Meros has seen steady growth in Japanese institutional investors’ interest in sustainable investing over the past two years, and this interest in sustainable investing has, in turn, sparked an interest in the food and agriculture space. We have observed this shift directly through interviews during our projects, in discussions in our webinars and over casual chats with colleagues across the food and agriculture industry.
Until now, Japanese financial players have had a minor presence in global food and agriculture investment. They have lacked incentive, as well as knowledge about how to pursue investment in the agriculture sector – a sector traditionally monopolized by government banks and agricultural cooperatives. However, in recent years the tide has begun to turn.
Japanese institutional players have slowly started exploring investment opportunities in food and agriculture both domestically and globally, facilitated by recent policy and regulatory changes in Japan.
The critical milestone however was when several leading Japanese institutional investors made the first investments into the global food and agriculture space – and this move by these few pioneers has forced other players to suddenly start to look for seriously for opportunities in order to not be left behind. This hesitancy to be the first mover, and then the mad rush by many to follow right behind the first movers, is a typical Japanese corporate behavior pattern.
We thought it is a good time to provide some background and insights on these changes as we move into 2022.
Who are the Japanese institutional investors?
So, who are we talking about when we say institutional investors in Japan?
Major institutional investment sources in Japan include insurance, pension funds, as well as banks’ surplus funds as shown in the table below.
The insurance sector has the largest assets, especially life insurance companies. Despite Japan having a comprehensive public health insurance system, Japan is the second largest life insurance market in the world, with high consumer demand for life and health insurance products. Major players include Nippon Life Insurance Company (also known as Nissey), Dai-ichi Life Insurance Company and Japan Post Insurance. Among these, Nippon Life was the first to foray into global farmland investment, making an investment three years ago.
Japanese pension funds are also massive. Japan’s two-tier pension system, consisting of a base public pension and supplemental private corporate pension, has created the world’s largest pension fund –Government Pension Investment Fund (GPIF) with $1.4 trillion in assets under management (AUM). Although GPIF itself has not yet made any agricultural investments, as early as 2017, GPIF began investing in ways that were linked to ESG indices, and that prompted a dramatic shift towards sustainable investing by other Japanese financial players. GPIF began investing in alternative investments only seven years ago, but has sharply expanded them since then, and now has set a 5% allocation target for alternative investments.
In addition to the public funds, there are more than 1,800 private corporate employees’ pension funds, and the Pension Fund Association – PFA, which was founded as an association of those corporate funds, also has their own reserve. Because of pension funds’ risk-averse mindset, they have been slow to move toward agricultural investments. Nevertheless, several private corporate pension funds invested in a global food and agriculture funds in 2021.
These public and private Japanese pension funds commonly work with gatekeepers, a generic term for fund-of-funds managers and subadvisors, for their alternative investments.
Another major source is the surplus funds of banks, including major city banks like MUFJ Bank, Sumitomo Mitsui Banking Corporation- SMBC, Mizuho Bank, regional banks, trust banks and government banks. Bank deposits have been on the rise in recent years, especially during COVID19, against the backdrop of the Bank of Japan’s massive monetary easing. As a result, banks needed to develop innovative investment strategies to manage their surplus funds and have begun to turn to alternative investment products.
In terms of agriculture, we should not forget about The Norinchukin Bank, a financial institution established by Japanese agriculture, forestry and fishery cooperatives, and one of the largest banks in Japan, managing about $500 billion USD.
University endowments are relatively small in Japan, but the government announced that it will launch a fund of around $90 billion USD by 2022 to strengthen the financial foundations of universities.
In addition, leasing companies such as Orix; financial securities firms, such as Nomura and Daiwa Securities Group; and the sogo shosha, Japan’s general trading conglomerates that engage in a vast range of global business activities and investing, such as Mitsubishi Corporation, Mitsui and Itochu Corporation, are also major players in the investment scene. They are not institutional players in the narrow sense, but almost all of these major leasing companies, securities and sogo shosha have their own financial advisory companies that provide support to institutional investors as ‘gatekeepers’, similar to large insurance companies and banks.
Are Japanese investors really moving toward sustainable investing? A look at ESG (Environmental, Social and Governance) and the Sustainable Development Goals
Consideration of the SDGs has become mainstream in the Japanese financial industry over the last two to three years.
‘ESG’ has become almost a buzz word and now the term ‘ESG investing’ in Japanese is used to refer to ALL sustainable investments and related finance schemes. It does not refer only ESG integration investment, which is a globally accepted term defined by the UN Principles for Responsible Investment (UNPRI) and the Global Sustainable Investment Alliance (GSI), but instead is used as an umbrella term to refer to other investment concepts such as sustainability-themed investments, negative screening, impact investing and even green, social and sustainability bonds.
As we mentioned earlier, the Government Pension Investment Fund (GPIF) revised its investment principles in October 2017, and declared that it will promote investment that takes “ESG factors” into account in all of their assets, including bonds, not just stocks. Since GPIF is the largest single money source in Japan, their action forced other financial institutions in Japan into action and laid the foundation for the current momentum toward “ESG investing”. The unprecedented global economic crisis caused by COVID 19 accelerated this trend. For example, Norinchukin Bank, announced in May 2021 that they will pour $90 billion into projects to address “ESG issues”, by both investing and lending, over the next 10 years.
As of the end of March 2021, sustainable investments were 62% of the total assets under management in Japan, according to the Japan Sustainable Investment Forum – JSIF.
Among various sustainable financing schemes, ESG integration investments and green, social and sustainability bonds (referred as ‘ESG bonds’ or ‘SDGs bonds’ in Japan) are the areas that Japanese investors are increasingly moving into. ESG integration investment in Japan has been flourishing and reached $1.9 trillion in 2020, which was 8% of global ESG integration investment. At the same time, the total of green, social and sustainability bonds issued in Japan reached about $20 billion USD in 2020.
In my view, the key reason Japanese investors were able to move into ESG integration investments and green, social and sustainability bonds so quickly was that various global rating and evaluating systems have been established by organizations such as MSCI, FTSE Russell, Dow Jones, CDP and the World Benchmarking Alliance, and can now be used for evaluating these sustainable finance options. Therefore, it was relatively easy for the risk-averse Japanese financial players to feel comfortable engaging with these new investment opportunities thanks to reference tools they can trust.
On the other hand, impact investments by investors in Japan lag far behind their global economic counterparts. Japan was one of the original members of the Global Steering Group for Impact Investment, a taskforce originally established in 2013 at the G8 summit. But Japan’s investors were slow to warm to this innovative investment methodology. Currently, Japan’s impact investment market size is a mere $5 billion – less than 1% of the global market. This seems to be a reflection of Japanese investors’ hesitation to take the initiative to determine impact goals and to develop impact measurement tools by themselves.
In this sense, many may assume that the Japanese industry is simply studying the various rating systems established by rating organizations and strengthening only those aspects of their businesses and investments necessary to get good scores on these rating systems but is not taking any real action to increase sustainability.
We cannot deny that this aspect exists, but still, as ESG becomes a mainstream concept among major Japanese financial players, we are seeing trickle-down effects into businesses along the entire food and agriculture chain.
With this shift among leading financial players, major Japanese food processing, retail and food service players are rushing to identify their ESG challenges and take the initiative to change their food and agriculture supply chains. The Ministry of Agriculture, Forestry and Fisheries in Japan recently established a committee to discuss “ESG investing” in food supply chain and Meros’ Chisa Ogura was invited as a committee member. One committee member from a major beverage company commented, “Retailers are the key. Once you push retailers, things change. In the past, retail buyers have been very reluctant to deal with products marketed as “sustainable” because these products do not necessarily sell well, but now, retailers are establishing sustainability departments and have become very proactive in checking the sustainability standards of their suppliers. In response, we, as a manufacturer, are forced to take action too.”
Furthermore, the major banks have started to support Small and Medium-sized Enterprises (SMEs), which represent the majority of players in the food supply chain. The director of the Sustainability Division of a major bank told us, “Japanese financial institutions are well aware that sustainability is a challenge within the entire food supply chain. Our support for sustainable supply chains, like developing guidance on how to disclose climate-related information, calculate CO2 emissions and plan steps to tackle these issues, are for SMEs along the entire food supply chain. We are not the only one. All other financial institutions are taking the initiative to encourage SMEs to take action.”
How does this all link to investing in global sustainable food and agriculture supply chains?
So how will all these changes within Japanese institutional investor thinking be connected to sustainable investments in the global food and agriculture sector?
Despite the changing dynamics, Japanese players still have a limited presence in global farmland and agricultural investments.
Yet, there are some notable exceptions.
One early pioneer was Dai-Ichi Life Insurance Company who in 2016 purchased $50 million worth of the African Development Bank’s first Feed Africa Bond , which finances projects to enhance agricultural supply chains and agribusiness in Africa, as a part of Dai-ichi’s effort to actively engage in asset management that incorporates an ‘ESG perspective’.
The pioneer in global farmland investment was Nippon Life Insurance Company, who invested $100 million USD into Hancock Natural Resource Group’s Australian farmland fund in 2018. Nippon Life mentioned clearly in their press release that this investment is a part of their four-year management plan to allocate $13 billion to ‘ESG-related’ investment and lending. They thought that this investment will contribute to the Food and Agriculture Organization (FAO)’s goal of ensuring global food security. Nippon Life Insurance Company’s team told us that it took years to examine the fund before investing, from learning the differences between the income streams of field crops and permanent crops to factors which impact farmland prices and the farmland taxation systems of many different countries. The deciding factor was that Hancock Natural Resource Group is a part of Manulife group, which is in the same life insurance industry and has an office in Japan for hands-on support.
Japan needed to wait till November 2020 to see the next major investment case, when the government-backed Development Bank of Japan – DBJ invested $100 million into Equilibrium Capital’s Controlled Environment Foods Fund II, which targets large-scale controlled environment agriculture to pursue sustainability-driven real asset opportunities.
Katsumi Sugiura, the director in charge of DBJ’s agriculture investing, explained during a panel discussion Meros organized in April 2021:
“It took about five years to make this happen. DBJ’s primary role has been to provide large-scale public finance, including investment and loans, for development in highly strategic industries for Japan like heavy industries, and it had little involvement in the food and agriculture sector. However, through financing for sogo shosha and the international grain majors in this sector, we became interested in global food and agricultural investing. Since one of DBJ’s roles is to learn from overseas financial practices and apply them to solving domestic challenges, we thought we could do the same thing in agriculture, a sector that is facing fundamental challenges in Japan. At the same time, DBJ also felt this was a chance to examine global food and agricultural funds through the lens of DBJ’s financial advisory business, which manages client assets as a gatekeeper. We felt we should try these funds out with our own money before recommending them to our customers.”
DBJ expects to form a dedicated team to handle food and agriculture fund investments this year and continue to move forward in this sector. In 2021, they invested in several more global food and agriculture funds, including a Proterra Investment Advisors (Singapore) fund in September 2021.
Why were Japanese investors so slow to move into sustainable food and agriculture investment?
We think that the main reason for the lag among Japanese investors is the lack of knowledge about how to pursue investment in the agriculture sector.
Japanese agriculture is characterized by small farms which were created as a result of radical land reform under the US occupation after World War II to prevent communization. The Japanese Agricultural Land Act, created as part of this land reform, stipulates that only farmers who cultivate land can own agricultural land, and therefore agricultural land does not have any collateral value for financial institutions in Japan. Thus, agricultural finance has been dominated by Japan Finance Corporation( JFC), a state-owned financial institution that was designed to support SMEs, as well as the agricultural cooperatives, who also provide government-backed loans.
The Japanese government has acknowledged the importance of private investment in agriculture to revitalize the struggling agricultural industry which is under extreme pressure from an aging workforce. Therefore, the government made some positive regulatory changes to allow investments into farmland by non-farmers if the non-farmer share remains less than 50% of the total stock and developed a scheme through the Agriculture Investment Facilitation Act to promote investment, by having JFC provide half of the capital for agricultural funds established by private banks and financial institutions. As a response, twenty-two agricultural funds have been formed so far by regional banks and Norinchukin Bank. However, the scale of investments by these funds are small, with an average of less than $1 million per investment.
What those funds are struggling with most is a pipeline of profitable and scalable businesses to invest in.
The fact that there are few scalable businesses within the Japanese agriculture sector is well known by financial institutions as the key challenge. Over the past 5-6 years, many financial institutions, such as Sumitomo Mitsui Banking Corporation (SMBC), Daiwa Securities and ORIX Corporation, have even been experimenting with setting up their own pilot farms and sending their own employees to a get their hands dirty and learn about agriculture, in a desperate bid to try to develop bankable and scalable farming business models on their own.
The DBJ agriculture fund investment team also mentioned that “when we first became interested in agricultural investment 4-5 years ago, we actually did not have ESG or impact investing in mind. We were much more interested in how international agriculture funds increase the sales and profitability of agriculture.” Without profitable and scalable agricultural business models, no industrial development through private investment can be expected.
This is not the first time Japanese investors have tried to get involved in overseas agricultural investments. The sogo shoshas have made investments in Latin America, and the failure of some of these investments brought significant loss. For example, Mitsui invested in Multigrain, a grain grower/distributor in Brazil, in 2007 and later made Multigrain a subsidiary. However, Mitsui pulled out in 2018, with a loss of $35 million. Sojitz also invested in CGC Group, which produces and exports grains in Brazil, but posted a loss of about $8 million in 2017.
Nevertheless, the push toward sustainable investment has brought renewed interest in agricultural investing.
On May 2021, Japan’s Ministry of Agriculture, Forestry and Fisheries (MAFF) finalized Japan’s Green Food System Strategy, aiming to achieve net-zero emissions in agriculture by 2050. MAFF will support the establishment of sustainable agriculture by reducing the use of chemical pesticides and fertilizers and promoting organic farming domestically. It is also encouraging food manufacturers and distributors to achieve sustainability-conscious procurement of imported food by 2030. This strategy reflects a recognition that a fundamental transformation of Japan’s global food supply chain is needed. The MAFF committee to discuss ESG investing in the food supply chain, of which Meros was a committee member, was also created in line with this new policy.
In sync with that, the government amended the Agriculture Investment Facilitation Act in April 2021, allowing an expansion of the investment scope of agricultural funds. The new scope will include not only domestic farming corporations but also peripheral companies in the agricultural supply chain such as distribution and trading companies, agri-tech and food-tech ventures, as well as overseas corporations and international farmland and agriculture funds.
Who will be next to invest in global sustainable food and agriculture supply chains?
We think a few more years will be needed before we see truly rapid growth in Japanese institutional investment in global sustainable food and agriculture.
But in the last one year we have already seen more companies start to follow in the footsteps of the first movers
We heard from farmland funds and ag-tech funds with global and Asian presence that they succeeded in raising money from Japanese investors in the past year, mainly from corporate investments and banks, but also from some other institutional investors, such as pension funds and university endowments. Daiwa Research Institute’s survey of corporate pension funds revealed that while there were no investments in farmland funds in FY2020, 2.4% of surveyed funds indicated that they plan to invest in farmland funds in FY2021. Other research by Soken, a media company specialized in asset management, also showed that several pension funds and university endowments have invested in farmland funds.
Our own experience at Meros supports this growing interest among Japanese institutional investors. In April 2021, I was a panelist at a global agriculture investment event organized by Nishimura & Asahi Law Firm with over 100 institutional investors participating. Over the last year, we also started to see articles in industry news media introducing farmland and agricultural investments as a new opportunity for institutional players.
Another sign of growing interest is that that placement agents that deal with agricultural funds are beginning to appear. As the number of specialists increases who can bridge the gap between international fund managers and Japanese investors, who still have language barriers, the potential for investment in the agricultural sector increases.
How can we accelerate their shift?
While there are plenty of signs that Japanese institutional investors are becoming more interested in the agricultural sector, sustainable investing in agriculture nevertheless still remains a very new topic for Japanese institutional investors. Language barriers also remain.
Therefore, we strongly believe that comprehensive education for investors will be needed to further stimulate Japanese investments in the global sustainable food and agricultural space, and there is still much more work to be done to bring Japanese players into the international eco-system of sustainable investing in agriculture and food supply chains.
If this article was helpful for understanding the current trends in Japanese investing in agriculture and food, let us know! Please connect if you have additional topics you are interested in.