Why Japan Leads The Way In ESG Despite Global Slowdown

ESG investments in Japan—Environmental, Social, and Governance—have surged, with sustainability bonds more than doubling to ¥6.7 trillion in 2023. On the contrary, the pace of growth in ESG is slowing down on a global scale. ESG has become more appealing to corporations and financial markets due to its measured and pragmatic approach, which ensures their long-term sustainability, making it central in the transition to green finance in developing Asia. According to Yasunobu Katsuki, senior sustainability strategist at Mizuho Securities, the ESG growth of Japan is fairly different from the global scene. "The trend in Japan is clearly different from the global one. The pace hasn't slowed down," Katsuki said. The nation's sustainability bond market reached ¥6.7 trillion in 2023, making it grow more than twice the level in 2021, according to data from the Japan Securities Dealers Association. Part of the drive is Japan's pledge in 2020 to reach net-zero greenhouse gas emissions by 2050—a clear goal that spurred corporate action. Japan has been careful not to court the kind of political backlash now being seen in the United States and Europe. Several American states have signed anti-ESG bills, an impetus for companies to step back from touting their association with ESG. Europe, too, is seeing a slowdown in ESG momentum amid higher inflation and living costs. Japanese financier Makiko Hashizume, an expert at the Japan Research Institute within the field of ESG and sustainable finance, said: "Regulations were only getting stricter," adding that European businesses have grown frustrated. While Japan has charted a middle-path position, this has helped insulate it from similar anti-ESG feeling. "Japan hasn't been doing anything too radical that would cause opposition to sustainability, so I don't think things are going to end up like they have in the U.S. or Europe," he said. The practical strategy thus laid the foundation for Japan to make stable and continual advancements on ESG and puts itself in a better position to be a leader in sustainable finance within Asia. Japan's innovative financing tools also link with its ESG success. February 2024 saw Japan introduce the world's first-ever "transition bonds" as a sovereign, designed to finance a wide array of projects aimed at accelerating the country's shift to net-zero emissions. The government looks to attract ¥150 trillion in green investments over the next decade, with ¥20 trillion expected from transition bonds alone. But ESG investment has been slumping globally. Only 170 new sustainable funds were launched in the first half of 2024, data from Morningstar shows, against 325 funds set up in the same period in 2023. The decrease is more considerable in the U.S., where the exuberance toward ESG investment has been seriously dented by political and regulatory headwinds. Although globally this is a tough time for ESG, in Japan, the approach remains very futuristic. "Now, issues like climate change, biodiversity, and human rights have become agenda items in the entire world, so I don't think the movement will go backward," Katsuki said. That is why some efforts of Japan, such as the Asia Zero Emission Community, have resonated particularly in Southeast Asia, home of many fossil-fuel-dependent nations that may see in Japan a possible model on how to balance growing with green objectives. Especially for other regions that view the recognition of Japan through promoting this balanced and pragmatic approach in implementing the ESG investment policy, especially significant in negotiating the pitfalls of sustainable finance, here, Japan has been at the frontier of the changing global ESG landscape. That is why Japan lags behind in the transition processes toward the sustainable future driven by stable momentum in the sphere of innovative financial strategies.