Betting on the planet

Sustainable investments make the world go round

FEBRUARY 2021 Feature / Text by Justin McCurry

On the front lines of the fight against climate change, veteran campaigners for the environment have an unlikely ally: institutional investors that are choosing to invest in environmentally responsible firms and keeping their cash away from big polluters.

These investors are increasingly basing their decisions on how potential investee firms measure up to environmental, social, and governance (ESG) standards. Put simply, they are looking carefully to see if their money will go to firms that can help save the planet.

Over the past several years, the financial sector has seen a rise in sustainable investments, that is, money funnelled into anything from electric vehicles to wind power projects. This has been partly in response to government-level commitments made at international forums — such as the Paris Agreement, adopted in 2015 — to address the climate emergency. In turn, this has triggered growth globally in the number of financial products being offered that invest in innovations to tackle environmental issues.

In some cases, these come in the form of 100% green bonds, issued by companies, local governments, or other organisations specifically to raise funds for environmental projects. The bonds are sometimes also offered in combination with ordinary bonds whose issuers demonstrate a strong commitment to the climate by, for example, switching to cleaner forms of energy.

As a result, investments in green bonds have skyrocketed in the markets of Europe, the US, Japan, Canada, Australia, and New Zealand, rising by 34% in just two years to reach $30.7 trillion in assets at the start of 2018, according to the most recent report by the Global Sustainable Investment Alliance.

After lagging behind Europe, Japan is now the fastest-growing region for ESG-conscious investments. In 2016, sustainable assets accounted for just 3% of professionally managed assets in Japan, but had more than quintupled to 18% by 2018, the report said. Today, Japan is the third-largest centre for sustainable investing after Europe and the US.

In 2014, Japan introduced a stewardship code to “promote sustainable growth of companies through investment and dialogue”. The framework is an attempt by the government to tilt the playing field and encourage institutional investors to increase their engagement with the companies they invest in, with an emphasis on having them become more sustainable.

“Investors can use their influence to encourage sustainable business practices, responsible use of natural capital, equitable and just treatment of employees, and management of climate-related risks,” says Gabriel Wilson-Otto, global head of sustainability research at BNP Paribas Asset Management, part of the French international banking group. “We are seeing strong growth in sustainable and green investments in Japan, which is consistent with trends we have seen in both Europe and other areas of the world.”

Several factors have contributed to the “rapid growth” of ESG in Japan, including greater focus on environmental issues among retail investors, Wilson-Otto adds.

“There has been a terrific amount of work undertaken by both government-linked and private entities in Japan to help encourage and foster the development of an ESG or sustainable investment ecosystem,” he says.

In 2019, two typhoons that hit Japan wrought extensive destruction, including ¥1.3 trillion of economic damage. They served to galvanise Japanese opinion on the clear and present danger posed by extreme weather events, which scientists have linked to climate change.

Further, last October, Prime Minister Yoshihide Suga used his first policy speech in the Diet to commit Japan — the world’s fifth-biggest emitter of CO₂ — to cutting net greenhouse gases to zero by 2050. Establishing a firm deadline has buoyed climate campaigners and brought Japan in line with the EU, which made a similar commitment in December 2019.

Yasunori Iwanaga, chief responsible investment officer at Amundi Japan, the local unit of the French asset management company, says firms and institutional investors have been waking up to the value of aligning themselves with sustainable development goals agreed by the United Nations General Assembly in 2015.

“Financial institutions are keen to demonstrate their commitment by funding businesses and projects that would address social and environmental problems or by applying ESG criteria to aspects of their investment activities,” he says.

However, Iwanaga described the Japanese market for sustainable investment as “nebulous” compared with that of the EU.

“It is not so much financial consideration as external reputation behind this move so far,” Iwanaga states. “Corporates use social and green bond issuance to grow their corporate value while attracting new investors with the message that their purpose and business align with targets of the sustainable development goals.

“The challenge for asset management firms is how to influence investors’ mindset or values,” he adds. “It may be a long shot. Japan probably needs a holistic framework with enforcement, or external pressure, to expedite the mind-shifts such as those the EU has developed since 2015, after the Paris Agreement.”

Kenji Fuma, founder and CEO of Neural Inc., a strategy and management consulting firm in corporate sustainability and ESG investment, said Japan’s interest in sustainable finance had evolved rapidly since its public pension funds rolled out ESG investments in 2017.

The shift has come partly from the involvement of major life insurers and investment managers, including international giants such as BNP Paribas Asset Management and Blackrock. But it is also in response to criticism of Japan’s erstwhile enthusiasm for fossil fuel investment.

“Corporate Japan previously thought it was the world leader in the environmental domain,” Fuma says.

That, however, was until it got a wake-up call, not just from campaigners but also from institutional investors.

“Japan gradually came to realise that business transition is indispensable in order to attract foreign investment,” he added.

How, then, is sustainable finance expected benefit the environment?

“The government’s goal is to create and develop new capital flows into green tech and social businesses,” Iwanaga says. “The expected outcomes of sustainable finance will include a smooth transition to a low carbon economy, a level playing field in education, and improved biodiversity.”

The trend has been accelerated by a shift in attitudes among policymakers. Suga’s zero-carbon pledge, for example, has drastically altered the mindset of bureaucrats at the Ministry of Economy, Trade and Industry, as well as business organisations. They have been transformed from “climate opponents to climate guardians”, Fuma notes.

Wilson-Otto was similarly upbeat about a future in which investment decisions will be increasingly influenced by a younger, more environmentally conscious corporate and consumer demographic.

“Globally, we are seeing a trend, among millennials, towards a stronger focus on environmental and social issues in their investments,” he said. “As this generation becomes increasingly influential in investment markets, that focus is likely to continue to grow.” •