https://orcid.org/0000-0002-6297-0964
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ABSTRACT
This article examines the role of sustainable finance and investment in Japan and how the Japanese financial sector can mitigate growing climate risks and support Japan's transition towards a zero-carbon, sustainable economy. It first illustrates Japan’s exposure to physical and transitional climate risks before reviewing emerging practices in sustainable finance. These include the growing importance of environmental, social, and governance (ESG) criteria in financial decision-making; more rigid reporting and disclosure standards; and the development of green bond and sustainable investment markets. The article also assesses the role of policies and regulations in scaling up sustainable finance and low-carbon infrastructure investments. Subsequently, it analyses transitional climate risks via scenario analysis, applying the Paris Agreement Capital Transition Assessment (PACTA) tool to examine the exposure of subsectors of the Japanese equity market over several climate scenarios. The article concludes with policy recommendations for aligning Japan’s financial sector with global climate and sustainability goals.
Acknowledgments
The authors would like to thank participants of the Fourth Annual Conference of the Japan Economy Network held at the Bank of Japan in August 2019 and the ADBI workshop on ‘Green Infrastructure Development in Asia: Investment, Financing and Economic Impacts’ held in November 2019 for valuable feedback. Hugues Chenet acknowledges the support of the Chair Energy and Prosperity, under the aegis of the Fondation du Risque. Kim Schumacher acknowledges the support of the ESRC through its IAA Innovation Fellowship scheme (Grant Nr. 1709-NPIF-348). The usual disclaimer applies.
Disclosure statement
No potential conflict of interest was reported by the author(s).
ORCID
Kim Schumacher http://orcid.org/0000-0002-6297-0964
Correction Statement
This article has been republished with minor changes. These changes do not impact the academic content of the article.
Notes
1 Reports indicate that in 2017, Japan was still planning to construct more than 42 new coal-fired power plants (Renewable Energy Institute Citation2017). Japan is the largest provider of fossil fuel finance among G7 countries and is currently the world’s second-largest provider of funds to carbon-intensive power generation technologies, having provided funding to more than 19,788 MW of current and 2,520 MW of future coal-fired energy capacity (Burrows et al. Citation2019; Furuno Citation2019; Hanada, Ohira, and Fukumoto Citation2019; Smee and Hurst Citation2019; Bengali Citation2019; EndCoal Citation2019). The fact that Hiroshi Kajiyama, Japan’s Minister of Economy, Trade and Industry, declared that Japan would continue to fund coal power technologies in and outside of Japan, primarily in Asia, has led to strong condemnations and criticism over Japan’s stance at the COP25 in Madrid in December 2019 (Mainichi Japan Citation2019a). Although Shinjiro Koizumi, the Minister of Environment, apologized for Japan’s continued use of coal power and acknowledged the problems caused by continuous coal use, he offered no credible pathways toward a materially significant decarbonization of Japan’s energy systems (Mainichi Japan Citation2019b). In recent comments about the planned Vung Ang 2 coal-fired power plant in Viet Nam, Koizumi questioned the financing provided by the Japan Bank for International Cooperation (JBIC) (NHK World Citation2020), and requested a review on said financing, as the project does not appear to fulfil certain export-related conditions for projects wanting to benefit from development finance (Nikkei Asian Review Citation2020). In light of the recent criticisms addressed at Koizumi at COP25, these statements might indicate a slight shift toward fossil fuel technology exports, although the government still plans to finance the plant (Nikkei Asian Review Citation2020).
2 The PRI comprise six principles: Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes; Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices; Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest; Principle 4: We will promote acceptance and implementation of the Principles within the investment industry; Principle 5: We will work together to enhance our effectiveness in implementing the Principles; Principle 6: We will each report on our activities and progress toward implementing the Principles.
3 Each company in the 2019 CDP survey belongs to one of the following sectors for the change disclosure score: ‘Agricultural commodities’, ‘Cement’, ‘Chemicals’, ‘Coal’, ‘Electric utilities’, ‘Food, beverage & tobacco’, ‘General’, ‘Metals & Mining’, ‘Oil & gas’, ‘Paper & forestry’, ‘Steel’, ‘Transport OEMS (original equipment manufacturers)’, and ‘Transport services’. The scoring scale is, with A being the top and F being the bottom grade: A, A-, B, B-, C, C-, D, D-, F.
4 An early initiative to promote sustainable and responsible investment in Japan was the Japan Sustainable Investment Forum (JSIF), which was established in 2001. It is interesting that until recently, most member companies of the JSIF were nonfinancial companies (JSIF Citation2015a; Citation2015b).
5 For detailed information on PACTA, see: https://www.transitionmonitor.com.
7 Note that the data we use in the analysis are from end 2017, slightly after the publication of the TCFD final report (FSB-TCFD Citation2017).
8 Carbon and ESG stress tests are currently being actively researched or considered by the German and Dutch governments as well as the European Central Bank (Reuters Citation2019; Navigant Citation2018; Vermeulen et al. Citation2018).
9 The first of its kind was Article 173 of the French energy transition and green growth law from 2015, which requires large institutional investors and asset managers to declare how they address ESG criteria in their risk management and investment policies (FIR Citation2016).
10 The three pillars are: (1) Reorienting capital flows toward a more sustainable economy; (2) Mainstreaming sustainability in risk management; and (3) Fostering transparency and long-termism.
11 The road map was published in November 2018 and built upon the work done by the EU High-level Expert Group on sustainable finance (European Commission Citation2018; Innpact and UNEP FI Citation2018). It listed nine national ambitions and 28 recommendations. The nine ambitions are: (1) Formalize and communicate an ambitious, tailor-made, and clear sustainable finance strategy; (2) Set up a coordinating entity; (3) Leverage financial sector expertise; (4) Raise awareness and integrate sustainability into education and professional training; (5) Promote innovation; (6) Develop expertise and best practice; (7) Analyze and redesign the system of incentives and taxation; (8) Lead by example and ensure proof of concept; and (9) Measure progress.