Uncomfortably for some, climate is now a central issue for Japanese business
English original of article published today in Japanese in Nikkei Business
For good reason, corporate executives generally try to avoid getting involved in politics, making an exception only where an issue directly affects the regulation or taxation of their sector. However the Russian revolutionary, Leon Trotsky, had a saying in the early 20th century about the extreme form of politics, namely war: “You may not be interested in war”, Trotsky said, “but war is interested in you”. Right now, there is a big political issue which companies have tried not to be interested in, but suddenly and forcefully is becoming interested in them: it is climate change.
Big companies, in Japan, Europe and North America, have for many years made public statements about “sustainability” and the environment, but few have really considered the issue to be a top operational business priority, unless they are directly involved in selling environmental goods and services. In fact, quietly they have often lobbied governments behind the scenes to go slow on tax and regulatory measures designed to reduce greenhouse-gas emissions. This has been especially true in Japan.
In the immediate aftermath of the Great East Japan Earthquake, tsunami and nuclear meltdown, there was much talk of Japan making a big, even world-leading, push into developing renewable energy, especially solar and wind power. But it remained just talk. Only 19% of Japan’s electricity currently comes from renewables, with a target set in 2018 to raise this just to 22-24% by 2030. In the United Kingdom, like Japan an island nation surrounded by seas and not blessed by a sunny climate, the share last year of electricity from all renewables was 42%, with almost 25% coming from wind turbines alone.
Naturally each nation’s politics makes its own choices on energy and climate change. With nuclear energy offline — even today, 10 years after the Fukushima meltdown, 45 out of Japan’s 54 nuclear reactors are idle — Japan’s choice was to import coal, with the result that one-third of annual electricity output comes from what is currently the most climate-unfriendly fuel available, and 22 new coal-fired power plants are either under construction or in the planning stage. Not surprisingly, Japan has by this choice also chosen to lag far behind other advanced economies in reducing greenhouse-gas emissions, including even the United States under the climate-change-sceptic presidency of Donald Trump.
For quite some years now, Japan’s poor climate record has been damaging its international reputation. Claims by Prime Minister Shinzo Abe that Japan wants to be a leader in promoting liberal values through multilateral agreements have been tarnished by the daily evidence that Japan is a laggard on the biggest multilateral issue of all, climate change. But with Donald Trump in the White House and international relations dominated by other issues, this didn’t seem important.
The political world has changed, however, remarkably rapidly, and the financial world is changing too. As Trotsky said, Japan may not be interested in climate change but climate change is interested in Japan: the worsening of severe weather events is one proof of this, but the big political proof came on April 22-23 when Trump’s successor, President Joe Biden, hosted a two-day summit of world leaders on climate, with the aim of putting pressure on all of them, including Prime Minister Yoshihide Suga, to make their commitments to reduce greenhouse-gas emissions more ambitious and more credible.
The new target Prime Minister Suga announced was not as high as President Biden may have wanted, but it was still ambitious: a 46% reduction in greenhouse-gas emissions from 2013 levels by 2030, compared with a previous commitment of just a 26% cut. This also means that instead of a climate plan mainly targeted at achievements in 29 years’ time, in 2050, Prime Minister Suga has committed Japan to one targeted just nine years ahead. And it means that failure to follow through on those targets with real, immediate policy changes will become a major issue in US-Japan relations.
Some businesses and business organisations have been campaigning publicly for a more ambitious climate plan from the government. But until now, that pressure had been countered by other corporate pressure for low energy costs and low carbon taxes. Meanwhile, however, the pressure from investors, particularly foreign institutional investors but also Japanese institutions, for companies to live up to higher standards for environmental, social and governance (ESG) has been growing. With international politics now closely aligned to that aim, the investor pressure is likely to grow stronger still.
What all this means is that public and corporate policy-change and investment to meet the 46% emissions-reduction target are going to play a dominant part in business decisions, in politics and in markets during the rest of this decade. The energy transition to meet climate-change goals will no longer be a gradual, incremental process, and ESG will no longer be just a matter of putting a decorative appearance on annual reports: from now on, it will be among the most important issues in corporate strategy.