Rules-based approach to sustainable finance could stifle innovation and technology advancements, says Japan FSA

The rapid growth of the sustainable finance sector means that introducing a rules-based regime – such a set of baseline criteria for ESG funds – could result in regulators always being one step behind market developments, according to Tomoko Amaya, Vice Minister for International Affairs at Japan’s financial regulator the Financial Services Agency (FSA). 

“Since this is a very fast developing area, introducing a rules-based approach could stifle market innovation and technological development,” Amaya told RI, but also noted that the regulator was keeping a close eye on regulatory developments within the EU and globally. 

“We are not planning on introducing specific criteria for ESG funds, at least at this stage. Our focus right now is to monitor the ESG policies and practices of asset management companies, and to make sure that they are disclosing accurate sustainability information for investors to be able to compare products which are currently on the market,” she added. 

When asked for examples of subject areas which were still evolving in the market, Amaya referred to methodologies to evaluate carbon emissions and other sustainability topics across the value chain, in addition to technologies which reduce and offset emissions. 

And while the EU’s approach of introducing a taxonomy of activities considered eligible for sustainable investment has been embraced elsewhere  – including jurisdictions as disparate as Russia, Australia, Thailand, Malaysia, Indonesia and Singapore, as well as plans for a Southeast Asian regional taxonomy – Japan has pushed back against proposals to align with such an approach.  

“We are aware that other jurisdictions are looking at introducing sustainable finance taxonomies but that is not the only way to prevent green or transition-washing,” said Amaya. “In Japan, we are instead developing science-based roadmaps for hard-to-abate sectors and individual companies can develop their own transition strategies based on these roadmaps.

“Subsequently, the credibility of these strategies will be assessed by external evaluation organisations. It is important to emphasise that transition pathways will be diverse depending on the circumstances of each region, sector or individual company, and will evolve over time as technology advances. We believe that this is a practical, inclusive and dynamic approach to these challenges.”  

Details on the criteria by which Japan’s corporate transition plans will be judged and the process for appointing external evaluators are currently being developed by a working group on sustainable finance chaired by the Japan Exchange Group, which includes the FSA. 

The same group is also developing an “information platform” which will consolidate information on green and other ESG-related bonds, and a certification framework which will underpin such products. 

Separately, the FSA is formulating guidance on how financial institutions should engage with their debtors and portfolio companies on the management of climate-related risks. Amaya said it will introduce basic concepts and case studies, but investors and banks will have autonomy to decide their own engagement strategies.  

“We do not think that regulators should enforce a prescriptive approach to engagement, so the guidance will also serve as a discussion tool between us and financial institutions,” she said. 

The guidance is expected to be finalised in Spring 2022. 

Meanwhile, Amaya called for increased allocation of capital to fund the low-carbon transition, particularly toward carbon intensive sectors.  

“Discussions tend to focus on green or sustainable finance but it is obvious that Net Zero cannot be achieved without reducing emissions from sectors currently not seen as green – this is the biggest challenge of all and will require a lot of investment. Japan has stressed the importance of transition finance for a long time, and it is now being recognised globally.”