the business activities.” They are specific steps to create “Social impacts” and visualize how specifically a business owner contributes to generate social impacts.

Our thought on social returns and social impacts

Regarding financial returns of investment on SDGs funds, we evaluate, the business plan as well as financial and accounting aspects of past track record of an investment target business owner.

1 IRR should be at least 2% when the business plan is achieved.

  • In case that an investment target business owner achieves the business plans, IRR of distribution can be, at least, more than 2%.

2 Business plan in the future (Plan of the sales and profits)

  • In the plan, cash flows can be secured to pay distribution of the fund.
  • There are concrete measures to achieve the business plan and these are convincing.

3 Achievement in the past (if any)

  • In case of on-going business, there are no doubt about the past track record and financial statements.

We think that investment target businesses of SDGs funds should aim to create good virtuous cycle that profits from such business are used for the next social business, because these businesses are highly profitable due to its social significance.

1 Social significance and profitability have relationship to generate synergy, not contradiction

  • Business generates reasonable profits due to its high social significance.
  • As profits generated from business are used on-going or new social businesses, social significance of an investment target business owner further increases.

We value that investment target business is attractive enough to obtain empathy and supports from potential investors.

1 Innovativeness and originality of business

  • Business is innovative and has originality.
  • It is a business with great significance because of a business owner.

2 Empathy for business

  • Investors can have empathy for a business and want to support it.

3 Governance

  • Management members work on social returns with integrity.
  • There is no issue of attitude toward disclosure.
  • Not only management members but also all employees are well informed of social activities of their own company.

FAQ

There are issues listed below to consider details of criteria to select investees.

    Items         Contents         Answers    
Definition of “Social returns” What is the definition of “Social returns”? We define “Social returns” as indicators which show “how much gap can be filled toward the achievement of SDGs” by investment target business during the accounting period, for example, “CO2 reduction by investment target business,” “the numbers of disabled people newly hired due to investment target business” and etc.
Clear commitment to both social and financial returns Is it required that management members and authorized persons of investment target business owners take responsibility for both social and financial returns? It is important for management members and authorized persons of investment target business owners take responsibility for both social and financial returns from the governance perspective.
In some cases, their commitment is clarified, stated in the contract with investment target business owners.
How to evaluate and carry out IR regarding social returns How social returns are evaluated?
How is IR carried out to investors regarding social returns of investment target business?
When and in which format will IR be carried out?
Investment target business owners, on their own initiative, publish social returns of the business. We check them and evaluate how much level investment target business owners achieve compared to the quantitative target of social returns they set in advance.
External evaluation by a third party is not necessarily conducted.
IR is supposed to be carried out annually likewise sales reports during the accounting period.
When we evaluate social returns, we use information and figures provided by the investment target business owners. We clarify in the contract before investment that these information and figures are not false.
Setting priority points Are there any priority points to select and decide investment?
Are there any specific areas to be focused on investment among SDGs’ 17 goals?
We do not set particular priority points at this moment.
We will probably establish priority points, in accordance with the state of the society.
Monitoring system of social returns What is the monitoring system of social returns?
How are screening and monitoring implemented for “Negative impacts” which the investment target business owners do not expect?
As we mentioned, regarding monitoring we evaluate social returns annually during the accounting period.
We suppose that all businesses have uncertainties and unexpected “Negative impacts” could occur.
We try to mitigate “Negative impacts” and risks which we can estimate on the due diligence stage before investment, as much as possible, by discussions with the investment target business owners.
In case that we judge that “Negative impacts” are enormous, we do not make investment.