Sustainable Finance in Japan

We examine the emergent role of sustainable finance and investment in Japan and scrutinize the need for the Japanese financial system to mitigate growing climate risks and support the transition of the Japanese economy to a low-carbon, sustainable pathway. We first illustrate Japan’s exposure to physical and transitional climate risks before reviewing the developments and emerging practices in sustainable finance. These include the growing importance of environmental, social, and governance criteria in financial decision-making; more rigid reporting and disclosure standards; the development of a green bond market; and the growing importance of sustainable investing by the financial sector. We also assess the role of policies and regulations in scaling up sustainable finance and low-carbon infrastructure investments in Japan. Subsequently, we analyze transitional climate risks via scenario analysis, applying the Paris Agreement Capital Transition Assessment tool to examine the exposure of subsectors of the Japanese equity market over several of the International Energy Agency’s climate scenarios. We conclude with policy recommendations for aligning Japan’s financial sector with sustainable development and the Paris agreement.

WORKING PAPER NO: 1083