Political importance

 

Japan has made significant strides in integrating Environmental, Social, and Governance considerations into its corporate, regulatory, and investment frameworks. The country is experiencing an increasing range of initiatives that are raising ESG standards and reshaping business practices. In 2020, the Government Pension Investment Fund partnered with several institutions, including 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). 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. 

 

 

Corporate attention

Many Japanese companies are already committing to community and societal responsibilities, including lifelong employment, eco-friendly production, customer-focused services, and product safety. Researchers have highlighted nearly all major companies have made some strides toward the UN SDGs, but fewer than 40% of Japanese companies publicly disclose ESG information. 

A McKinsey ESG scoreboard also revealed that while Japanese companies are improving, larger companies generally outperform smaller ones because of their greater global exposure, in which they are more responsive to international ESG norms. Overall, Japanese companies focus on employee health and safety, but many could benefit from strengthening their 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 its government agency, the Cabinet Office, launched work-style reforms to address long working hours and support flexible work options. 

Gender diversity presents another significant potential for creating value. Japanese firms with over 30% women executives tend to outperform others, and those in the top quartile for gender diversity are 25% more likely to achieve above-average profitability. Despite this, women made up only 5.2% of board directors at listed companies in Japan in 2019, placing the country 121st out of 153 in the World Economic Forum’s gender-gap index. Other ESG areas, such as investing in decarbonization technologies, are also becoming more common as it also generates more value. 

 

Trends

ESG investing has become a cornerstone of Japan’s financial landscape. Since aligning with the 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.

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. 

 

Threats and opportunities

 

Japan has set ambitious net-zero targets by 2050 with its Green Growth Strategy and Nationally Determined Contributions. 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. On the other hand, Japan has 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. 

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. 

 

 

Useful resources

 

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ESG compliance services

Danish Industry offers online diploma courses for individuals, and in-person training workshops for full teams. The point of departure is to introduce basic ESG concepts and advice on how to align business with local regulations and social expectations.

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Support options

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ESG in other Asian countries

ESG varies all across Asia. We have gathered the most important information about politics, trends, opportunities, and threats in the different Asian countries.

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