Green Japan & Green Finance in Japan
How green is Japan, and how is its green finance industry doing? We took a look at two studies that were published in the spring, the MIT Green Future Index covering the former, and the Z/Yen Global Green Finance Index covering the latter.
Amazingly, the direction of travel is in opposite direction. While Japan has made the single largest jump upward in the MIT rankings, the Z/Yen chart for green finance has seen it declining steadily (in ranking, not in absolute score).
This is somewhat surprising as Japan’s Government Pension Investment Fund (GPIF) has been spearheading ESG investments globally from 2015 onwards. To state the obvious, “green finance” equates to “E” in “ESG”, thus is only a subset. Further, with Japan just now catching up on policy making and implementation, as demonstrated by the MIT Green Future Index, the finance industry might have been ahead of the actual physical measures taken. It should be a trailing indicator, not a leading one (unless it is financing efforts out of the country), so there is a hopeful expectation that the trajectory of the green finance score will follow its sibling going forward.
MIT Green Future Index
The Green Future Index is a research program by MIT Technology Review Insights that measures the extent to which 76 countries and territories are moving toward a green future by reducing their carbon emissions, developing clean energy, innovating in green sectors, and preserving their environment, as well as the degree to which governments are implementing effective climate policies.
The top-ranked cohort of 20 countries saw new entrants representing an additional cluster of European economies, as well as South Korea and Japan; both have seen significant rises in their innovation scores thanks to their world-beating green intellectual property contributions and notable increases in pivoting infrastructure spending toward clean and green projects (as has the US, ranked 21st).
The index is structured so that it measures 22 indicators that are grouped into five pillars:
- Pillar 1: Carbon emissions — This pillar measures how effectively countries are curbing carbon dioxide emissions overall, as well as in key sectors.
- Pillar 2: Energy transition — This pillar assesses the contribution and growth rate of renewable energy sources, and now includes nuclear power.
- Pillar 3: Green society — This pillar measures the efforts made by government, industry, and society to promote green practices.
- Pillar 4: Clean innovation — This pillar measures the innovation environment for building a low-carbon future, such as the relative penetration of green patents, investment in cross-border clean energy, and investment
- Pillar 5: Climate policy — This pillar measures the ambition and effectiveness of climate policy, including carbon financing initiatives, sustainable agriculture policy, and the use of pandemic recovery spending to achieve a green economic recovery.
Japan has made the single largest jump in the overall rankings, rising from 60th to 19th place, in large part because of steps taken in 2021 to increase decarbonization efforts and aspirations. Japan’s updated 2030 NDC target moved up its emission reduction targets from 26% to 46%, with a stretch goal of 50%. Japan’s Ministry of Economy, Trade, and Industry (METI) also released its sixth Strategic Energy Plan in October 2021 and has made substantial progress in energy investment transition.
However, Japan has only one Top Ten ranking for individual pillars, namely for Clean Innovation, where it comes in 10th. For comparison, South Korea is 8th in Energy Transition, first in Green Society, and 8th in Clean Innovation, in line with the higher ranking overall (10th).
Overall, one can say that momentum has been building based on the measures taken, and Japan appears to be on the right track. Is it where it should be as one of the largest economies in the world? Certainly not, and the jump from 60th into the Top 20 was the easy part, moving from here into the Top 5 will require continued focus on policy implementation.
Z/Yen Global Green Finance Index
Those who have been following us for a while know that we are great fans of the Z/Yen Global Financial Centers Index (GCFI), which has a history of more than 16 years, and has seen Tokyo recently slipping out of the Top 20, from an all-time high third position in March 2020.
Z/Yen has been publishing a Global Green Finance Index (GGFI) as well, which is a bit younger, and on its 11th semi-annual edition (April 2023). GGFI 11 was compiled using 150 instrumental factors, and also is based on quantitative and qualitative inputs. There are 86 centers ranked, which are those which received a minimum of 25 assessments from survey respondents located outside of those centers.
The index is structured so that it measures 16 instrumental factors that are grouped into four broad areas:
- Sustainability
- Infrastructure
- Human Capital
- Business
Similar to the GCFI, Tokyo has been sliding in its green sibling recently as well, losing 7 spots to 31st place, all while increasing its overall score — thus a story you have heard before as well: it is not that Tokyo is not changing, it is that other locations/jurisdictions are improving faster. Tokyo is not ranked among the Top 15 for any of the four broad areas.
There are five Asian cities among the Top 20, namely Singapore (11th), Seoul (15th) and Shanghai (20th). If you extend the geography to APAC, you may add Sydney (13th) and Wellington (18th).
How strong is the correlation between the GFCI and GGFI? Taking the Top 20 of the GFCI as the basis, the centers not reaching a similar ranking in the GGFI are as follows:
- Hong Kong — 4th as a global financial center, 37 as a green financial center
- Boston — 9th as a global financial center, 29th as a green financial center
- Shenzhen — 12th as a global financial center, 25th as a green financial center
- Beijing — 13th as a global financial center, 27th as a green financial center
- Frankfurt — 17th as a global financial center, 36th as a green financial center
- Munich — 18th as a global financial center, 22nd as a green financial center
The correlation overall is given with an R-Squared of 0.8.
Similar to the GFCI, the GGFI also analyzes the breadth and the depth of the market. Unlike the GFCI, though, where Tokyo is still ranked as a “Global Leader” despite the declining overall ranking, for green finance Tokyo is characterized as relatively broader than deep. However, that implies that most sub-sectors are covered, but not necessarily fully developed, which can more easily improve as the policy implementations progress.
This article is part of our Tokyo FinTech Publication, please follow us to read more from our writers, like hundreds of readers do every day. Please also register for our short weekly digest, the “Japan FinTech Observer”, on Medium or on LinkedIn.
Should you live in Tokyo, or just pass through, please also join our Tokyo FinTech Meetup. In any case, our YouTube channel and LinkedIn page are there for you as well.
