When it comes to ESG, Japan has a reputation as a bit of a laggard – though, on the ‘E’ part at least, this is not very fair. A 2021 report from McKinsey, Charting a path from the shuchu kiyaku to ESG (‘shuchu kiyaku’ meaning ‘code of ethics), actually rated large Japanese companies ahead of their North American counterparts in terms of environmental sustainability – and similar to those in Europe.
The problem, however, is that Japanese companies are not as good at reporting and communicating their ESG initiatives – they have made the right steps but failed to make investors aware of them. In contrast, one area where Japan may have edge over North America and Europe is with through co-operation between competing companies. The government is taking a lead in this, pushing for technological development to take place within a cross-industry framework.
‘Green steel’
A good example is ‘green steel,’ where replacing existing blast furnaces with green hydrogen electrolysers could transform the industry. Competitors Nippon Steel, JFE, Kobe Steel and others have jointly announced a collaboration framework for the development of hydrogen steelmaking. Similar projects are afoot in Europe too, such as pilot plant plans for hydrogen ironmaking between Arcelor Mittal and SSAB –the difference being that these collaborations are mostly between companies that already have close relationships with each other.
In Japan, the steel industry is experimenting with large-scale collaboration between competitors, which tends to be more dynamic than partnerships between companies already close to each other. As a result, the collaboration is likely to have a much greater impact on the Japanese steel industry than the partnerships in the European steel industry.
This is reflected by the fact the Japanese government aims to reduce its carbon emissions by 46% by 2030 when compared to 2013, compared to the EU target of 41.6%. This is a significant display of confidence by the Japanese government, reflecting its belief the country’s steel industry can catch up with Europe, and perhaps even outpace it.
Massive EV development
Furthermore, in the automotive industry, major Japanese manufacturers such as Toyota and Honda have started massive development on electric vehicles (EVs). Honda’s recent announcement of a joint venture with the LG Group to develop batteries for EVs is as a significant move from in-house production to a partnership framework.
In Europe, meanwhile, Japanese companies are set to cut into the strongholds where Volkswagen, Peugeot and other European peers have invested aggressively so far. Toyota, for example, has announced it will invest ¥730bn (£4.55bn) into the production of batteries for EVs, showing how Japanese companies are prepared to make the necessary investments to make their industries more sustainable.
Despite the strides Japanese companies are making, they are not always good at keeping their eye on the latest global ESG trends and reporting practices. Japanese authorities have also lagged their European counterparts in developing a framework for climate change regulation – though Japan is now catching up.
In July last year, for example, Japan’s Financial Services Agency drafted the world’s first Code of Conduct for ESG Evaluation and Data Providers. This framework, which includes a Cabinet Office ordinance announced last year, will place a requirement on listed companies in Japan to include ESG subsections such as environment and human capital in their annual disclosure documents, which should do a great deal to improve the reputation of Japanese companies with overseas investors.
ESG ratings issues
Japan also suffers from difficulties with ESG rating agencies – and, again, this is often a communication problem. As Japanese companies are in different time zones and speak a different language, ESG ratings agencies, which are usually based in Europe or the US, have less interaction with them than they would with Western companies.
This often means Japanese companies are at a loss on how to respond to ESG enquiries from some western rating agencies, and cannot put necessary changes into place. Sometimes it even means Japanese companies have missed opportunities to win the ESG rating they deserve as executives are unable to explain their companies’ ESG initiatives properly.
Much more needs to be done but Japanese companies are definitely getting there when it comes to the environment. ESG investors should take another look – though, at the same time, Japanese companies need to recognise more and more international investors care about ESG and communication and reporting needs to be stepped up. If not, a lot of good work underway in Japan will go unreported and unrewarded.
Tetsuro Takase is senior stewardship officer at SuMi TRUST
