OPINION | Will van de Pol, CEO at Market Forces
Japan’s big banks have a big problem. Like climate change, it will get much worse unless it is addressed quickly.
The megabanks are lagging behind when it comes to playing their part in the critical transition to clean energy, as compared with many of their peers in Europe and Australia.
Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG) and Mizuho Financial Group each are facing mounting pressure from international investors over their climate policies.
At their annual general meetings this week, shareholders are to vote on proposals from Market Forces demanding that the banks assess their directors for competency in managing climate-related risks and opportunities. They will also be asked to vote on propositions calling for disclosure on how the banks will ensure that they only finance companies that are mitigating risk by genuinely transitioning in line with agreed climate goals.
These kinds of proposals are attracting significant investor interest and follow years of engagement with Japan’s megabanks on climate risk management. Investors are concerned about climate risks that threaten the banks’ bottom lines, as well as their reputations and credibility at home and abroad.
Last year, Market Forces shareholder proposals calling for greater action and transparency by the banks about meeting net-zero carbon emissions targets received support from up to 21% of shareholders, including UBS, the world’s third-largest asset manager, Amundi, Europe’s largest asset manager, Anima, Italy’s largest wealth manager and Irish Life Investment Managers, that country’s biggest pension fund. These global investors have made it clear they want to see greater accountability from Japanese banks about managing their corporate clients’ emissions.
Australia’s big four banks — Commonwealth Bank, ANZ Banking Group, Westpac and National Australia Bank — have leaped ahead of the Japanese megabanks by implementing new policies to end financing for new oil and gas production projects.
Commonwealth Bank, in particular, set a new benchmark, announcing that from next January, it will no longer provide any financing to oil and gas companies unless they have comprehensive, science-based decarbonization plans in place.
In contrast, the Japanese megabanks have left gaping holes in their climate policies. They have not ruled out project finance for new oil and gas fields, nor provided any details on the transition plan disclosures they will require from coal, oil and gas clients as a condition of providing further financing.
MUFG, SMFG and Mizuho have committed to align their lending with achieving net-zero emissions by 2050. The megabanks have also announced that they expect their high-emitting clients to produce climate transition plans. But without clear deadlines and assessment criteria to ensure the plans are genuinely aligned with the climate goals of the 2015 Paris Agreement, it is all just talk.
The Japanese megabanks’ policy gaps are allowing massive financing of new fossil fuel activities to continue, leaving the banks exposed to mounting financial risks and investor concerns. Mizuho and MUFG ranked as the biggest lenders to the liquefied natural gas (LNG) sector globally last year, according to the annual Banking on Climate Chaos report produced by the Rainforest Action Network and other environmental advocacy groups. SMFG was also in the top 10.
This level of lending flies in the face of the banks’ net-zero commitments and exacerbates financial risks. The International Energy Agency has estimated that up to three-quarters of LNG projects now under construction could fail to recover their initial capital costs if the global energy transition moves along the path to reach net-zero emissions by 2050.
Energy security is often thrown up as a fig leaf for LNG expansion plans that the IEA sees as incompatible with global climate goals. The truth is, a rapid transition to clean, renewable energy would decrease dependence on expensive, polluting imported fossil fuels like LNG. At the same time, the transition would reduce the social and economic risks posed by more frequent climate disasters, including severe heatwaves, typhoons and flooding.
But corporate Japan has been misled into thinking more LNG is necessary. Japan is the biggest export market for Australian LNG, but Japan resells more of the gas overseas than it imports from Australia.
The Japanese domestic LNG market is in decline and oversupplied, as spelled out in recent research by the Institute for Energy Economics and Financial Analysis. Japan’s LNG demand has fallen 25% since 2014 and is forecast to drop a further 25% by 2030.
This plummeting demand means that in advancing loans for new LNG ventures, Japan’s megabanks are taking on exposure to companies whose prospects rely on increased gas sales in emerging Asia.
But such sales would run counter to the climate goals and national interests of those emerging Asian economies. Even from a pure credit risk perspective, this is untenable.
There are also social risks. Residents of the Tiwi Islands off northern Australia have filed human rights complaints with 12 major banks, including MUFG, Mizuho and SMBC, that are helping to fund development of the Barossa gas field by Australia’s Santos and Japan’s JERA. The complainants argue that the project threatens the cultural expression and way of life of the First Nations communities they represent, and that the banks’ financial support breaches their international human rights responsibilities.
To properly manage climate-related financial, human rights and reputational risks, Japan’s megabanks must have clear requirements for genuine and detailed transition plans from clients involved in the fossil fuel sector, and ensure those plans are credibly aligned with the Paris Agreement goal of limiting global warming to 1.5 C.
Being accountable would mean finance would no longer flow to projects and companies that threaten communities and are incompatible with global climate goals. The buck must ultimately stop with board directors, who must ensure that corporate policies and processes are up to the task of managing the growing risks posed by climate change.
Japan’s megabanks are overdue in their response to investor concerns about their inadequate management of climate risks. Given increased shareholder focus on this issue, the banks and their directors must act swiftly to bring policies and practices into line with the clean energy transition required to limit global warming to 1.5 C and to mitigate the worsening risks of a rapidly heating planet.
First published in Nikkei Asia on 24 June 2024