December 31, 2006


Proactive Investing to Promote Sustainability - Sustainable Investor Co., Ltd.

Keywords: Newsletter 

JFS Newsletter No.52 (December 2006)
Toward a Sustainable Japan--Corporations at Work Article Series No.56 in Japanese)

"Sustainable Investor Co.": A New Concept for Investor Participation

On March 2006,a company was launched in Nago-city, Okinawa -- Japan's only special economic zone for financial de-regulation -- by a group of young financial industry specialists led by Shin Takizawa and Hiderou Okuyama. The name of the company, Sustainable Investor (SI), embodies its mission: using the tools of finance to build a sustainable society.

In their previous jobs, Takizawa and Okuyama were on the frontlines of the mainstream finance industry at major financial institutions, dealing with fund management, and product development, etc. When asked why they took the risk of leaving their companies and launching SI, they reply, "When we thought of major challenges facing society such as climate change and the need for fundamental social change, we thought we could use the tools of finance and contribute in a different way."

In fact, when it comes to the current situation of finance, many challenges remain ahead in terms of sustainability. For instance, the combined total of the Socially Responsible Investment (SRI) funds in Japan has grown to roughly 200-300 billion yen (U.S.$1.6-2.5 billion). This is a major achievement for the past several years in itself, but compared with the size of SRI market in the United States, which is said to be roughly U.S.$ 2 trillion, the Japanese figure remains very small.

Another challenge also is the composition of SRI funds; some point out that the composition of major SRI fund here tend to be similar to that of conventional index funds such as the Nikkei 225, partly due to the fact that leading companies tend to have solid environmental and social programs. Despite this situation, no major shift toward a sustainable society has yet occurred, evident in Japan's still-rising greenhouse gas emissions.

Takizawa and Okuyama felt that financial flows today are not always oriented toward sustainability. One of the reasons, they thought, is that what makes sense to an individual may not necessarily be reflected in larger capital flows. They asked themselves how can each individual in society, while dealing with the pressures of everyday life, take the future and the planet seriously as their matters affecting their own lives? Their conclusion was that they could help design financial solutions to address these challenges. This is an approach where, each one of us, concerned with sustainable lifestyles and consumption, can take on our own risk and invest in companies. As shareholders, we then deliver our opinions and requests to help companies move in a more sustainable direction. Through communication with companies, in greater amounts than what would be possible by just working alone, individuals and companies can grow and change together.

The term Sustainable Investor is used to refer to "intellectually rich" people, who may not necessary be financially rich, but "rich" on an intellectual level. "We believe that a great number of people can be counted in this category in Japan. Who wishes to fulfill social responsibility in his or her respective field and contribute to building a better society? Mothers raising children, individual professionals, business persons, company executives, retired seniors, educational professionals, athletes, and artists and entertainers, and many more. It is their participation and risk taking that is needed to use finance as a trigger for change. We would like to provide attractive financial solutions for that purpose."

A Proposal from Experts

Out of this philosophy, their first solution was born -- the "Eco Value Up Fund," a "participatory" and "shareholder-activism oriented" closed-end fund. This fund aims to contribute to sustainability while making healthy profits, taking the form of a limited partnership for investment, holding the shares of domestic public companies and others. The price is 100,000 yen (approx. U.S.$830) per share, and the fund will be liquidated after five years. Investment proceeds are distributed to investors annually. Also, from the returns a maximum of 10% will be donated to environmental and social institutions and nongovernmental organizations. Over a two-month period (between July and September 2006) selling exclusively by Internet, about 100 individuals invested 270 million yen (U.S.2.3 million) in this fund. Okuyama, chief investment designer, says, "SI believes in this fund's performance and invested 10 million yen (U.S.$83,000) of its own funds, unlike other major funds that try to avoid risk. This funds invest in stocks, which naturally means there will be up and downs over time, but on average we are shooting for a 10% return for the next five years."

Actual investment will be done by the following process. First, SI looks at the "Eco Value" of companies. It is important that the current stock price of a company is low compared to its inherent "Eco Value," and that the "Eco Value" will increase in the future. For some companies the "value-up" will take place without any interference, but for others there is a potential but the company itself hasn't realized yet. So SI breaks down the investment targets into three categories: "Eco Best," "Eco Tech," and "Eco Potential."

"Eco Best" companies are advanced in terms of environmental programs but have an under-valued market price. About half of the portfolio is in this category. "Eco Tech" companies have outstanding environmental technologies and business models. About 20% is in this category. And finally, "Eco Potential" companies do not have the best environmental programs but have the potential to rise to the "Eco Best" category. About 30% is in this category. In many cases these companies don't realize their own potential, requiring a good amount of work on the part of SI to make them aware. Here, SI as a shareholder will work with "value-up partners," including environmental NGOs such as Natural Step, Club Ecofacture, and sustainability-oriented companies such as Japan Applied Research Institute, in order to make strategic proposals to the companies in which SI has invested, and to urge the companies to take steps to realize their "Eco Value-up" potential.

The key feature of this fund is its "participatory" design. Members receive up-to-date information bi-weekly on the environment and sustainability, investments and asset management, as well as information directly from the target companies. Furthermore, members receive not only information, but may also voice their opinions on a members' blog and participate in discussions about the target companies on the SI website. SI compiles and analyzes comments and makes proposals directly to the management of the companies, thereby having a positive influence on their strategies and actions.

For the further details of Eco Value Up Fund, please see (only in Japanese)

On December 2006, SI launched its second fund, named "Forest Fund." Forests provide clean air, water, and nutrients for many life-forms, including fish in the oceans. But for a forest to grow well, it is not enough just to plant trees -- it needs to be properly managed over a long time with the right care, including branch cutting and thinning. Many Japanese plantation forests are not receiving proper care, and domestic timber prices continue to fall, mainly due to the fact that the necessary funds are not secured for forest management. This Forest Fund was designed by SI to generate the necessary financing to restore those forests in a sustainable manner.

Of course, simply purchasing a forest will not make it sustainable. SI used its financial expertise to create a "hybrid" fund. Half of the fund is used to purchase a forest, and the other half is used to purchase high-yield foreign bonds and others instruments to secure stable financial performance. Okuyama explains, "We could purchase 50 million yen of New Zealand dollar bonds at 7.0% interest. Ignoring currency risk for the moment, this would yield 3.5 million yen every year. This return, combined with subsidies, etc. can be used to restore and manage a forest of a certain size. In this case, even considering currency risk, we could secure the necessary funds for sustainable forest management in a stable and continuous manner."

The fund will be liquidated after 14 years, in 2020. For a forest to grow it would take 50 to 100 years and this fund could be set longer, but a shorter term was chosen, as this is the first attempt at this type of fund, and 2020 is the second target year for the Kyoto Protocol.

SI is considering two types of forests to purchase. One is a "recreational" forest where members can visit to enjoy, located at walking distance from Musashi Itsukaichi station in the outskirts of Tokyo. The other is an "economic" forest that actually generates income, located further in the mountains. The economic forest will be managed in a sustainable manner with the support of a local professional foresters' network. Okuyama explains that "It may be difficult to put a price on a 20-meter long cedar tree 50 years from now, but we all know that tree actually provides value to our ecosystem, by absorbing CO2 and helping to maintain ecosystem biodiversity. It is often said that forestry is not a profitable business here, but we believe it can be, depending on model chosen. As financial professionals, we would like to help create the conditions that make investments in forests is good not only for the forests but also in terms of asset management." For further details on the Forest Fund, please see (only in Japanese)

Taking the Responsibility of Managing Our Own Assets

People generally think of finance as something that large financial institutions do on their behalf. In contrast, Mr. Takizawa says, "As exemplified by the Internet, the tide of our times is shifting power from a few elites to the masses. The assets that financial institutions hold do not belong to the institutions but to us, the investors. If individuals expand their scope of knowledge and are confident in their own judgment to influence capital flows, we are convinced that they can be drivers for a better society."

SI wants to help create a society where individual can responsibly invest and manage their own assets. For that purpose, in addition to prove steady performance of Eco Value Up Fund and Forest Fund, SI is now planning to launch various other products and programs that can empower individuals through their own experience of investing. One idea is a participatory financial education program in which participants do not use text books filled with theories, but actually gain experience in fund management

We hope that SI will continue with its high aspirations and commitment to sustainability, and with an intimate understanding of the potential as well as limitations of finance, as it proposes new money flows that move society toward a sustainable future.

(Written by Kazunori Kobayashi)