This year again, Japan lost ranks in the annual index that monitors progress towards the UN’s Sustainable Development Goals for 2030. Japan is in the red zone on gender equality, biodiversity, responsible production and climate action.
The ‘Land of the Rising Sun’ does not perform much better in other sustainability rankings. In the climate benchmarks established by the World Benchmarking Alliance, a global non-profit tracking the sustainability efforts of 2,000 international companies, Japanese car manufacturers and electric utilities are outranked not only by Western companies, but also now by peers in Indonesia and China.
Japanese companies certainly have all the required resources – technologies, financial capacity, human capital – to accelerate their transition to a low-carbon economy, but after a few years trying to catch up on global environmental, social and governance practices, Japanese companies are still not where they should be. A recent study from global non-profit CDP shows that Japanese listed companies are collectively aligned with a 2.8°C pathway – when the Paris Agreement goal is to limit global warming to 1.5°C.
Japanese companies slow on net zero
In the global race to decarbonise, Japanese companies seem to have chosen the strategy of the tortoise, taking their time before fully setting themselves in motion towards a low-carbon economy. In their defence, they are not actively pushed by the Japanese government. Two years after former Prime Minister Yoshihide Suga’s pledge of carbon neutrality by 2050, concrete policies and regulations are still being discussed in seemingly never-ending committees.
Japanese companies can also thank their domestic customers for not being too demanding when it comes to reducing the carbon footprint of their products and services. A 2021 study from the Pew Research Center in the US found that among eight major economies, Japan was the only one whose population was less concerned about climate change than in 2015, the year of the landmark Paris Agreement.
Another hindrance to changing the mindset at Japanese companies is a corporate management structure sorely lacking in diversity. In the top 200 companies, the average director of the board is 67 years old. Only 6% of board members are women – against 25% in Europe or in the US. Worldwide, climate advocacy is making progress thanks to the voices of people outside traditional power circles, but there is no Greta Thunberg in Japan. Young and female employees are rarely in a position to challenge top management with questions on corporate climate plans.
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More pressure is needed to help Japanese companies move from setting aspirational targets to designing and implementing concrete low-carbon transition plans – and to do it fast. If this pressure is not forthcoming from the Japanese government, consumers or employees, where could it come from?
Shareholder climate activism reaches Japan
In February 2022, Hiromi Yamaji, CEO of the Tokyo Stock Exchange, urged Japanese companies to open a constructive dialogue with activist shareholders. According to financial newspaper Nikkei, nearly one-third of Japanese securities are now held by non-Japanese investors. What if the wave of shareholder climate activism was now coming to Japan? Could it help push Japanese companies towards sustainability, just like Admiral Perry’s Black Ships ended the archipelago’s decades of isolation when they reached the coast of Japan two centuries ago?
Kiko Network, a local non-governmental organisation (NGO), was the first to walk this path. The Japanese non-profit, whose roots go back to COP3 and the Kyoto Protocol in 1997, made the headlines in spring 2020 when it filed the first-ever shareholder climate resolution in Japan.
The proposal, submitted to other shareholders of Mizuho, one of three Japanese megabanks, would – if approved by a majority – have forced the bank to disclose its climate-related risks and publish an investment plan aligned with the Paris Agreement. The resolution received 34% of supporting votes from shareholders of Mizuho.
“That was much more than we expected,” says Yasuko Suzuki, programme coordinator at Kiko Network. “We heard from international NGOs that shareholder proposals could be a useful tactic, but we were not sure it would work in Japan.”
In 2021, Kiko Network teamed up with three other non-profits, including Australia-based Market Forces, to lead a similar initiative at MUFG, another Japanese megabank. In both cases, even though the resolutions did not pass, they were followed a few months later by significant changes in the climate strategies of the banks.
These pioneering NGOs were followed in April 2021 by the city of Kyoto. The first Japanese member of the Powering Past Coal Alliance submitted a shareholder proposal to Kansai Electric, calling on it to stop building new coal plants. This initiative opened a possible future path of action: shareholder climate activism by local governments in Japan at companies in which they own shares – such as transport, energy and real estate companies.
2022: broader and bolder moves from investors and NGOs
Following these first attempts, this year’s shareholders voting season, in spring, saw two further meaningful developments.
First, an expansion of the sectoral scope. Kiko Network, Market Forces and their allies repeated their efforts, this time targeting not only financial companies but also electric utilities. “We have been very concerned about TEPCO and Chubu Electric, joint owners of JERA, the largest thermal power generator in Japan,” explains Sachiko Suzuki from Market Forces. “JERA is aggressively expanding its thermal power business in developing countries across Asia, while renewables are already cheaper in many.”
Second, foreign shareholders have started to become more vocal.
Three Danish pension funds and the city of New York, all shareholders of Toyota Motor, openly criticised the carmaker’s climate strategy in May. They warned they would not tolerate “outspoken climate negativity” anymore.
Environmental NGOs see these new signals from shareholders as supporting their efforts. “Climate action is closely tied to improved financial performance,” says Daniel Read, climate campaigner at Greenpeace Japan. “Institutional shareholders are therefore becoming more likely to support climate resolutions submitted by activist funds. No company is immune, regardless of how big they may be.”
After NGOs in 2020 and 2021, major international investors submitted climate resolutions to a Japanese company for the first time in 2022. French and British asset managers, including Amundi and HSBC, asked J-Power, Japan’s largest operator of coal-fired power plants – alone responsible for nearly 6% of the country’s carbon emissions – to set and disclose a science-based low-carbon transition plan and to align top management remuneration with the achievement of climate goals.
These resolutions received around 20% of votes in favour, far from a majority, but much more than the percentage of J-Power’s capital held by these European investors, thus demonstrating the capacity for minority shareholders to rally supporters – including domestic investors – to their cause.
“Since last year, we have been telling Japanese companies the stories of ExxonMobil and others pressured by climate activist shareholders,” says Kyoya Okazawa, founder of Codo Advisory, a consultancy helping Japanese companies decarbonise. "We have been telling them this would be coming to Japan sooner or later, but we didn’t expect it would be this early. It is time for Japanese companies to make sure their plans are aligned with the expectations of global investors.”
New rules will make it easier for activist investors in Japan
The shareholder voting season for 2022 is over, but after three years of escalating action, 2023 will most likely bring to Japan another, stronger wave of shareholder climate activism.
Japanese financial regulations may further facilitate such initiatives, thanks to two significant changes introduced this year. First, the disclosure of climate-related risks is now mandatory for the 4,000 companies listed on Tokyo Stock Exchange’s Prime Market. Second, the same 4,000 companies now have to publish their reports for investors in English, something that was so far done only by those Japanese companies most exposed to international markets. Combined, these two changes will make it much easier for foreign investors and activists to identify which Japanese companies are most exposed to climate risks – and which are less credible in their decarbonisation plans.
“A strategic investor engagement programme is key to ensure that a company’s strategy to deal with climate risks is clearly conveyed to the investment community,” says Tereza Kaneta, partner at business advisory group Brunswick in Tokyo. “There is an opportunity for Japanese companies to leverage on the expanded disclosure requirements defined for Tokyo Stock Exchange Prime Market to stay ahead of the curve, reduce the risk of becoming easy targets for activists and navigate this new scenario of increased scrutiny.”
In the race to net zero, the pressure from foreign activist investors may prove to be the push the Japanese tortoise needs to catch up with the hares.