The Development Bank of Japan (DBJ) first Asian investor into US-based Equilibrium’s Agriculture Impact Fund

The Development Bank of Japan (DBJ) announced on November 19, 2020 that it will become the first Asian investor into US-based agricultural impact fund Equilibrium’s Controlled Environment Foods Fund II. This is Equilibrium’s second fund investing in large-scale controlled environment agriculture.

Meros has been fortunate to work alongside the DBJ team over the past year to help identify international agricultural impact investing trends and their impact on agricultural industries. We have also helped to outline the diverse challenges and investment and financing landscape facing Japanese agriculture that may potentially be addressed by agricultural impact funds in Japan. The last two years in particular have seen increased interest in the importance of impact and ESG investments in international farmland and agriculture supply chain investment, with ever-evolving discussion about how to measure and assess the impact of these investments.

Equilibrium Capital, the Pioneer of Agricultural Impact Fund Investing

Equilibrium is a US impact investment fund management company that creates investment opportunities with a focus on sustainability for institutional investors. The company is currently developing infrastructure investment funds for large-scale environmentally controlled agriculture and agricultural wastewater treatment projects. Founded by Dave Chen in 2008, the company is a pioneer in US impact investing.

In 2018, it launched the , the world’s first impact investment fund dedicated to large-scale, environmentally controlled agriculture, raising US$336 million and within one year, Equilibrium was operating over 100 hectares of greenhouse operations. CEFF II is now its second fund.

Equilibrium aims to create impact at every stage of the project. On the production side, the advantages of controlled environment farming are seen as efficient use of limited farmland, no soil runoff problems, less pesticide use, a better environment for workers compared to open field farming, and higher productivity, while reducing the need for irrigation. In terms of distribution and consumption, the peri-urban location of their greenhouses reduces logistics costs and carbon dioxide emissions in the distribution process, preserving freshness and providing nutritious food, reducing food waste, and improving food safety. The fund’s greenhouse operators are asked to align their businesses with Equilibrium’s goals, which include both growing efficiency and increased yields, as well as compliance with international food safety standards (GFSI) and working with retailers and freshness preservation technology companies to reduce packaging materials.

Development Bank of Japan (DBJ) and Sustainable Investment in Agriculture

By becoming an LP in Equilibrium’s fund, DBJ aims to obtain a deeper understanding of global trends in the agri-food sector, acquire advanced know-how, and contribute to the future growth of Japan’s domestic agricultural and food industries by sharing the knowledge gained from this investment with industries in Japan. Mr. Takuya Ogawa, Director of Corporate Finance Department 3, a core member of the DBJ team, commented: “We hope to achieve a more sustainable society through financial support to the food and agriculture sector and gain a deeper understanding of sustainable agriculture as advocated by Equilibrium and CEFF II.

As a government-funded financial institution, DBJ’s mission is to act in the public interest when selecting investments, and thus has a strong affinity with Equilibrium’s mission, sharing a philosophy of sustainable environmental, labor and social structures along the food chain, and impact investing in the food and agriculture sector.

Japanese Institutional Investors Already Moving into ESG Investing in Food, Agriculture and Farmland

While DBJ is the first to invest in an agricultural impact fund, Japanese institutional investors have already been moving into farmland investment. Nippon Life’s announcement in 2018 of an investment of approximately 10 billion yen in an overseas farmland investment fund managed by Hancock Natural Resources, a member of Manulife Life Group, is believed to be the first farmland fund deal by an Japanese institutional investor. According to their press release, Nippon Life Insurance expressed interest in how the fund can contribute to stable food supply through the environmentally friendly operations of farmland. The investment was positioned as an initiative within Nippon Life’s ESG-related investments and loans which total 200 billion yen. Hancock Natural Resource Group has a long history of investing in farmland, but in recent years, it has been focusing on more on sustainable practices in farmland operations, and in January of 2020, it announced the development of an ESG evaluation criteria for farmland operations, called Leading Harvest, together with several other large farmland investment funds.

As awareness of both ESG investing and impact investing grow in Japan, we look forward to Japan’s leading investors increasingly playing a role in global impact funds and bringing the lessons of sustainable farmland operations and impact investing to address Japan’s own agricultural challenges.

Meros hosts J-IIN’s first webinar on impact investing and impact measurement

While things have been in a state of adjustment these last months with COVID 19 restrictions in place, we are moving our discussions online!   To kick it off, Meros hosted the Japan Impact Investing Network (J-IIN)’s first webinar on June 4 on the topic of  “Impact Investing 101”.  Some of the key topics that were discussed in the lively after-discussion among the participants included

  • the potential impact of COVID19 on impact investing
  • whether there has been any progress in analysis and information exchange on impact investing failures
  • how widely the GIIN IRIS indicators can be disseminated
  • what kind of education can be provided to Japanese investors, and whether impact investing really has the potential to become a main stream investment strategy

Meros, J-IIN and Impact Investing in Agriculture and Food

The Japan Impact Investing Network has been active since the end of 2019, promoting discussion of practical experiences and case studies around the concept of Business with Impact. While impact investing is gaining recognition internationally as an important investment strategy, in Japan impact investing still has an image as a non-profit, corporate social responsibility (CSR) activity. In addition, Japan’s presence on the international stage often remains limited due to investment interest focused more on domestic issues than global issues.

The Global Steering Group for Impact Investment (GSG) had been created under UK leadership of the G8 In 2015 and in Japan, the Global Steering Group (GSG) Domestic Advisory Committee was established around the same time. Japan’s first domestic impact investment fund was launched by Shinsei Corporate Investment in 2017. However, the Japan Impact Investment Fund has focused on domestic issues such as women’s activities, welfare, education, and energy, and has not put much emphasis on agriculture and food.

Globally, food and agriculture sector has attracted some of the greatest attention within impact investing, and  impact investment has become an important way for entrepreneurs involved in food and agriculture to raise funds. In the past two years in particular, impact investing and impact evaluation have become common topics of discussion at global agricultural investment as well as foodtech and agri-tech events.

This was the impetus for Meros join J-IIN as a founding member- to deepen our own understanding of impact investing, particularly within food and agriculture and to give back to Japan, by contributing our own experiences and global perspectives.

J-IIN was created as a place where both entrepreneurs and investors with links to both Japan and overseas business can gather and communicate informally and learn to “speak the same language” about measuring and defining impact.

J-IIN’s Impact Investing 101 Webinar

 J-IIN’s first webinar was designed to provide an introduction to impact investing and was attended by about 10 institutional investors, VC funds, entrepreneurs, and consultants.

Most of the participants were Japanese and involved in businesses or investments both inside and outside of Japan. For many of the participants, impact investing and measurement of impact were somewhat new topics but all were very interested in discussing practical issues and challenges.

The key speakers at this inaugural event were J-IIN’s founders, Mr Takuro Kimura , president of G-cubed Partners who is based in Tokyo and NYC and Ms. Sawa Nakagawa, founder of Three Arrows Impact Partners who lives in South Africa. Mr Kimura introduced the philosophy and international trends in impact investing and Ms Nakagawa discussed Social Impact Evaluation and Management. Here are some of the highlights of their presentations.

Tak Kimura: Philosophy of Impact Investment and Impact 101

Mr. Kimura spent many years working at the International Finance Corporation (IFC), investing in emerging markets in the manufacturing, agribusiness, services and energy sectors. IFC is part of the World Bank Group and is responsible for investing in the private sector in emerging markets. IFC’s strong performance over the years (15% above the S&P 500) makes it a strong example of how it is possible to combine both market returns and creation of social or environmental impact

Mr Kimura discussed the background of impact investing. The concept of impact investing was first adopted by the Rockefeller Foundation in 2007. In 2013, the G8 Task Force on Social Impact Investing was formed. Today, impact investing has grown to US$500 billion, with an annual growth rate of 26-50%.

The basic principle of impact investing is that if an investment does not create social impact, there can be no investment, despite what the financial returns may be. While some impact investors are philanthropic and are willing to accept a slightly lower expected return, the majority of impact investors seek both return and impact, and seek a financial return that is commensurate with the risk, while also seeking to create social impact. In order to create sustainable impact, the core idea is that impact must grow by scaling the business, rather than by trying to attract more philanthropy funding.

The challenge for impact investing in the future is that numerous institutions are taking the lead in setting standards for impact investing, and this is resulting in multiple standards are being developed. It is therefore important for Japanese stakeholders to be actively involved in these international discussions and to participate in the movement toward the unification of principles and standards.

Sawa Nakagawa: Social Impact Evaluation and Management

Ms. Nakagawa is the founder of Three Arrows Impact Partner, an impact investment and social entrepreneurship advisory firm based in Johannesburg, South Africa. She provides consulting services on impact investing to private investment institutions and government financial institutions in various African countries, as well as assistance to social entrepreneurs in building impact evaluation and management systems. She is also a board member of the National Empowerment Fund, a South African government agency that invests in entrepreneurs from historically disadvantaged backgrounds.

Globally, the extreme poor still account for 10% of the world’s population. 2.2 billion people worldwide lack access to safe drinking water, the number of refugees and displaced people has surpassed 70 million, and the total economic damage caused by droughts in developing countries is US$29 billion (2005-2015). In order to measure progress on solutions to these  problems, the United Nations has set the Sustainable Development Goals (SDGs). It is estimated that an annual investment of 2.5 trillion dollars (about 280 trillion yen) is needed to achieve the 17 SDG targets. Since the investment by international organizations and governments alone is far insufficient, it is necessary to actively utilize private investment.

Why do we need social impact assessment and management in the first place? The first reason is that the establishment of an impact evaluation and management system will enable private investors to make decisions about potential investment based on this system, which in turn will promote the use of private funds and is the key to making impact investment a mainstream and expanding form of private investment.

The second reason is that entrepreneurs who aim to attract impact investment funding and their investors also need to be able to define the desired social impact, monitor the social impact of their business activities, and make further improvements. Just as in the pursuit of economic returns, quantifiable indicators for impact are necessary to set KPIs and implement the PDCA cycle.

The key case study in the presentation was I&P, an impact investment fund that invests in social entrepreneurs in Africa. It invests in more than 50 companies and has 70 million euros in assets under management. I&P has created a framework of social impact assessment tools and processes based on the internationally recognized IRIS indicators developed by the global impact platform Global Impact Investing Network (GIIN) and it was this system that was introduced as part of the case study.

Every year, GIIN obtains data from entrepreneurs, based on more than 100 indicators, and analyzes the broader social impact of its portfolio companies and their stakeholders to provide information to investors. This allows a  better understanding of the scale of social impact, and at the same time, this data gives entrepreneurs that ability to show these results as a tool for raising funds on a larger scale.

Social impact assessment and management is still in the process of global trial and error and that is what makes it such a dynamic and important area to watch.

J-IIN will continue to create opportunities for communication and dissemination of information around impact investment and impact measurement. Please contact us if you are interested in joining future discussions.