How insurers in Japan can diversify in debt while scaling in sustainability
Innovative listed credit solutions are creating unprecedented opportunities to drive both financial performance and social good.
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Japan’s financial institutions have long been significant players in the global investment landscape. Having traditionally focused on domestic investments such as long-duration Japanese government or corporate bonds, the lower-yield environment at home over the past two decades forced a shift in strategy. Increasingly, Japanese insurers and asset managers diversified into non-Japanese Yen credit markets, particularly those hedged in Yen, to capture competitive yields while mitigating currency risks.
In the early 2010s, this shift became evident as investment mandates for non-Yen investment grade (Yen-hedged) credit gained traction. However, this momentum waned as the Federal Reserve hiked rates between 2015 and 2018 – and was further stymied by the bond bear market of 2022. Yet, the diversification imperative remains strong, particularly as the Japanese credit market remains relatively undiversified. Insurance companies in particular continue to explore non-Yen credit investments to meet their portfolio diversification needs.
Sustainability imperative
Alongside this drive for diversification, Japan’s insurers are also grappling with sustainability demands. As long-term investors, most of which are signatories to the Principles for Responsible Investment, these institutions are committed to investing sustainably. However, many lack in-house capabilities to measure sustainability and impact throughout the life of their investments. This creates a critical gap in aligning their portfolios with their sustainability objectives, particularly as the financial sector shifts toward regulatory frameworks such as the Sustainable Finance Disclosure Regulation (SFDR) in Europe.
Meeting a dual challenge
In response to this dual challenge – diversifying credit exposure and embracing sustainability – BlueOrchard has developed innovative solutions. These include public debt impact strategies that allow Japanese insurers to invest through a sustainability lens, while enhancing their exposure to non-Yen credit markets.
The rise of listed debt in Japan represents a significant opportunity to scale sustainability-focused investments. Similar to equities, listed debt provides liquidity and accessibility, enabling investors to mobilise substantial funds for large-scale projects swiftly. As the sustainability and impact investment sectors continue to grow, the use of innovative financial instruments such as green, social and sustainability bonds has enhanced the credibility of these investments, which not only provide transparency through predefined key performance indicators, but also detailed reporting against specific sustainability criteria and metrics. This enables investors to quantify their sustainable investment outcomes, including their contribution to meeting the UN’s Sustainable Development Goals.
Through these innovative strategies, investors can gain exposure to investment-grade USD and EUR denominated corporate bonds financing environmental, social or other sustainability projects that meet BlueOrchard’s stringent impact criteria. By aligning with SFDR Article 9, BlueOrchard ensures that investments are not only financially viable, but that they also deliver measurable social and environmental outcomes. Meanwhile, currency risk can be managed through cross-currency swaps, with a fixed target yield in Yen that is competitive with the Japanese credit market.
Collaboration and capacity building
One of the keys to BlueOrchard’s success is collaboration. By partnering with local teams, and leveraging both its in-house solutions group and expertise across the broader Schroders Group, BlueOrchard has been able to tailor its solutions to meet the specific needs of Japanese insurers. For instance, the impact knowledge transfer provided by BlueOrchard’s team ensures that clients, even those without strong internal sustainability capabilities, can still engage meaningfully in sustainability and impact investing.
This collaborative approach is vital as Japan’s financial institutions seek to build in-house capabilities for both non-Yen credit investments and sustainability initiatives. As they continue to develop their internal expertise, partnerships with global leaders like BlueOrchard are critical to continue – and accelerate – their sustainability journeys.
The future of impact investing in Japan
The listed debt market offers fertile ground for scaling sustainability and impact investment in Japan. As more financial institutions embrace sustainability, the accessibility of impact-focused bonds allows a broader range of investors to participate in financing projects that deliver both social and environmental benefits. With innovative solutions like those offered by BlueOrchard, Japan’s insurers are well-positioned to navigate the complexities of global credit markets while making meaningful contributions to a more sustainable future.
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