When Japan’s finance minister, Shun’ichi Suzuki, announced in October that Japan would start to use its foreign reserves to buy ESG (environmental, social and governance) securities, it marked the latest in a long sequence of initiatives led by the country’s state institutions. The question is whether Japanese corporates will follow their lead.
There is no shortage of institutional landmarks. Japan has said it will reach carbon neutrality by 2050. Its central bank, the Bank of Japan, launched a strategy on climate change in July that committed it to buying green bonds, while also offering preferential borrowing terms to banks that make Taskforce on Climate-Related Financial Disclosures (TCFD) disclosures.
The Government Pension Investment Fund (GPIF), the world’s largest single pension fund, with $1.6 trillion in assets, has been allocating funds to ESG investments since 2017, having signed the Principles for Responsible Investing two years earlier. The country’s stewardship code has required companies to consider ESG implications since 2019. The Financial Services Agency (FSA) released draft social bond guidelines in July this year.
Nomura says Japan accounts for only 4% of green, social and sustainability bonds worldwide, about the same as far smaller South Korea
All of these are important steps, but the dominance of state institutions in this movement is problematic. According to FSA data cited by Fitch, 81% of social-bond issuers in Japan are government agencies; when one broadens the picture to Japan’s private sector, Fitch notes: “Green financing in Japan has so far lagged its potential.”
Based on July’s numbers, Japan ranks only 10th worldwide in cumulative green-bond issuance by value, and it is the private sector – both banks and corporates – that is lagging. Nomura says Japan accounts for only 4% of green, social and sustainability bonds worldwide, about the same as far smaller South Korea.
State direction
It is important to remember that state-directed coffers are particularly important in Japan, which has the second-highest level of reserves in the world, at $1.4 trillion. There is no bigger impact than either the ministry of finance, or the GPIF, turning its artillery around. It is because of GPIF’s change of tack that Japan’s ESG assets under management quadrupled between 2016 to 2018, according to McKinsey.
GPIF, for example, now requires all external asset managers to take ESG into consideration, and eventually this simply has to flow down to the corporate sphere, since companies will need to demonstrate their ESG credentials to investors or face consequences in their share prices.
And, piece by piece, one can see change permeating the corporate world: Hitachi appointed its first chief environment officer in April; Honda has pledged to end sales of petrol and diesel cars by 2040; Sony is including ESG metrics in annual executive pay; and Mitsubishi Heavy Industries is investing in carbon capture.
But Japan is still oddly sluggish when it comes to corporate issuance following the institutional lead. In fact, social bonds have been much more of a hit than green securities, the reverse of most other markets; there has been more traction in products geared towards pandemic response lately than there has on more classic environmental concerns.
Perhaps Suzuki-san’s announcement will finally prompt banks and corporates to issue more ESG bonds in the knowledge that there are ministry of finance assets just waiting to be deployed there. As COP26 arrives, now’s the time to start.
