Takeshi Kimura, special adviser to the board of Nippon Life, explains how the 1992 Kyoto Protocol spurred Japan to act on sustainability and how the country's insurers play their parts.
Is it correct that insurers in Japan have created a Japanese chapter of the net-zero asset owner alliance (NZAOA)?
There are no specific Japanese net-zero asset owner alliance. However, since 2017, before the NZAOA was established in 2019, Japanese life insurance companies have collaboratively engaged with investee companies as an initiative of the Life Insurance Association of Japan.
The initiative has targeted about 170 listed companies mainly focusing on three issues: improving climate change disclosures, improving ESG disclosures and improving shareholder returns.
For example, on the theme of improving climate change disclosures, the initiative made two requests to the 50 biggest emitters of greenhouse gas. First, perform quantitative and qualitative analysis of risks and opportunities associated with climate change and disclose this information. Second, create a strategic plan for the reduction of greenhouse gas emissions (GHG).
So Japanese insurance companies have been conducting such collaborative engagements before they joined the NZAOA in 2021, but it's not a Japanese chapter of the alliance.
Has that engagement been successful? Do you have any examples of achievements so far?
Yes, because many companies have increased their non-financial information disclosures and embraced reporting frameworks such as the TCFD. So, we think the cooperative engagement of life insurers has been effective.
There are seven Asian insurers members of the NZAOA, and five are Japanese, why is it such a big topic in Japan?
My personal view is that the first international treaty to set GHG reduction target was signed in Japan (Kyoto protocol), it has historically led to the high awareness of the need to address climate change. Then the Fukushima nuclear accident in 2011 as raised awareness further for the need for decarbonisation and stable energy supply.
The Japanese government's commitment to net-zero by 2050 is another key factor. In 2021, the government raised its interim target for 2030 from a 26% reduction to 46% reduction, this was a turning point that led the major Japanese life insurers to join the NZAOA.
Is net-zero a consideration for the rest of Asia? If not, why not?
Only a minority of Asian countries had committed to net-zero at the end of 2021. But that number is rapidly increasing. And the number of PRI signatories from Asia has also been increasing. Also, the issuance of sustainable bonds in Asia has tripled from 2020 to 2021.
So really, we expect the net-zero trend to become stronger in Asia in the future, even though the situation varies from country to country.
How is Nippon Life working towards achieving a net-zero investment portfolio?
We initiated ESG integration in all asset classes in 2021 to achieve our net-zero ambition in line with the multiple targets set at the NZAOA level.
Specifically, we have set two interim targets for GHG emission reductions. First, 45% reduction or more compared to the fiscal year 2010 for total emissions. Second, 49% reduction or more compared to the fiscal year 2020 on an intensity level basis.
We have engaged in constructive dialogues with investee companies to improve corporate value from medium to long term viewpoints. I mentioned the initiative with the life insurance association of Japan, but we also have our own initiatives. For example, with regard to climate change, we have engaged with the 70 of the top emitters, which account for 80% of the greenhouse gas emissions in our portfolio, requesting for more disclosures, including a 2050 net-zero roadmap. In 2021, we announced that we may use our voting rights to oppose the election of directors which are not working to resolve climate change issues.
What impact does a net-zero commitment have on the company strategy and on the business as a whole?
As an insurance company, we aim for net-zero, not only in asset management, but also in business operations. Specifically, we have a set of interim targets for 2030 on total emissions associated with our business operations themselves. Our target is to reduce by 51% or more compared to fiscal year 2013. And if our net-zero efforts in our business operations are not exemplary, then, as an investor, we are not qualified to engage in dialogue with investee companies. We cannot ask investee companies to do what we cannot do ourselves.
What is the process for determining and agreeing realistic and achievable net zero goals?
One of the critical points is to take into account the diversity of pathways and processes of each industry and companies from medium to long term perspective, and we should avoid a short-term approach, such as divestment based on ESG ratings alone.
We believe that it's very important to analyse investee companies in detail, taking into account various factors such as technological capabilities, energy security, and regional characteristics rather than relying on superficial ESG scores.
Some studies suggest that there is, perhaps surprisingly, a negative relationship between the generators of innovations that can address environmental challenges and where capital is being directed. For example, traditional energy companies are key innovators in green energy, but they are lower rated by ESG rating agencies, and are explicitly excluded from ESG Funds investment universe. So, in this sense, we think that ESG scores are pushing money away from innovation, and we need to avoid that.
How are you measuring and tracking progress?
For GHG we are currently measuring Scope 1 and 2 emissions of our portfolio. We recognise importance of Scope 3, but the right measurement method has not been established yet. We are tracking several KPIs including GHG level and the amount of ESG themed investment and finance on annual and quarterly basis. There are various challenges regarding measurement and we know we need to improve.
What would you say is the biggest challenge to achieve net-zero for your company?
The decarbonisation financing market, including transition bonds, is still in its infancy. It's difficult to make decisions on investments and loans in areas where there is no track record, and decarbonisation financing for privately held companies is also inherently difficult due to information asymmetry. So, we need more expertise.
In addition, for emerging economies it's necessary to devise financing schemes to attract private sector risk money.
Another issue is that transition finance in the short term may increase GHG in financial institutions investment portfolio, and therefore it should only be considered from a long-term perspective.
Are there specific challenges for Asian insurers to embark on a net-zero journey?
Asian countries have a heavy dependence on fossil fuels, including coal, and it's very difficult to achieve decarbonisation drastically in those regions. It's important to be very realistic about the transition to net zero, there are limits to what the private sector can do on its own. So, government support, the commitment is very essential.
Is there a cost to the portfolio and to the bottom line?
We believe ESG investments pay off in the long run from a return perspective.
If you look at the TCFD recommendations, they are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets.
I would never assume that the corporate value of an organization that takes these four core elements seriously would be lower than the corporate value of an organization that does not.
The process of moving toward net-zero may incur some costs, such as a short-term increase in GHG emissions in the portfolio by proceeding transition finance, but it will pay off in the long run and is rather a necessary process.
ESG incorporation is a form of risk management. We believe the risk/return profile of the portfolio will improve in the long run through the return enhancement via the increase of long-term corporate values, and the risk mitigation.
What is important is to promote net-zero from a medium- to long-term perspective, rather than from a short-term perspective.
There is a bit of a backlash on ESG, especially in the US, do you have any thoughts on this?
Some anti-ESGs say that CA 100+ may violate antitrust law by mobilizing shareholders to act in concert in a bid to influence the financial markets and companies.
However, investors joined CA 100+ to participate in dialogue with companies and financial institutions on matters important to their clients. They act independently in its investment decisions, they do not co-ordinate investment decisions with any members of CA 100+, and they do not buy, sell, hold or vote our shares together with any CA 100+ signatories.
Traditional antitrust authorities tend to focus on a very narrow price-centric view of consumer welfare and take a tough stance on industry collaboration.
In order to promote net-zero, it is crucial for antitrust authorities to broaden their views and take into consideration sustainability benefit to all consumers including not only actual consumers of the products but also society as a whole.
It is crucial for antitrust authorities to consider an internalization of the environmental externalities in their judgements.
Such green antitrust approach has been seen in Europe, including Netherland and Austria.
We are watching for future developments in the US anti-trust law.
