Political importance
In Japan, a range of initiatives are raising ESG standards and reshaping business practices. In 2020, the Government Pension Investment Fund partnered with Keidanren and the University of Tokyo to encourage investments aligned with the Society 5.0 initiative—a vision for a human-centered, sustainable society that aligns with the UN’s Sustainable Development Goals (SDGs). The Social Impact Measurement Initiative (SIMI) also fosters social-impact management across sectors, involving nonprofits, businesses, government agencies, and researchers. Additionally, in 2019, the Financial Services Agency updated its Stewardship Code, urging institutional investors to incorporate ESG factors into risk mitigation and growth strategies.
The Japanese government has also introduced several environmental regulations, including the ‘Act on Promotion of Global Warming Countermeasures’ and the ‘Act on Rationalizing Energy Use’ to help businesses reduce greenhouse gas emissions, improve energy efficiency, and transition to sustainable practices. Moreover, to encourage businesses to use renewable energy, Japan offers three types of certificates—J-credits, green electricity certificates, and non-fossil certificates—which facilitate favorable corporate power purchase agreements. The recent launch of the Green Transformation League’s emissions trading system in April 2023 further advances Japan’s green goals.
In the area of business and human rights, Japan released a national action plan in 2020 in alignment with the UN Guiding Principles on Business and Human Rights. Following a 2021 survey, the government introduced the ‘Guidelines on Respecting Human Rights in Responsible Supply Chains’ in 2022. In April 2023, additional guidance was provided, offering practical examples for businesses developing human rights policies.
Political importance
In Japan, a range of initiatives are raising ESG standards and reshaping business practices. In 2020, the Government Pension Investment Fund partnered with Keidanren and the University of Tokyo to encourage investments aligned with the Society 5.0 initiative—a vision for a human-centered, sustainable society that aligns with the UN’s Sustainable Development Goals (SDGs). The Social Impact Measurement Initiative (SIMI) also fosters social-impact management across sectors, involving nonprofits, businesses, government agencies, and researchers. Additionally, in 2019, the Financial Services Agency updated its Stewardship Code, urging institutional investors to incorporate ESG factors into risk mitigation and growth strategies.
The Japanese government has also introduced several environmental regulations, including the ‘Act on Promotion of Global Warming Countermeasures’ and the ‘Act on Rationalizing Energy Use’ to help businesses reduce greenhouse gas emissions, improve energy efficiency, and transition to sustainable practices. Moreover, to encourage businesses to use renewable energy, Japan offers three types of certificates—J-credits, green electricity certificates, and non-fossil certificates—which facilitate favorable corporate power purchase agreements. The recent launch of the Green Transformation League’s emissions trading system in April 2023 further advances Japan’s green goals.
In the area of business and human rights, Japan released a national action plan in 2020 in alignment with the UN Guiding Principles on Business and Human Rights. Following a 2021 survey, the government introduced the ‘Guidelines on Respecting Human Rights in Responsible Supply Chains’ in 2022. In April 2023, additional guidance was provided, offering practical examples for businesses developing human rights policies.
Trends
Many Japanese companies are committing to community and societal responsibilities, including lifelong employment, eco-friendly production, customer-focused services, and product safety. According to Nikkei Research, nearly all major companies have made strides toward the UN SDGs, but fewer than 40% of Japanese companies publicly disclose ESG information.
A McKinsey ESG scorecard also reveals that while Japanese companies are improving, larger companies generally outperforming smaller ones because of their greater global exposure, in which they are more responsive to international ESG norms. Overall, Japanese companies score well on employee health and safety, yet could strengthen efforts in well-being, talent retention, and performance management. To promote human rights, the Japan Business Federation amended its Charter of Corporate Behavior in 2017, and the Cabinet Office launched work-style reforms to address long working hours and support flexible work options.
Gender diversity is another area with potential for value. McKinsey found that firms with over 30% women executives tend to outperform others, with those in the top quartile for gender diversity being 25% more likely to have above-average profitability. Despite this, in 2019, women represented only 5.2% of board directors at listed companies in Japan, ranking the country 121st out of 153 in the World Economic Forum’s gender-gap index.
Trends
Environmental, Social, and Governance (ESG) investing has become a cornerstone of Japan’s financial landscape, reflecting the country’s commitment to sustainability and responsible investment. Since aligning with the Sustainable Development Goals (SDGs) and the Paris Agreement in 2015, Japan has made significant strides in integrating ESG principles across its economy. This focus has positioned Japan as a leader in Asia’s ESG market, driven by robust government policies, influential institutional investors, and innovative financial products.
A major driver of ESG adoption in Japan is its progressive policy framework. The Stewardship Code, first introduced in 2014 and updated in 2020, encourages institutional investors to actively engage in promoting sustainable corporate governance. Complementing this is the Corporate Governance Code, revised in 2021, which mandates improved disclosure of climate-related risks, diversity, and other ESG-related information for Tokyo Stock Exchange-listed companies. Japan is also a global leader in supporting the Task Force on Climate-related Financial Disclosures (TCFD), with the highest number of TCFD supporters worldwide, underlining the country’s emphasis on ESG transparency.
Japan’s largest institutional investor, the Government Pension Investment Fund (GPIF), has been instrumental in embedding ESG principles into the nation’s investment ecosystem. Managing over $1.5 trillion in assets, GPIF collaborates with leading ESG index providers such as MSCI and FTSE Russell, integrating ESG benchmarks into its passive investments. Its influence has catalyzed a broader market shift, with other financial institutions and asset managers following suit.
The trading landscape for ESG in Japan continues to expand, with a noticeable rise in ESG-linked financial instruments. Green bonds, designed to finance environmentally friendly projects, have seen exponential growth, reflecting Japan’s commitment to achieving carbon neutrality by 2050. Additionally, sustainability-linked bonds, where interest rates are tied to the fulfillment of specific sustainability goals, are gaining traction among Japanese corporations. Exchange-traded funds (ETFs) focused on ESG criteria have also proliferated, further enhancing accessibility to sustainable investments.
Several key players are leading the ESG charge in Japan. Apart from GPIF, major asset management firms like Sumitomo Mitsui Trust Asset Management, Mitsubishi UFJ Trust and Banking, and Nomura Asset Management are advancing sustainable investing practices. Financial institutions such as Mizuho, Mitsubishi UFJ Financial Group (MUFG), and Sumitomo Mitsui Financial Group (SMFG) are actively financing renewable energy projects and issuing ESG-focused bonds. The Tokyo Stock Exchange (TSE) has also played a pivotal role by introducing ESG-specific indices and advocating for enhanced sustainability disclosures among listed companies.
Despite its progress, ESG adoption in Japan faces challenges. The lack of standardized disclosure practices across companies remains a critical issue, as variations in reporting hinder comparability and transparency. Additionally, while Japan’s corporate culture of long-term planning aligns well with ESG principles, further improvements in governance transparency are necessary to meet global standards.
Looking ahead, Japan’s ambitious target of achieving carbon neutrality by 2050 will continue to drive ESG investments. Sectors such as clean energy, green infrastructure, and sustainable technology are expected to attract significant capital. Furthermore, growing awareness of ESG benefits among institutional and retail investors, particularly younger generations, is likely to sustain momentum in the market. Innovations in fintech and blockchain may also enhance ESG trading by improving transparency and traceability, ensuring investments align with sustainability goals.
As ESG becomes an integral part of Japan’s financial and corporate strategies, the country is poised to remain a key player in shaping the future of sustainable investing in Asia and beyond.
Threats and opportunities
Japan has set ambitious net-zero targets by 2050 with its Green Growth Strategy and Nationally Determined Contributions (NDCs). However, challenges persist, including a slower electric vehicle transition and no firm commitment to phasing out coal-fired power. Balancing energy security with decarbonization remains complex, especially as Japan attempts to restart nuclear plants.
Japan has also advanced corporate governance, with large companies disclosing climate-related actions aligned with government and Tokyo Stock Exchange targets. The introduction of a Stewardship Code and Corporate Governance Code has pushed for sustainability committees and ESG-linked executive compensation. However, the country faces human capital challenges from an aging population and low gender diversity as only 20% of women hold leadership roles, leading to Japan’s position as one of the largest gender pay gaps in the OECD.
Another challenge is the concerns about “greenwashing” among asset managers. To solve this the Financial Services Agency (FSA) has new disclosure standards and labeling guidelines for 2025, signaling Japan’s commitment to a stronger ESG focus.
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