By the end of 2017, the global value of ESG investments had grown to roughly $31 trillion1, primarily led by Europe and the United States. While Japan accounts for a relatively small proportion (roughly 3%) of the world’s $777.2 billion in outstanding ESG bonds (Green, Social, and Sustainability bonds), activity by ESG bond issuers has recently grown sharply. Annual issuance value ballooned from approximately $500 million in 2015 to nearly $12 billion in 20192. As issuance activity spread further across a wider range of business sectors, Japanese corporations, banks and government agencies expanded their activity beyond green bonds to include social and sustainability bonds and diversified how fundraising proceeds are utilized.
A key influencer of this growing activity in Japan is the development of supportive initiatives by the Ministry of Environment, including the establishment of the Green Bond Guidelines, the provision of additional guidance through the Green Bond Pilot Project3 and the establishment of a subsidy program.4
Further stimulating activity is the support from the Japanese private sector. In November 2017, the “Charter of Corporate Conduct” was revised by the Keidanren (Japan Business Federation), Japan’s most influential business lobby, to urge businesses to give due consideration to the SDGs in the development of management policies and to focus on contributing towards reaching those goals.
Since then, ESG awareness has risen among both issuers and investors, with a large number of corporations integrating elements of the SDGs into their management policies and a growing focus on both issuing and investing in ESG-related bonds. Additionally, there are indications of the ESG themes gaining traction with retail investors as evidenced by the brisk demand seen with the Tokyo Metropolitan Government’s green bond issuances.
ESG is expected to continue growing in importance in Japan, possibly becoming one of the core themes of Japanese financial markets. While ESG investment themes and methodologies have so far been primarily spearheaded by the US and Europe, they have adapted to local issues specific to Japan. This includes the “super aging” of Japanese society, a population that enjoys one of the world’s longest life expectancies yet simultaneously suffers from one of the world’s lowest fertility rates. In addition, factors such as the decline of regional economies as the populace concentrates around Tokyo, economic and income inequality, energy mix issues, and natural disasters could in turn ultimately lead to the development of a market distinct from that of other countries.
The United Nations University’s 2017 World Risk Report lists Japan as the country 4th most exposed to the effects of natural disasters out of 171 nations. The country is no stranger to natural disasters, having historically experienced frequent typhoons, hazardously heavy snowfalls, floods, landslides, earthquakes, tsunamis and volcanic eruptions. The Cabinet Office of Japan estimates that the country has suffered almost a fifth (roughly $421 billion) of the total global economic toll caused by natural disasters from 1984 to 2013. Furthermore, climate change has recently driven a significant increase in the destructive force of climate-related disasters, exacerbating Japan’s fiscal woes and impacting regional economies and societies. As a result, it is becoming fiscally unsustainable for both national and regional governments to continue shouldering the majority of the financial burden caused by these disasters as they have in the past. The role of corporations, financial institutions and investors will grow in importance in providing the funding necessary for recovery efforts and the development of societal climate change resilience through the capital markets.
It is important to note that while ESG factors are nationally pertinent to Japan, their importance has continued to grow on the international stage, leading to significant actions such as withdrawals from fossil fuel-related investments by major institutional investors, primarily those in the US and EU. As a result, it will be important for Japanese issuers to also be mindful of the role of ESG themes in the international landscape.
Additionally, the emergence of new initiatives aimed at further promoting sustainable finance is expected to accelerate the uptake of sustainability elements into the management strategies of Japanese corporations. One example is EU’s proposed introduction of Taxonomy regulations and efforts by the TCFD5 to improve the quality of climate-related financial disclosures.
Going forward, the financial institutions of the world will play an increasingly critical role in facilitating both public and private sector ESG-related market activities through the development of new climate change-related financial products, the cultivation of the nascent ESG investor base and improvement in the quality
of impact reporting.
1 Source: Global Sustainable Investment Alliance
2 Source: Bloomberg; as of Dec. 31, 2019
5 Source: Task Force on Climate-Related Disclosures