How to finance the world’s transition to a greener future is one of the most important dialogues of this millennia. A critical question is how to raise the enormous funds needed to decarbonize high-emission industry, like steel and shipping, which will struggle to go green in a single leap. Here, Japan is at the forefront. At the heart of the country’s strategy to reach net-zero by 2050 lies a new financial approach, called transition finance, which offers a realistic solution. This topic, and the key role Tokyo will play in opening transition finance opportunities to investors, was in focus at FinCity.Tokyo’s webinar “Accelerating the Momentum for Transition Finance” on December 7, 2022.
Tokyo as a Hub for Transition Finance
“The climate crisis is becoming ever more serious and against this backdrop a major trend is emerging in transition finance,” said Koike Yuriko, Governor of Tokyo, in her opening remarks.
Indeed, while expanding low-carbon initiatives is important for a sustainable future, greening of high-emitting, or brown, industries, will have a much more direct effect on current emission levels and help nations around the world meet climate targets. The key is to encourage steady, long-term climate action by enabling high-emitters to reach an “amber” state that has less environmental impact through energy-saving investment and a shift to low-emission fuels, and from which further efforts can be made.
Tokyo is well-positioned to respond to this trend and become a hub for transition finance. Not only does the city serve as the nexus of Japan’s formidable industrial base and Asia-wide manufacturing supply chains; Japanese investors have in recent years wholeheartedly embraced sustainable finance.
In fact, Japanese Prime Minister Kishida has already laid out a plan to issue 20 trillion yen ($157 billion) worth of “green transition” bonds to help finance investment to achieve a carbon-neutral society.(1) And in 1H 2022 alone, Japanese issuers sold $2.2 billion of transition bonds, about 40 percent of the global total, putting Tokyo in the prime position to be Asia’s center of transition finance.(2)
However, to Aritomo Keiichi, Executive Director at FinCity.Tokyo, an organization dedicated to cementing Tokyo’s profile as a global financial hub, the opportunities from transition finance are much wider in scope than just the capital markets.
“Transition finance, in our definition, is much broader than just green bonds or lending,” he said. “We need to better integrate the entire investment chains and supply chains for green transformation. In other words, the goal of transition finance is to achieve green transformation through the end-to-end supply chains.”
Japan, the world’s fourth largest export economy, thus stands poised to play a pivotal role in helping Asian countries on their net-zero journey.
Inoue Tetsuya, Head of Policy Research at FinCity.Tokyo, highlighted that the economic similarities between Japan and other Asian countries puts Japan in good stead to support the region’s transition towards a greener future.
With Asia being the world’s largest manufacturing region by far(3), “Asian economies and Japan share the same characteristics with heavy concentration of manufacturing and energy activities, allowing for better understanding of the financing nuances needed,” said Inoue.
Ikeda Satoshi, Chief Sustainable Finance Officer at Japan’s Financial Services Agency (FSA), echoed this observation at a recent media roundtable arranged by FinCity.Tokyo. Japan, he said, is already helping countries in the Association of Southeast Asian Nations to design energy transition plans through technical assistance.
“Once we assist in setting certain sector roadmaps for critical industries within their respective countries, the transition finance framework will work better,” said Ikeda.
The Need for A Just Transition
At present, transition finance investing can be tricky for global asset managers due to in-house portfolio guidelines or regulatory taxonomies. For example, some may have a divestment policy for coal, and hence are not allowed to invest in that industry full stop. What many asset managers do agree on, however, is that investments into the transition must happen and that the transition itself must be fair and inclusive.
“There is a very significant level of consensus within international markets on the need for a just transition,” commented Timothee Jaulin, Head of ESG Development & Advocacy, Amundi Asset Management.
Decarbonization, he emphasized, can be achieved not only through divestment but also largely by guiding these assets towards being decommissioned. In other words, he believes that engagement, and not divestment alone, will be key to success.
This view is echoed in the report entitled Financial Institution Net-zero Transition Plans, released by the Glasgow Financial Alliance for Net Zero (Gfanz) in November 2022.
“Financial institutions should consider the potential for real-economy emissions reduction in their activities, recognizing that the greatest emissions reduction may be achieved by directing financing and related services to — rather than divesting from — firms and assets that need to transition,” reads the report.(4)
Ishikawa Tomohiro, Managing Director, Head of Government & Regulatory Affairs Office at Mitsubishi UFJ Financial Group (MUFG), agreed that divestment would not be a practical or responsible way to deliver net-zero targets.
“We need to assess whether transition plans are credible or not,” said Ishikawa. “The robust assessment of transition plans will allow us to understand our clients’ strategy and provide appropriate financial solutions.”
Avoiding greenwashing and suspicion of greenwashing, a much-criticized practice in which businesses take steps to appear more sustainable than they actually are, will be critical to ensuring that transition finance investments serve their purpose. However, Amundi’s Jaulin challenged the current climate of fear around greenwashing, stressing that fears of finger-pointing should not detract a company from embarking on their green journey, nor communicating on it.
“Presently, people point at greenwashing, when they identify assets that they see as polluting and consider not compatible with the green credentials,” he said. “This is not the right approach — greenwashing should be about the difference between the realisation of the climate ambition and the climate ambition that has been voiced.”
“While it is key to have observers such as non-governmental organisations analyse the credibility of a transition plan,” continued Jaulin. “It is also important to remain pragmatic and try to understand the reality of different companies and geographies whereby some sectors may need more time.”
Supporting Real life Outcomes
Clearly, no company, institution or country can reach net-zero goals single-handedly.
Hence, the Asia Transition Finance Study Group was established by private financial institutions in September 2021 to explore the concept of the region transitioning as a whole.
Understanding the importance of engaging a wide range of stakeholders to engage climate goals, the Tokyo Metropolitan Government (TMG) is strongly promoting transition finance among the various initiatives contained in the Tokyo Green Finance Initiative (TGFI), its strategic effort to build Tokyo into a green finance hub. The goal is to enable a sustainable recovery for Tokyo’s economy and society in the post-covid era that contributes to Japan’s long-term growth and global prosperity.
Articulating the city’s own transition focus provides a certainty at a policy level, which would then allow real economy players to invest with confidence.
Emphasizing that transition efforts should focus on greening the whole global economy, and not just on green assets, the FSA’s Ikeda highlighted the rising global acceptance of transition finance.
“Japan was considered a maverick or an outlier a few years ago in setting out transition policy making,” he said at the FinCity.Tokyo roundtable. “Now it has become clear that transition finance is one of the key pillars of climate finance policies in many jurisdictions.”
For more about FinCity.Tokyo and other related information, please see:
https://fincity.tokyo/en/
https://www.seisakukikaku.metro.tokyo.lg.jp/en/pgs/gfct/vision/index.html
https://www.youtube.com/watch?v=8ZEBY_Dwu18Y
(1) https://www.reuters.com/business/sustainable-business/japan-lays-out-plan-issue-157-bln-green-transition-bonds-2022-05-19/
(2) https://www.businesstimes.com.sg/companies-markets/banking-finance/japan-alert-greenwashing-it-lends-us40b-esg
(3) https://www.unido.org/resources-statistics/quarterly-report-manufacturing
(4) https://assets.bbhub.io/company/sites/63/2022/09/Recommendations-and-Guidance-on-Financial-Institution-Net-zero-Transition-Plans-November-2022.pdf
