NextGen ESG Trends Japan 2023

April 14, 2023

A Glimpse into the Future of Sustainable Business

Sasja Beslik, Chief Investment Strategy Officer, explores ESG trends in Japan

The world of Environmental, Social, and Governance (ESG) in Japan is evolving. This analysis by Sasja Beslik, Chief Investment Strategy Officer, provides insight into the shifting landscape of ESG trends in Japan and an insightful compass for the years ahead.

The Changing Tides of ESG in Japan

The landscape of ESG is changing in Japan. As Japanese companies realize the benefits of sustainable business practices, they will continue to develop new business driven sustainable strategies to incorporate these into their operations and investments. A mounting body of evidence suggests that companies with strong centre of gravity where ESG actions drive business growth outperform their peers, making ESG investing a sound financial decision.

Whether driven by financial incentives or a desire to do good, the shift toward next generation of ESG investing is gathering momentum in Japan and is likely to continue to gain ground in the years to come. As investors increasingly factor environmental, social, and governance (ESG) considerations into their decision-making, companies in Japan are under pressure to improve their ESG performance and investors are under pressure to show tangible results and concrete improvements.

Clearly, 2023 will open up new frontiers for ESG investing in Japan, creating a solid ground for Japanese companies and investors to capitalise on the work done. Few companies are prepared for the world we are heading toward and encouraging or pushing them to adapt will be important to protect their value.

Setting the Course: Japan’s ESG Journey

The last decade has seen a fundamental shift in the way the financial sector approaches investments. The era of short-term profit chasing is giving way to a more holistic, long-term strategy embedding ESG considerations. Japan’s financial institutions are catching this wave, with sustainable investments now accounting for nearly a quarter of total managed assets in the nation. Challenges remain: ‘green-washing’ is a genuine concern, and the clarion call is for deeper, more genuine engagement from both businesses and investors.

Balancing the Scales: Energy and Decarbonization

Japan’s quest for energy security coexists with its ambitious goal to achieve net-zero emissions by 2050. While the nation has charted its path, evident by initiatives like the Green Growth Strategy, the pace of implementation remains a concern. The switch to electric vehicles and the phasing out of coal-fired plants are hurdles yet to be crossed. The narrative underscores that investors need to critically analyze company commitments to ascertain their real-world impact.

The Human Dimension: Talent in Japan

Japan faces a demographic challenge – an aging, declining population. The nation’s businesses heavily lean on human capital, emphasizing the need for greater attention to human capital development. There’s a significant opportunity in tapping into gender diversity, especially in leadership roles. While there have been strides in aspects like health and safety, Japan still grapples with human capital investments, particularly around employee training and engagement.

Hidden Gems: Japan’s ESG Diamonds

SMEs, the backbone of Japan’s technological development, hold enormous potential for ESG improvement. These nimble entities, forming over 80% of all listed companies, have vast room for growth in their ESG journey. Challenges lie ahead – the need for dedicated ESG expertise, for instance, or the pressure of increasing competition. Nevertheless, the importance of accurate ESG data disclosure stands paramount, with both regulators and executives emphasizing its criticality.

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Wataru Baba

Senior Fellow, Climate and Sustainability at Panasonic Group since 2022, where he accelerated the company’s growth through an integrated strategy for creating positive impact on climate change and established Sustainability Committee, chaired by the Group CEO. Board Member of Japan Professional Football League (J.League) and Independent Director for a civic technology nonprofit, Code for Japan, and a web3 startup, Financie, Inc