Japan government develops an environmental assessment framework for investors

Japan’s environment ministry has teamed up with some of the country’s key financial players to develop an environmental risk and opportunity assessment framework for investors, looking at broad factors like biodiversity, water use and resource efficiency as well as climate change.

The Ministry of Environment (MoE) hopes the framework will spur disclosure from corporates and promote investment decision-making based on financially material environmental factors, according to the report laying out the framework (Japanese).

The framework, designed for use by investors looking to integrate ESG, has come out of a committee chaired by renowned corporate governance expert and professor Tetsuo Kitagawa and including representation from “megabanks” MUFG and Sumitomo Mitsui Trust Bank, as well as investment management majors Asset Management One and Resona Bank AM.

The MoE said businesses prioritising environmental issues would also be able to use the tool to understand needed frameworks and disclosure as well as how investors evaluate companies in the mid to long term.

According to the Ministry, the framework – or “environmental axis”, as it is referred to in the report – will also underpin an award system to launch later this year.

The axis lays out four key areas to assess companies on: risks, opportunities and strategy; KPIs [key performance indicators]; governance; and additional elements.

In line with the framework, information disclosed by companies to the public and to investors would be analysed to discuss factors including firms’ mid to long term strategies on environmental issues, dialogue with investors on the issues, and their environmental risk and opportunity management process.

In the KPI section, climate change, water resources, biodiversity, circular use of resources, and pollution prevention are included.For example, a company achieving the highest score on “circular use of resources” would have set ambitious KPI targets and strategies for meeting them, monitoring progress and explaining the reasons for any delays in reaching targets.

Companies are also assessed on whether they are signatories to the Task Force on Climate-related Financial Disclosures (TCFD), if they appear on Science Based Targets’ list of companies taking action, and whether they issue certified green bonds.

The committee that put forward the framework, the Committee on Environmental Information and Corporate Value, was first convened by the MoE in 2017.

The committee members are Fumiaki Goto (Sumitomo Mitsui Trust Bank), Megumi Sakuramoto (Asset Management One), Minoru Matsubara (Resona Bank AM), Hayashi Toshiyazu (MUFG) and Keisuke Takegahara (Development Bank of Japan).

Acting as observers were departments from Japan Exchange Group and the Ministry of Economy, Trade and Industry (METI).

Recent years have seen Japan’s environment ministry join up with the financial market in a bid to spur green finance on several occasions, often hand in hand with other key governmental players.

Efforts to spur domestic green bond issuance kickstarted in 2017 with the publication of its own green bond guidelines, A year later, with the ministry dissatisfied with “limited” green bond issuance, it followed up with a support scheme offering subsidies to issuers to cover the costs of second party opinions.

The MoE, in collaboration with other Japanese governmental bodies, has backed various TCFD initiatives including a study group, guidelines and a company/investor dialogue consortium and it has been known to provide subsidies for firms to conduct TCFD-aligned scenario analysis.