Japan’s Nationally Determined Contribution (NDC) under the United Nations Framework Convention on Climate Change is a 26% reduction in greenhouse gas emissions by 2030 from 2013 levels.1 To achieve this, the Japanese government has set carbon targets for all sectors backed up by a national carbon tax and Tokyo emissions trading scheme. In the first period up to 2015, the average cost of a tonne of carbon was USD 95.2
The challenge is significantly higher for Japan following the 2011 earthquake and tsunami which lead to the shutdown of many nuclear power plants. Japan is the fourth-highest country globally in terms of generation of coal fired power.3
Exhibit 1 shows greenhouse gas emissions per million U.S. dollars invested in various S&PDJI indices. Given Japan’s level of 331 tonnes, only the Latin American and emerging market indices are more carbon intensive. The fact that Japan is already a relatively efficient economy means reductions in emissions will require greater effort. Japanese companies should be conscious of the likely implications of polices required to achieve the reductions to meet Japan’s NDC.
Room for improvement on disclosure
A key element in any country’s program to manage GHG emissions is reliable data from emitters. Exhibit 2 takes the same set of indices and looks at the disclosure levels of listed companies for carbon emissions. Trucost data provides complete coverage for every index shown—but the extent to which Trucost has to use the model estimates (in grey) or do further calculation (in yellow) shows that the level of disclosure in Japan is lower than for Europe and the U.S.
Companies in Japan with poor disclosure might need to reconsider their approach. Market participants are increasingly demanding better carbon data disclosure and greater transparency on how they are responding to the energy transition challenge. The recent Japanese Stewardship Code says market participants should “monitor investee companies so that they can appropriately fulfil their stewardship responsibilities with an orientation towards the sustainable growth of the companies.”4
As a member of the G20 Financial Stability Board (FSB), Japan understands that “addressing new and emerging vulnerabilities in the financial system, including those associated with conduct, correspondent banking and climate change” is a priority.5 The FSB’s Task Force on Climate-Related Financial Disclosures is developing recommendations that look set to bring carbon disclosure into the mainstream.6
Financial architecture is emerging to reward carbon efficient companies. The S&P/TOPIX 150 Carbon Efficient Select Index, powered by data from Trucost, is designed to measure the performance of companies in its underlying index, the S&P/TOPIX 150, while excluding companies with the largest relative carbon footprint. While the index is optimized to closely track the performance of its underlying index, its carbon footprint is less than one-half that of its benchmark.
Japanese companies that respond constructively by disclosing robust carbon data and developing an effective climate change strategy can demonstrate to market participants, policy makers and customers that they are getting ready for business in a carbon-constrained world.