Progressive integration of clearly defined environmental, social, and governance (ESG) factors through regulatory measures offers economic benefits, and consequently the ESG strategies within Japan are key to its economic development.
This report examines the emergent role of sustainable finance and investment in Japan and scrutinize the need for the Japanese financial system to mitigate growing climate risks and support the transition of the Japanese economy to a low-carbon, sustainable pathway. It first illustrates Japan’s exposure to physical and transitional climate risks, before reviewing the developments and emerging practices in sustainable finance. These include the growing importance of environmental, social, and governance criteria in financial decision-making; more rigid reporting and disclosure standards; the development of a green bond market; and the growing importance of sustainable investing by the financial sector. It also assesses the role of policies and regulations in scaling up sustainable finance and low-carbon infrastructure investments in Japan. Subsequently, it analyzes transitional climate risks via scenario analysis, applying the Paris Agreement Capital Transition Assessment tool to examine the exposure of subsectors of the Japanese equity market over several of the International Energy Agency’s climate scenarios. It concludes with policy recommendations for aligning Japan’s financial sector with sustainable development and the Paris agreement.