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ESGs in Japan

ESGs in Japan

What are ESGs, and Why Do They Matter in Japan?

In the ever-evolving landscape of global business, one acronym has been making waves, resonating not just with corporations but also with conscientious investors and stakeholders – ESG, or Environmental, Social, and Governance factors. As we explore ESGs in Japan, let’s begin by understanding why they hold significance within the Japanese context.

In the modern business landscape, Environmental, Social, and Governance (ESG) considerations are not merely buzzwords; they’re the compass guiding companies toward sustainable growth while helping them avoid reputational and economic pitfalls. Japan, a global economic powerhouse, is acutely aware of the importance of ESGs in shaping its future. Let’s go into why ESGs in Japan matter, breaking down the ‘E,’ ‘S,’ and ‘G’ aspects.

E: Environment

The ‘E’ pillar, addressing environmental sustainability, has gained substantial traction in Japan, largely due to unwavering government commitment. At COP26 in Glasgow in 2021, Japan’s Prime Minister, Fumio Kishida, made a groundbreaking pledge of USD10 billion over the next five years to transition Asia from fossil-fuel-fired thermal power to zero-emission alternatives like ammonia and hydrogen. This pledge harmonizes with Japan’s Green Growth Strategy, introduced in 2020, which aims to achieve net-zero greenhouse gas (GHG) emissions by 2050 to mitigate climate change. 

This strategy outlines 14 growth sectors, including offshore wind, solar, and geothermal power, hydrogen and ammonia production, energy storage, and carbon capture technologies, all designed to fulfill Japan’s ambitious GHG reduction targets. Furthermore, during the Leaders’ Summit on Climate hosted by the United States in 2021, Japan heightened its GHG emission reduction goal to 46% compared to 2013 levels.

Not stopping there, Japan solidified its commitment by amending the Act on Promotion of Global Warming Countermeasures, legally anchoring its aim to achieve carbon neutrality by 2050.

S: Social

The ‘S’ in ESGs encompasses a broad spectrum of social issues, from business practices to employment and diversity. Japan has been making strides in various social domains:

  • Antitrust Regulations: New regulations targeting digital platforms aim to bolster market fairness and competition.
  • Gender Equality: The nation is intensifying efforts to promote gender equality, striving to create a more inclusive workplace.
  • Human Rights Due Diligence: A growing emphasis is placed on ensuring human rights are upheld throughout corporate operations, aligning with global standards.

G: Governance

Corporate governance, often considered the cornerstone of ESG, holds paramount importance for institutional investors. It’s seen as a key factor in addressing environmental and social concerns while improving long-term corporate value.

Two critical aspects of governance under scrutiny in Japan are:

  • Independence of the Board of Directors: Ensuring the board’s independence from undue influence.
  • Effectiveness of Executive Compensation: Evaluating the alignment of executive pay with corporate performance.
ESGs in Japan

Understanding ESGs in Japan

Are there notable ESG practices in Japanese companies?

  1. Takeda Pharmaceuticals, a global pharmaceutical giant headquartered in Japan, is a prime example of a company deeply committed to ESGs in Japan. Their core strategy, encapsulated in the “Patient, People, and Planet imperatives,” embodies their dedication to:
  • Patient Care: Transforms science into treatments for patients and communities with limited options, addressing critical medical needs
  • People Empowerment: Diverse and inclusive organization where people thrive, grow, and realize their potential
  • Planet Stewardship: Safeguarding natural systems and human health
  1. Toyota, a global automotive leader from Japan, is deeply committed to reducing its environmental footprint and fostering sustainable development in all aspects of its business. This commitment is central to Toyota’s role in promoting ESGs in Japan:
  • Environmental Responsibility: Toyota strives to minimize its environmental impact across its operations, echoing the ‘E’ in ESGs in Japan, emphasizing environmental sustainability.
  • Collaborative Partnerships: Toyota forges strong bonds with diverse individuals and organizations dedicated to environmental preservation, addressing societal aspects of ESG.
  • Initiative: Toyota’s proactive ESG initiatives include the Toyota Earth Charter, established in 1992 and revised in 2000. They’ve consistently engaged in environmental efforts since the 1960s. Notably, in response to global environmental challenges, they formulated the Toyota Environmental Challenge 2050 in 2015, aligning with global governance standards in ESG.
  1. Rakuten, a prominent Japanese e-commerce and technology company, practices ESGs in Japan through the following: 
  • Environmental Responsibility: Rakuten addresses the climate crisis through tangible actions involving every part of its value chain, envisioning a future where it leaves a positive impact on the environment and its resources, aligning with the emphasis on environmental responsibility in ESGs in Japan.
  • Social Inclusivity: Embracing diversity and inclusivity, Rakuten creates a safe environment where all employees can thrive. The commitment to social responsibility aligns with the societal aspects of ESGs in Japan, promoting the well-being of its workforce.
  • Governance Excellence: Rigorous governance enhances corporate value at Rakuten. The company continually strengthens its foundations for responsible management structures, upholding the trust of stakeholders. This governance commitment aligns with the ‘G’ aspect of ESGs in Japan, emphasizing ethical and transparent practices.

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How do cultural values influence ESGs in Japan?

ESGs in Japan are deeply rooted in a 400-year-old concept known as Sanpo Yoshi, meaning ‘three-way satisfaction’: benefiting the seller, buyer, and society. This age-old principle traces its origins to itinerant merchants called Omi Shonin in western Japan during the early days of Japan’s modern economic era. These enterprising individuals played a crucial role in early Japanese industry, facilitating everything from infrastructure development for manufacturing to the flow of Western goods into Japan after centuries of isolation.

These merchants, who traversed far and wide for business, recognized the importance of building long-term, trusting relationships with the communities they visited. They based their trading principles on Confucius’ ‘Golden Rule’ – ‘do unto others as you would have them do to you.’ This ethical foundation earned them acceptance across Japan and led to their immense success.

These enduring principles have had a profound influence on the development of modern ESG practices. By urging CEOs and leaders to run their businesses with a holistic perspective that considers employees and society, not just shareholders, Japan has cultivated distinctive ESG practices that would make ESG-conscious Western companies proud (See our articles covering American Companies in Japan and European Companies in Japan for some insights about their nature).

Here are some more cultural values, which are explored in more detail in Japanese Corporate Culture and Japanese Business Etiquette, that play a pivotal role in guiding ESGs in Japan.

Japanese Corporate Culture

Putting Society First

Japanese CEOs, in contrast to their US counterparts, receive significantly lower compensation. The average Japanese CEO’s pay in 2019 stood at JPY 188 million, compared to over JPY 1,400 million for their US counterparts. This lower pay reflects a lesser focus on profit and personal gain, allowing Japanese CEOs to prioritize the social purpose of their companies.

Honesty and Customer-Centricity

Japanese entrepreneurs are known for their frankness and honesty in dealings with customers. They don’t adopt aggressive sales tactics like their US counterparts but often prioritize their customers’ needs. For instance, Lasertec, a semiconductor inspection tool supplier, invests in equipment worth three years of revenue but only recognizes it as such when customers are entirely satisfied. This drives them to create the best, most sustainable products for their customers.

Unique Initiatives Rooted in Sanpo Yoshi

Japanese companies have taken unique initiatives based on the principles of Sanpo Yoshi, even before the modern conception of ESG. Sysmex, the world’s largest blood testing company, gained a reputation for caring about its customers by providing quick and comprehensive blood tests in the 1970s. This approach contributed significantly to its growth and status today.

Another example is Daikin, the world’s largest air conditioner maker. Recognizing the harm caused by commonly used refrigerants to the ozone layer in the latter half of the 20th century, Daikin swiftly developed ozone-friendly alternatives. They established the world’s first commercial-scale plant for a key alternative in 1997, showcasing their commitment to environmental responsibility.

In essence, while Western companies have had to integrate ESG into their practices, Japanese businesses have had these principles ingrained in their DNA for centuries. Many Japanese companies, as exemplified earlier, have always possessed a sense of purpose, a social role, and an environmental conscience without needing to shout about it. This is the essence of Sanpo Yoshi, a philosophy that continues to pave the way for ESGs in Japan to flourish. 

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Are there any major announcements from the government?

The Japanese government has taken some proactive steps to implement ESGs in Japan, aligning the nation with evolving global standards. It recently unveiled a transformative Green Transformation (GX) policy to achieve net-zero carbon emissions by 2050. The GX policy covers various sectors, emphasizing carbon pricing, regulatory assistance, and international collaboration.

Balancing environmental goals with local considerations, Japan seeks a gradual transition to green energy. ESGs in Japan are integral to Japanese businesses, offering growth opportunities while posing risks if mishandled. The government has also taken steps, including a code of conduct for ESG data providers, impact investing guidelines, and mandatory ESG disclosures for public firms. These measures enhance transparency and accountability.

ESG Investment in Japan

What is ESG Investment?

ESG investments consider a company’s performance and impact in these three crucial areas. Environmental criteria assess a company’s ecological footprint, such as its carbon emissions and resource usage. Social criteria evaluate the company’s impact on society, including labor practices and community engagement. Governance criteria analyze the company’s leadership, ethics, and corporate governance structure.

What is the current status of ESG investing in Japan?

Japan, as one of the world’s major economies, has embraced ESG investing as part of its sustainable development strategy. In recent years, ESG investing has gained substantial traction in Japan, with investors increasingly prioritizing companies that align with these principles. Japanese companies have recognized the importance of integrating ESGs in Japan into their operations and reporting practices to attract investors and ensure long-term sustainability.

How is ESG investing contributing to environmental sustainability in Japan?

ESG investing is contributing significantly to environmental sustainability in Japan. It incentivizes companies to adopt eco-friendly practices and reduce their environmental impact. Here are some key ways ESG investing promotes sustainability in Japan:

Carbon Reduction Initiatives: ESG investors encourage Japanese companies to set ambitious carbon reduction targets. This leads to greater investments in renewable energy sources, energy-efficient technologies, and sustainable practices.

ESGs in Japan: Environment

Resource Efficiency: ESG criteria include resource management and waste reduction. Japanese companies are optimizing their resource usage to minimize waste and environmental harm.

Innovation and Research: ESG-focused investments drive innovation in sustainable technologies. Japanese companies are at the forefront of developing clean energy solutions, electric vehicles, and environmentally friendly materials.

Community Engagement: ESG principles promote corporate responsibility towards local communities. Japanese businesses are increasingly involved in community development projects and initiatives to address environmental concerns.

ESG Investment Trends

In recent years, Japan has emerged as a hub for ESG investments, reflecting a global trend towards sustainability-focused financial strategies. 

In addition to GLIN Capital, noteworthy sustainability-focused accelerators that may also invest in ESGs in Japan are listed on this webpage:

Japan Investor List

These accelerators, while primarily focused on fostering sustainable initiatives, also have the capacity to invest in ESG-related ventures. Their active participation highlights the growing recognition of ESGs in Japan as vital criteria for evaluating investment opportunities and driving positive change in Japan’s business ecosystem.

ESG Performance in Japan

Who rates ESG performance in Japan?

Performance in ESGs in Japan is evaluated by a range of specialized ESG rating agencies and organizations. These entities play a critical role in assessing how well Japanese companies align with environmental, social, and governance criteria. Notable ESG rating agencies operating in Japan include global firms like MSCI, Sustainalytics, and Refinitiv, as well as local organizations that provide ESG evaluations and ratings tailored to the Japanese market.

What is the role of ESG rating agencies in Japan?

ESG rating agencies in Japan serve as independent assessors of companies’ environmental, social, and governance practices. They gather data, analyze corporate disclosures, and assign ESG scores and ratings to help investors and stakeholders make informed decisions. These rating agencies contribute to promoting transparency and accountability in Japanese businesses by holding them accountable for their ESG commitments.

What are the challenges in ESG reporting and ratings in Japan?

Despite the growth in ESG reporting and ratings in Japan, several challenges persist. One challenge is the need for standardized ESG reporting frameworks, as there is currently no universally accepted standard. Additionally, ensuring the accuracy and reliability of ESG data remains a concern. Japanese companies are still adapting to ESG reporting, and inconsistencies in disclosure practices can hinder accurate assessments.

Where can you find ESG scores for publicly traded companies in Japan?

ESG scores for publicly traded companies in Japan can be found on various ESG data platforms and websites. TerraSt, an online platform dedicated to sustainability data, provides ESG scores and information for Japanese companies, making it a valuable resource for investors and stakeholders interested in Japan’s ESG landscape.

Are ESG ratings indicative of financial performance in Japanese companies?

ESG ratings can be indicative of financial performance in Japanese companies. Research has shown a positive correlation between strong ESG performance and financial stability and growth. Companies that prioritize ESG principles are often better positioned to mitigate risks, attract responsible investors, and seize opportunities associated with sustainability and responsible governance.

Why is transparency in ESG data important?

Transparency in ESG data is crucial because it fosters trust, enables informed decision-making, and drives accountability. Investors and stakeholders rely on transparent ESG data to assess a company’s sustainability practices and ensure that it aligns with its stated ESG goals. This transparency also helps companies identify areas for improvement and demonstrate their commitment to addressing environmental, social, and governance issues.

Green Jobs in Japan

Green jobs are intimately linked to the broader goals of ESGs in Japan. Green job initiatives not only complement its ESGs in Japan but also drive the nation’s transition to a more sustainable economy. 

Environmental Responsibility: Green jobs contribute significantly to the ‘E’ (Environmental) aspect of ESGs in Japan. These jobs focus on activities that have a positive impact on the environment, such as renewable energy development, pollution control, and sustainable agriculture. By fostering green job creation, Japan aligns with its commitment to reducing greenhouse gas emissions and transitioning to a green economy.

Social Advancements: The ‘S’ (Social) pillar of ESGs emphasizes inclusivity, diversity, and employee well-being. Green jobs offer opportunities for a diverse workforce in sectors like renewable energy, environmental consulting, and sustainable construction. As Japan promotes green job growth, it simultaneously advances social equity and empowers its citizens to thrive in sustainable careers.

Governance Excellence: Effective governance is essential for driving sustainability initiatives in Japan. Government investments in green job programs and the establishment of innovation funds reflect a commitment to governance structures that promote ESG principles. These actions ensure that green job creation aligns with Japan’s long-term sustainability objectives.

While Japan has made strides in certain areas, it lags behind Europe and the U.S. in various aspects of climate action. Non-governmental organizations (NGOs) in Japan often struggle with limited recognition, inadequate staffing, and resource constraints. Private sector initiatives, at times, are viewed with skepticism as potential greenwashing efforts. Sustainable finance has room to grow, and the government’s stance on coal remains a point of contention. Additionally, voter engagement in climate issues can be challenging, and overseas development aid sometimes aligns with fossil fuel finance.

Promoting green job creation in Japan

However, these challenges also present opportunities for education and change. The demand for experts in ESGs in Japan within the private sector is on the rise, driven by companies’ efforts to meet net-zero commitments. Sustainability positions at major firms are actively advertised on platforms like LinkedIn, providing prospects for individuals passionate about green initiatives. Philanthropic organizations funding climate work are keen to support its growth in Japan, potentially enabling NGOs to attract top talent.

The renewable energy sector, in particular, offers promising prospects. Project developers working for renewable energy companies can enjoy competitive salaries and a global outlook, making this industry highly appealing. The international nature of the renewable energy sector aligns with the increasing global focus on sustainability.

If you’re eager to contribute to the growing wave of ESGs in Japan and work for environmentally conscious companies, you’ll find valuable opportunities on websites like Environment Jobs. This platform serves as a dedicated job board for individuals passionate about ESGs in Japan and beyond. Whether you’re seeking roles in sustainable finance, renewable energy, or corporate responsibility, this resource can connect you with career opportunities aligned with your values and aspirations. 

Government Investment in the Green Economy

Japan’s resolute pursuit of carbon neutrality by 2050 is anchored in initiatives like the Green Innovation Fund. Launched within the FY2020 Tertiary Supplementary Budget by the Ministry of Economy, Trade and Industry (METI), this formidable 2 trillion yen fund is propelling green innovation, hastening Japan’s sustainable transition.

Objectives:

  1. Targeted Support: The Green Innovation Fund offers steadfast backing to entities embracing ambitious 2030 goals. Collaboratively forged by public and private sectors, these goals span a decade of R&D, demonstration, and social implementation. METI and the New Energy and Industrial Technology Development Organization (NEDO) lead this charge.
  1. Priority Fields: Aligned with the Green Growth Strategy, a comprehensive industrial policy, the fund zeroes in on high-impact priority fields demanding continual support for successful public implementation.

Policies:

  1. Support Criteria: Eligible projects should average at least 20 billion yen, excluding those better suited for short-term government programs. Leading implementers should be profit-making entities, encouraging diverse participation. Projects must embody innovative, fundamental R&D elements worthy of government commissioning.
  1. Maximizing Impact: METI actively engages company managers in pursuing long-term objectives. Managers submit vision and business strategies during applications, report to working groups, and provide project updates. An incentive system rewards target achievements.

If you’re looking to explore avenues for business growth and innovation in Japan while aligning with its green objectives, consider checking out our informative podcast: Get Japanese Government Money for Your Business with Miho Tanaka. It provides valuable insights on leveraging government support for your business ventures in Japan, making it an excellent companion for those interested in sustainable initiatives and investments. You can also refer to our Guide to Startup Subsidies in Japan for comprehensive information on government support available to startups and businesses in Japan.

Get Japanese Government Money for Your Business with Miho Tanaka

Womenomics Empowering ESGs in Japan

When it comes to ESGs in Japan, one significant facet often overlooked is Womenomics. Its synergy with ESG principles is unmistakable, as it contributes to both social inclusivity and sustainable economic development.

  1. Gender Diversity and Inclusion: Promoting gender diversity aligns with ESGs in Japan, fostering more inclusive workplaces and equal opportunities. Japanese companies recognize that diversity isn’t just about fulfilling quotas but about enriching perspectives and driving innovation.
  1.  Economic Sustainability: A diverse workforce cultivates a more sustainable economy. By breaking gender barriers and offering women equitable access to professional opportunities, Japan enhances its ESG profile and ensures a more prosperous future.

Promoting Gender Equality in Japanese Companies

Kathy Matsui, a prominent figure in Japan’s financial world, is on a mission to drive meaningful change. As a Womenomics and ESG champion, she’s using her expertise to reshape the startup landscape in Japan. Here’s how:

Matsui’s journey started with her groundbreaking “Womenomics” report in 1999, advocating for diversity in the workplace. Her vision is to empower women entrepreneurs and boost gender diversity in leadership roles. Over the years, Japan has made significant progress in female workforce participation, but there’s still work to be done.

Rather than targeting established companies, Matsui and her MPower Partners Fund focus on “teenage” startups. These companies are more adaptable and nimble, making it easier to integrate the values of ESGs in Japan into their core strategies. By supporting tech-enabled, sustainable living companies, Matsui drives scalable growth while promoting ESG principles.

In Japan’s vibrant startup ecosystem, resources like Guide to Creating Startups in Japan as well as our podcast episodes Startups in Shibuya with Yoshiro Tasaka, Sapporo with Miho Tanaka, and State of Startups in Japan in 2023 provide invaluable insights and guidance for entrepreneurs. Kathy Matsui’s fund adds a unique dimension by channeling investments into startups that share her vision of gender diversity and ESG excellence.

State of Startups in Japan in 2023 with Tim Romero

Matsui emphasizes the growing importance of ESG principles. Companies that neglect diversity and governance will face consequences in the form of higher capital costs. ESG isn’t just a compliance checkbox– it’s a fundamental shift in how businesses operate. 

In a post-COVID world, Matsui questions traditional business practices, like extensive travel, and suggests a fresh perspective. She advocates for “attack mode management,” encouraging companies to reassess their approaches and embrace sustainability. 

As ESGs in Japan gain momentum, Kathy Matsui’s MPower Partners Fund is a driving force behind positive change, empowering startups and fostering diversity in leadership roles. Japan’s future looks promising under Matsui’s visionary leadership.

Educating the Youth about ESGs in Japan

Japan is actively integrating ESG principles into its society, especially through high school education, which includes environmental topics within a broader sustainable development curriculum. Japan adopted the UN Sustainable Development Goals (SDGs) for 2030 in 2015, emphasizing climate action, poverty reduction, and gender equality.

Currently, 156 high schools in Japan are designated as UNESCO schools, emphasizing the 2030 UN SDGs. For example, Odori High School engages students in various SDG-related activities, including growing organic cotton and beekeeping. KidZania Tokyo also introduces sustainability concepts to kids.

However, classroom time constraints limit in-depth discussions on global events like UN climate meetings. While climate change is frequently discussed in Japanese high schools, the focus often remains on knowledge acquisition rather than practical application.

Although additional opportunities for environmental discussions exist outside of class hours, academic pressures sometimes prioritize exam-related activities over advocacy. Nevertheless, glimpses of awareness and activism, such as students refusing plastic bags, reflect growing curiosity and commitment to addressing ESGs in Japan.

Challenges persist in equipping the younger generation with the tools and knowledge needed to drive meaningful change in line with ESGs in Japan.

Final Thoughts

ESGs in Japan have become paramount in shaping the future of Japan’s economy and society. The transition to a more sustainable world is not just a choice; it’s a necessity. Here’s an overview of why ESGs in Japan matter:

Navigating a Changing Landscape

ESGs offer a roadmap for navigating the changing global landscape. They provide businesses with a compass to steer toward sustainability while avoiding reputational and financial risks.

Active Engagement for a Sustainable Future

Businesses, policymakers, and individuals all play pivotal roles. Businesses can integrate ESG principles into their operations, demonstrating a commitment to long-term sustainability. Policymakers can create supportive frameworks and incentives, while individuals can make conscious choices to support ESG-driven initiatives.

Global Implications of Japan’s Approach

Japan’s proactive stance on ESGs sets a global precedent. As one of the world’s largest economies, its commitment to sustainability has far-reaching implications. Japan’s approach can inspire other nations to follow suit, fostering a collective effort to combat global challenges.

In a world where the environment, social responsibility, and corporate governance are central to success, embracing ESGs in Japan isn’t just a trend– it’s a vision for a better future. It’s a call for sustainable practices that resonate globally, driving us towards a more equitable, responsible, and resilient world.

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