Japanese companies face climate transition risks, in addition to the physical risks of climate change. Investors are moving to incorporate rising climate risks within the Japanese market into their investment strategies and increasing allocations towards investment opportunities in green businesses.
More than 130 countries and close to 700 companies globally [1] have announced their commitment to achieving carbon neutrality or have adopted a target of ‘net zero’ emissions by 2050. These commitments include interim emissions reduction targets aligning with the goals of the Paris Agreement which aims to limit global warming to ell below 2°C and preferably to 1.5°C compared with pre-industrial levels. In Japan, former Prime Minister Yoshihide Suga announced in 2020 that Japan will reduce its greenhouse gas (GHG) emissions by 46% by 2030 from 2013 levels and will achieve a ‘net zero’ emissions reductions by 2050.
In line with Japan’s climate change ambitions, the Tokyo Stock Exchange (TSE) revised the Securities Listing Regulations pertaining to the revision of Japan's Corporate Governance Code with effect from 11 June 2021. The revised Code enhances the quality and quantity of climate-related disclosure based on the Task Force for Climate-related Financial Disclosures (TCFD) recommendations or equivalent international frameworks of Prime Market listed companies from April 2022 onwards.
Climate risk disclosure in line with the TCFD recommendations is now widely adopted within the market, with 527 Japanese companies publicly supporting the TCFD recommendations [2]. However, despite the growing number of Japanese companies declaring their commitments to a net zero target by 2050 greater specificity is needed over how these goals will be achieved in order to reassure investors. Companies need to urgently disclose specific GHG emissions (across scope 1, 2 and 3) and short, medium and long-term reduction targets, incorporated into management strategies and to clarify management roles and responsibilities. The management quality of climate change varies between companies and sectors, in particular for companies operating in carbon-intensive industries that have a significant impact on climate transition, which has become a major concern for investors.
However, as of 2021, more than half of the power supply in Japan still relies on fossil fuels, with 31.7% of power being sourced from LNG and 26.5% from coal [3]. With a moderate GHG emission target in the non-power sector (industry, transportation, etc.) major structural changes must be realised at a considerable speed in order to achieve Japan’s net zero target by 2050.
Recognising these changes and Japan’s broader climate goals, FTSE Russell, and the Japan Exchange Group (JPX) jointly launched the FTSE JPX Net Zero Japan 500 and the FTSE JPX Net Zero Japan 200 indexes in April 2022. The reference benchmark for the indexes comprises constituents of JPX’s market leading TOPIX 500 Index. The FTSE JPX Net Zero Japan 200 is based on the largest 200 stocks by market capitalisation in the TOPIX 500 universe. Using FTSE Russell’s proprietary Target Exposure index construction methodology, the indexes are designed to enable investors and participants in the Japanese markets to:
- Integrate and implement climate change risk related considerations, including managing exposure to carbon emissions and fossil fuels;
- Capture climate opportunities including the shift towards emergent activities in the green economy;
- Increase exposure to companies aligned with the net zero transition using Transition Pathway Initiative (TPI) Management Quality and Carbon Performance data.
The methodology for both indexes complies with the Climate Transition Benchmark (CTB) requirements set out in the EU Benchmark Regulations to achieve an initial 30% drop in emissions intensity by comparison with the underlying reference benchmark and a 7% year on year reduction in carbon exposure to align with ‘net zero’ pathways.
FTSE Russell and Transition Pathway Initiative (TPI) data sets and index calculation methodologies provide a transparent, disclosure-based framework and clear standards for companies' climate transition management designed to support investor stewardship activities on climate change.
[1] Hale, T. et al (2021), Net Zero Tracker. Energy and Climate Intelligence Unit, Data-Driven EnviroLab, NewClimate Institute, Oxford Net Zero. https://www.zerotracker.net/
[2] As at December 2021. The Task Force on Climate-related Financial Disclosures 2021 Status Report. https://www.fsb.org/wp-content/uploads/P141021-1.pdf
[3] Institute for Sustainable Energy Policies (ISEP – 2022), 2021 Share of Electricity from Renewable Energy Sources in Japan (Preliminary), 5 April 2022 https://www.isep.or.jp/en/1243/
