The most significant sustainability issues for Japan are climate change (Japan's energy mix is 76% reliant on fossil fuels), human capital & labor shortage (population is declining by 0.5% per year while wages have started to rise), and gender inequality, which affects other issues such as lack of diversity and poverty. The ESG investing landscape has improved over the last 3-4 years with updates made to the corporate governance code and sustainability disclosure requirements from the Financial Services Agency. The estimated proportion of "sustainable investment" in Japan has increased steadily to c. 34% of total AUM. While new fund launches have slowed from the 2021 peak of 67, this is in line with general product trends due to outflows from retail funds in 2022.
Climate Change: Japan's energy mix is 76% reliant on fossil fuels (2019), and imports almost all fossil fuels from overseas. The government plans to reduce this to 41% fossil fuels by 2030, while increasing renewables and nuclear from 24% to 59% over the same period. The share of renewables has been increasing gradually, but resuming nuclear power generation is challenging, and the share of energy from nuclear has not risen. The national GHG emissions target is a 46% reduction in 2030 vs 2013 and to achieve carbon neutral by 2050. For this purpose, the government has plans to raise and spend 20 trillion yen through the GX bond (transition bond), to subsidize R&D and capex related to emissions reductions. The transition bonds will be repaid using tax revenues generated through the carbon surcharge (2028-) and auctions in the emissions trading system (GX League). Though the emissions trading system is currently voluntary, our view is that it will become mandatory, and we see potential signs of this happening.
Biodiversity & Water: Around 65% of all key biodiversity areas in Japan are "Protected Areas" and the country scores well relative to other major economies on other measures of natural resource protection. It helps that the population is declining and continues to aggregate in urban areas, but biodiversity can still be damaged, even in protected areas, when economic interests are prioritized. Japan has committed to protect 30% of land and sea by 2030 (30by30) and has set out a detailed plan of objectives and indicators, but it remains unclear how "Other Effective area-based Conservation Measures" will be defined. Though water stress is not expected to be as severe as other major economies, variation in rainfall is expected to increase due to climate change, making the likelihood of regional/time-limited drought and flooding more common.
Human & Social Capital: The severe labor shortage, declining birth-rate, high dependency ratio and declining population (0.5% per year to 2030), is well understood, so here we focus on wages and inequality. The minimum wage in Japan has been increasing steadily for over 20 years though it appears to be declining due to FX effects. A key concern of the government over the past year has been to reverse the trend of declining real wages which has persisted for 22-months as of January 2024. We expect nominal wages to continue to rise as the labor shortage tightens. The gini index, representing the level of income inequality, is lower than the US and China, but given declining real wages, low income households' spending power has been declining. The relatively faster rise in minimum wages and the potential for average wages to increase in real-terms makes us hopeful that inequality and poverty will decrease. Gender inequality is also very much in focus, with the Financial Services Agency requiring disclosure of the gender wage gap in annual filings, and many investors engaging with corporates on this issue. Women spend around 15% of their day (24hrs) on unpaid domestic labor, while men spend around 3%. We expect the labor shortage, investor engagement, and government policy to continue to incentivize corporates to act on this issue.
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