Blogpost | 28 May 2019

Japan is catching up slowly


Tokio: Inländische Akteure dominieren Japans Finanzsektor. Investoren und Unternehmen sind deshalb kaum internationalem Druck ausgesetzt, um nachhaltiger zu werden. (Foto: Purota/​Pixabay)

The year 2019 will be key for future climate policy in Germany and Europe. Finance plays a key role in improving climate protection and sustainable growth.

To this end, Germany should learn from pioneering countries for "Green Finance". In the seven articles in our series, international authors will therefore explain their country's approach towards a green financial system, addressing opportunities, hurdles and unanswered questions.

In Japan, this year's G20 host, awareness of climate-related risks has risen in recent years. However, the road to a fully sustainable financial system is still long.

Despite the rise of other Asian nations, Japan is still an economic and cultural powerhouse that wields considerable regional and global influence, with the country hosting this year’s G20 summit. Sustainable development and green infrastructure were some of the core themes that Japan wanted to highlight during this event with leading heads of state and government in Osaka end of June.

Despite its overall importance in the global financial system, domestic players mostly dominate the Japanese financial sector. This partially explains why Japanese investors and companies so far have been less confronted with international pressure to take account of environmental, social, and governance (ESG) factors in their decision-making.

Underestimated Financial Risks

This has led to an underestimation of the physical and transitional climate risks that are highlighted in the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).

However, Japan and its economy are exposed to significant levels of climate risks, which include flooding, heat waves, sea level rise and ocean acidification. Osaka and Tokyo are among the cities most exposed to sea level rise-related stranded asset risks.

As the Japanese economy is highly reliant on the import of raw materials, Japanese companies and investors are also disproportionally exposed to external risks, for example regarding their investments in fossil fuel-related assets such as coal-fired power plants.

Growing Political Awareness

In recent years, however, both awareness of climate-related risks and action towards the integration of ESG policies have accelerated.

Following the ratification of the Paris Climate Agreement, the Japanese government has jump-started several initiatives to promote sustainable finance across the Japanese economy that are meant to support companies and investors to align their business models or portfolios more actively with ESG policies.

The publication of a Stewardship Code by the Financial Service Agency (FSA) back in 2014 was seen as one of the main catalysts towards the promotion of long-term sustainable investment decision-making.

It was the first comprehensive attempt to provide publicly listed companies with a set of guidelines on how to promote responsible investment behaviour and sustainable growth.

Building upon this framework, the FSA has been expanding the scope of its activities regarding ESG issues and climate-risk management. In late 2018, it has appointed a dedicated Chief Sustainable Finance Officer, which represents an important step expanding sustainable finance-related regulatory action. 

The Ministry of Economy, Trade, and Industry (METI) has created working groups on ESG policies and the TCFD in order to increase the quality and quantity of ESG data disclosed by companies.

Based on recommendations proposed by these working groups, the Ministry of the Environment has introduced a scheme that provides financial support to companies and investors when performing TCFD-recommended scenario analysis.

It has developed guidelines for green bonds and operates a financial support scheme for Japan-based bond issuers.

The Ministry thereby hopes to further increase the current cumulative green bond issuance value of US$9.7bn, which ranks 10th globally and already is the 2nd largest Asia Pacific market after China.

In October 2018, these ongoing efforts have been flanked by the creation of the Green Finance Network Japan (GFNJ), which is composed of members from the political, corporate, civil society, and academic sectors. It will support the government in expanding sustainable and green finance policies over the coming years.

Scaling Corporate Efforts

The Government Pension Investment Fund (GPIF) has been playing an instrumental role in driving growth of the Japanese sustainable finance sector.

Through a series of strategic ESG-oriented management decisions, the GPIF was able to leverage its domestic investment share, with domestic assets accounting for more than 50% of its US$1.5trn in assets, to raise awareness among financial actors to implement ESG principles more seriously.

The GPIF, for example, publicly supported the TCFD recommendations, commissioned environmental and ESG indices, and selected several external asset managers by looking at their ESG track records.

These moves then led to a multitude of various private-sector actions such as the Japan Exchange Group (JPX) creating a sustainability committee in August 2018 and announcing a collaboration with the London Stock Exchange Group (LSEG) on promoting the implementation of sustainability-oriented policies.

The Japanese sustainable finance sector still needs to grow to compete with the more mature and developed markets in Europe and North America. However, by building upon and expanding the aforementioned policy initiatives and capacity building efforts, momentum can be maintained and steered toward the expansion of climate and ESG-aligned investment.

This includes the reduction of asset holdings and investments in carbon-intensive technologies and project, both domestic and abroad. Numerous Japanese pension funds, insurers, asset managers, and banks are still relative laggards in terms of either reducing or disclosing their carbon-intensive assets, notably in the area of fossil fuel-related activities.

Until all of those commitments to ESG principles are transformed into concrete action, it will remain difficult for Japan to fully embrace sustainable finance and “realize and promote a free and open, inclusive and sustainable, human-centered future society”, as announced by Prime Minister Shinzo Abe.


Kim Schumacher

Dr Kim Schumacher is an Honorary Research Associate of the Economics of Sustainability Programme at the Smith School of Enterprise and the Environment (SSEE). His research interests focus on Climate Change Law and Policy, Sustainable Finance, Sustainable Energy Transition, and Environmental Regulatory Procedures. He is also a member of the Technical Working Groups of the Climate Disclosure Standards Board und der Climate Bonds Initiative.

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With the financial support of Stiftung Mercator. The author and Germanwatch are responsible for the content.

The blog post was first published at and is available in German.


Kim Schumacher