Exposed: Japan’s five largest investors delay clean energy transition

Market Forces’ latest analysis reveals that Japan’s five largest institutional investors

• Mizuho Financial Group/Dai-ichi Life Insurance¹
• Sumitomo Mitsui Trust Holdings
• Mitsubishi UFJ Financial Group
• Nomura Holdings and
• Nippon Life Insurance

hold US$40.6 billion in companies with the biggest plans to expand the fossil fuel industry, as measured by exposure to the Fossil Fuel Expansion Index (FFEI). Our research reveals that the vast majority of planned fossil fuel expansion is being done by a relatively small number of 190 companies around the world. We call this group of companies the Fossil Fuel Expansion Index. If the world is to achieve the goals of the Paris Agreement, fossil fuel expansion plans cannot go ahead. The United Nations estimates that the world will warm by a catastrophic 2.6-3.1°C with currently planned levels of fossil fuel production, which would see devastating global economic losses. The companies that make up the FFEI play a huge role in this scenario. If the coal, oil and gas expansion projects planned by these companies go ahead, they will unleash between 77-129 gigatonnes of carbon dioxide-equivalent (GtCO₂-e) – 1.3-2.2 times the world’s entire 2023 emissions at a time when deep reductions need to be made. Using their substantial financial power, large investors in the world’s biggest coal, oil and gas expanders must use all available tools to prevent such dangerous pollution from happening. The initial investment costs required to achieve the goals of the Paris Agreement are forecast to be significantly less than the costs associated with greater than 2°C of warming.² Fortunately for the five Japanese investors featured in this report, more than 80% of their investment in the FFEI is concentrated in just ten companies: Itochu Corporation, Mitsui & Co, Mitsubishi Corporation, Marubeni Corporation, ExxonMobil, BHP, Inpex, Chevron, Osaka Gas Co Ltd, and Chubu Electric Power. The expansion plans of these ten companies alone would release 7.7 GtCO₂-e into the atmosphere, wiping out nearly three years of global emissions savings currently achieved by renewable energy deployment. Failure to prevent the expansion plans of these FFEI companies will undo the benefits of the investors’ clean energy investments. Analysis has found that in 2030, every $1 invested in fossil fuels must be matched by $4 to ‘low-carbon energy’ to achieve the goals of the Paris Agreement. The investors featured in this report have slightly more invested in companies in the Bloomberg Goldman Sachs Clean Energy Index (Clean Energy Index) than the FFEI, at USD $43.2 billion. While this is an encouraging start, it falls well short of the 4:1 investment ratio required for a 1.5°C warming pathway. There is still a long way to go. As signatories to a wide range of investor-led climate initiatives, including Climate Action 100+, Asia Investor Group on Climate Change (AIGCC), and the Net Zero Asset Managers Initiative (NZAMI), Japanese investors have a duty to:

• Invest in companies and projects that will deliver the necessary clean energy technology for achieving net-zero emissions by 2050.
• Use their investments in the heaviest emitting companies to drive strategies away from fossil fuel production and use.

The latter point requires the investors to take firm action at portfolio companies that are doubling down on their enormous fossil fuel expansion plans. Large investors committed to climate action ought to be taking the following steps:

• pressuring companies to adopt ambitious and genuine emissions reduction strategies
• voting for climate-related shareholder proposals
• voting against directors who are unresponsive
• ultimately, if necessary, divesting loudly and proudly.

The asset managers featured in this report tended to be more supportive of climate-related shareholder proposals relative to peers, averaging 35% support compared to 17% from all shareholders across the proposals analysed. But voting for climate proposals does not deliver emissions reduction on its own. These same investors voted in favour of directors at Japan’s FFEI companies 99% of the time, despite their massive expansion plans. Pressure must be increased on companies with dangerous plans to expand the coal, oil and gas sectors. Transitioning from fossil fuels towards a clean energy system is essential for both Japan and Japanese asset managers to mitigate climate risk. Some Japanese asset managers are already aware that their portfolio’s power source mix is not 1.5°C-aligned – and not even 2°C-aligned – due to their significant investments in fossil fuels. Japanese asset managers cannot ignore increasing global recognition of their fiduciary duty to address climate-related financial risk, which is driving asset managers to actively oversee emissions reduction in their portfolios. More action needs to be taken to hold directors of companies expanding fossil fuels to account, including ensuring more effective risk controls and using director votes to ensure climate competent boards. If the current trend of voting practices continues and asset managers fail to change the course of companies expanding fossil fuels, they risk their reputations, beneficiaries’ assets and further destructive climate impacts.

[1] Mizuho Financial Group and Dai-ichi Life Insurance are separate entities, however, the two entities respectively own 51% and 49% of voting rights in Asset Management One.

[2] Further details are provided in the ‘Investors have an interest in aligning investee companies with a 1.5°C pathway’ section of the report.

The information provided by Market Forces does not constitute financial advice for the purposes of the Financial Instrument Exchange Act of Japan.

Nothing in this report, nor in any related oral discussion, is intended to be, nor should it be construed as, a “solicitation for proxies” for the purposes of the Financial Instrument Exchange Act of Japan, or as an offer, an acceptance or a consent, to enter into an agreement for the joint exercise of voting rights or any other shareholder’ rights for the purposes of the Financial Instrument Exchange Act and Foreign Exchange and Foreign Trade Act of Japan.

Market Forces has made every effort to ensure the analysis and information provided in the report are sound, but cannot guarantee the accuracy or correctness of any of the data collected from external sources.

Analysis featured in this report does not substitute analysis and disclosure from the investors themselves with primary information. The purpose of the information featured here is to demonstrate to readers the substantial climate-risks the investors are exposed to, and encourages them to undertake their own detailed, forward-looking analysis to demonstrate to readers how they are managing these risks.
Market Forces disclaims any liability arising from the use of information provided in this report. Translation of this report to Japanese was conducted by third parties. For quotes, please refer to the original version in English. This is a non-commercial product for public dissemination only. Not for sale.