What is leadership?  What is innovation?  How is it relevant for this responsible investment community?

These are questions I am trying to answer today by sharing my personal story.

Leadership.  Over 25 years of my experience in the financial industry including JP Morgan, Goldman Sach and Daiwa, I learned that leadership is a mindset, actions and ability to inspire others towards an important agenda.  In doing so, there may be obstacles, risks, unknowns but there is a burning agenda inside the leader that asks for  a change to get to a brighter future.  So, I can say, a leader is an optimist, who choses to create a positive outcome not just for oneself but for others and prints such images and brings in those who have the power to change, to make them a part of the solution, not obstacles. (Continue...)

I see three angles that are helpful for companies to transform: government policy, investor ESG, and sustainable finance.

1) Russian invation of Ukrain triggered energy crisis and post Corona's recovery is expected to be green and sutainable.  Many governments in the world have set policies to acclerate energy transition and  helpful for companies.  I want to come back to the details of this later.

Goverment policies:

US: in the case of IRA in the US, it has given tax credits to new technology in CCS and clean hydrogen. 

• Key theme also includes environmental justice.   This means that all people should have an access to affordable and stable energy.  IRA targets lower income areas and subsidies for unexperienced employees as well

• Another theme is  technology neutural.  This is not to make differentiation among technologies because which technology will materialize in 10-20 years span and also hard to abate sectors need technology to transition.

Japan also reached a cabinet decision on Green  Transofrmation.

• It states, roughly 1.2trillion dollars of public and private investements over next 10 years

• New sovereign bonds financing GX investments

• Introduction of carbon pricing

Key here is transition finance - creating a roadmap for hard to abate sectors such as energy, chemical and transport.  This contributes to changes in industrial structure in Japan. 

2) The second is ESG.  Investors are increasingly looking at managment quality, board effectiveness to handle energy transition.  Increasing disclosure and anti-greenwashing measures in EU, US, Japan, Australia, Hong Kong etc. for both investors and companies to really think about realistic approach to be profitable and sustainable.

• Investors are looking at both financial and non-financial factors when evaluating corprorate value.  This means that handling of energy transition, be it own operation improvement towards net zero, supply chain management or creating net zero friendly products help to create future financial value.  Though the concept of ESG has been around for some time, investors are looking at in the angle of management skills and board oversight are more apparent in assessing the risks and opportunies preseted by energy transition.

• Over 80% of asset managers have climate change measure related voting policy 

• In my recent coversation with an energy company, they are assessing long term plan and how best to communciate with investors.  In a smooth transition to net zero, they need to balance between providing stable energy source such as LNG, given a recent crisis AND long term story of cashflow sources to be about half of operations to come from non-traditional sources.

• Interesting movement by corporates is that they are looking for new venue to clean energy investments through venture capital.  Traditionally, companies tried to create their own innovation and technology but Japanese companies having more assets, they are becoming asset owners to provide capital to new clean technology.  The challenge is to match the money and investable organization and I see that there is still not enough forum to.

3) Third, sustainable finance.  In the recent news, EU has done a financial indutry-wide stress testing including climate change and concluded that 130 billion euro is needed to meet the 2030 climate targets.  This means that banks, securities companies and insurers need to make energy transition as part of decision making equattion.  So, companies with helpful technology can attract cheaper financing.

• The importance of sustainable finance is key for region like Asia where continued industrialization and growing demand for energy.

• More frameworks and guidlelines are coming out.   From the expert panel that I sit at Japan FSA, we have published guidelines for financial institutions for climante change, expectations for ESG asessors.  

• In this area, collaboration is key.  like GFANZ, there are many organizations working collaboratively towards creating real impact.  The challenge is to keep members on track with realistic targets.  In recent months, we have seen some financial institutions drop out because of anti-trust risk and lack of resources.

• I would like to note that it is a commercial opportunity for banks, securities companies, insurers to put investments in to cleaner energy. Tthe Japan FSA’s expert pane for for sustainable finance I am a member of has published “ Supervisory Guidance on Climate-related Risk Management and Client Engagement”.  It clarifies opportunity for financial institutions to contribute to clients climate transition as well as stresses their own governance and strategies to navigate this time.  I understand that there is a similar guidance in APAC context as well.

Amidst the need for sustainable society to transform the financial industry, the new financial methods dealt with in the "Basic Policy for GX" are an expression of the expectation that the public and private sectors will work on the environment (E) perspective in sustainable finance. 

On February 10, 2023, the "Basic Policy for GX" was approved by the Cabinet. This is a summary of the results of deliberations at the GX Executive Committee chaired by Prime Minister Kishida since July of the previous year. Here, I would like to organize the overall picture of sustainable finance, which is the trend behind these government movements. 

GX is an abbreviation for Green Transformation, but recently words such as DX (Digital Transformation) and SX (Sustainability Transformation) are circulating that yearn for changes in companies and society. The author has been with global financial institutions for about 25 years, most of which has been spent in the asset management industry. The investment and financing for this transformation are different in nature from the dot-com bubble, the Lehman shock, the European financial crisis, and other major turning points, in the sense that we expect financial institutions to fulfill their responsibilities to the future. 

The “Basic Policy for GX – A Roadmap for the Next 10 Years –” aims to reduce greenhouse gas emissions by 46% by 2030 and to achieve international pledges for carbon neutrality by 2050 by (1) providing a stable supply of energy, (2) It focuses on supporting structural and social structural reforms, and (3) introducing new financial methods, regulations and systems, and promoting sustainable finance.

(1) Concerning the stable supply of energy, based on geopolitical risks, energy conservation to reduce usage fees from the perspective of security, renewable energy as the main power source from the perspective of securing clean energy, and the use of nuclear power after ensuring safety are upheld.

(2) To support the transformation of industrial and social structures, decarbonization of the storage battery industry, improvement of international competitiveness, and GX (next-generation automobiles, next-generation aircraft, zero-emission ships, railroads, and logistics) in the transportation sector, carbon-oriented digital investment (development of semiconductors, optoelectronic convergence technology, etc.), research and development investment with an eye to the possibility of using hydrogen and ammonia and exporting CCS (Carbon dioxide Capture and Storage) technology to Asia, and promotion of innovation in the food, agriculture and forestry, and fisheries industries.

(3) As a new financial method, it is said that more than 150 trillion yen of public and private sector investment in GX will be required over the next 10 years. In order to realize this, the creation of GX economic transition bonds, the full-scale operation of the emissions trading system, and the introduction of a carbon levy are mentioned in terms of regulations and systems.

Many of the Japanese manufacturing industries seen in the field of stock investment are sufficient for the understanding of interested parties (stakeholders) whether they have a sufficient antenna to contribute to solving environmental issues and respond to social issues that are required from the outside. There is a lack of sense of crisis that management reforms such as changes in business areas must be carried out, or even if there is, it is difficult to say that we are proceeding concretely. Therefore, I would like to first confirm the previous research on the traps that are easy to fall into about management reform, analyze the cases of companies that are working to overcome the traps, find "DX thinking", and arrive at the practice of sustainable management behind it. 

Sustainable management is defined as "management that aims to contribute to a sustainable society while providing value to shareholders (owners of companies) and other stakeholders." From the statement that it includes shareholders, it can be seen that, first of all, because the company is sustainable, it is expected that sales and profits will be generated to an appropriate degree according to the business risk.