Green investment a key cue for growth

Japan’s efforts to curb climate change have been gathering speed since October 2020, when Prime Minister Yoshihide Suga declared a goal of achieving “net-zero” greenhouse gas emissions by 2050. Many businesses have accordingly announced climate change measures of their own.

A recent U.S. move has also been giving impetus to other countries’ climate change commitments. The United States convened a virtual Leaders Summit on Climate in April, with the world’s attention focused on the participating countries’ 2030 decarbonization targets. Japan announced a bold goal, pledging to cut emissions to 46% below fiscal 2013 by fiscal 2030.

We have 29 years to go until 2050, but 2030 is only nine years away. Japan will have to realize large emission reductions in the coming nine years. However, it is hard to expect breakthrough technologies for stopping climate change to become available in just nine years. Against this background, steady corporate efforts to lower emissions are particularly vital.

Governments in many countries, including Japan, aim to convert their climate change efforts into a growth strategy. To that end, they want climate-related investment to be a growth opportunity instead of merely the burdensome cost of protecting the environment. Great investment opportunities will emerge along with moves to develop electrified vehicles, utilize renewable energy as a major power source and build full-fledged hydrogen-based fuel supply networks, among other efforts. If this happens, massive investment will be stimulated on the demand side while technological innovation is accelerated on the supply side.

In Japan, both demand and supply have been in a slump for the past 30 years. With its economy remaining stagnant, many corporations have found investment opportunities to be few and far between. As a result, Japanese companies have had no choice but to sit on snowballing retained earnings and be less active in investment.

The consequence has been the stagnation of secular demand coupled with little growth in social capital stock and no outstanding technological innovation. It is obvious that no society can grow without robust investment, and the obvious has happened in Japan.

When asked why they do not invest further, corporate executives typically answer: “There are no promising investment opportunities.” The newly adopted goal of nearly halving greenhouse gas emissions by fiscal 2030 is expected to provide new investment opportunities for Japanese companies. I hope as many companies as possible realize the goal will be unattainable without immediate and wholehearted corporate investment and they therefore consider actually adopting such investment strategies.

Climate change technology development is expected to significantly advance from fiscal 2030 on. To stay competitive in this future environment, companies should launch bold investment programs now.

A new round of competition has already begun over investing in plans to develop new green technologies. When a large number of companies join the fray with their own climate change investment plans, the economy as a whole will usher in a large pool of investment projects. Then, the idea of making green investment the pillar of Japan’s growth strategy will no longer be a pipe dream.

The country’s decarbonization efforts have so far been limited largely to the supply side. Industrial sectors and corporations have worked on their own to reduce greenhouse gas emissions by setting low-carbon targets. All these efforts deserve praise as important climate change measures, but the benefits will be limited.

When setting targets, companies prioritize achievability. They avoid adopting goals that are too ambitious because failure would bring criticism from the outside.

When it comes to the attitude of Japanese society toward climate-related matters and people’s lifestyles, they can hardly be said to have sufficiently tackled this global issue. It is obvious that business’ efforts alone will be ineffective in attaining major climate change targets, no matter how hard they work.

Japanese society needs to be united to deal with and attain the bold target that was declared by Prime Minister Suga in April. In this regard, the demand side, including consumers, needs to play a vital role as well.

Lately I often hear statements like, “Companies that make no serious decarbonization efforts cannot survive.” This indicates how important pressure from the demand side has become. A little while ago, it was common for corporate executives to say things like, “If we seriously engage in decarbonization, our costs will increase so sharply that we won’t be able to compete.” Companies now have to face a different world.

For example, coal-fired thermal power plants have been referred to as a low-cost, price-competitive source of electricity. But lately there are warnings that corporations that depend on coal will be unable to raise funds as customers turn away from such entities.

Rising pressure from the demand side means it will be increasingly impossible for companies that fail to shift to renewable energy to survive. This is being reinforced not only by government regulations but also by the ongoing transformation to green governance by both financial markets and relevant social systems. Many companies are likely to increase their carbon-neutral investments, which is vital to the success of the government policy of realizing a growth strategy.

An interesting thing recently happened at U.S. oil company Exxon Mobil Corp. U.S. investment firm Engine No. 1, which advocates net-zero carbon corporate operations, nominated four carbon-neutral director candidates and eventually made Exxon add three of them to its board. The management of Exxon, which is one of the largest oil companies, now has three decarbonization advocates on its board.

Engine No. 1 has a stake of less than 0.1% in the energy giant. Nevertheless, in this David and Goliath standoff, media reports say the activist shareholder emerged as the winner because it was backed by Exxon’s large shareholders, including leading global investment manager BlackRock. Many Exxon shareholders are now thought to believe that to ensure corporate sustainability for the oil company, it has to actively engage in a green transition. Even this large oil company now finds it impossible to survive without dealing squarely with decarbonization — it is believed to be feeling such pressure particularly because it has been heavily dependent on fossil fuels as an oil giant. Companies are being increasingly pressured via shareholder intervention, as in this case, to expedite their green transition. This is one of the demand side’s moves on climate change.

The demand side’s drives for greater decarbonization efforts vary, ranging from the kind of shareholder behavior described above, to “green investments,” an important approach to finance and accelerate carbon-neutral projects. Companies are also required to proactively disclose corporate climate change information.

Apple Inc. and Toyota Motor Corp. were recently reported to have decided to include partners, such as parts and raw materials providers, in their supply chains to accelerate their global carbon-neutral programs. Many other companies are expected to follow suit.

Now that Japan has set a bold carbon-neutral goal, we need to pay close attention to whether a full-fledged carbon tax will be introduced. Many economists have endorsed the effectiveness of introducing a carbon tax for many years. However, the government opted to levy such a tax on a limited scale apparently because it was thought to be “powerful medicine.” Nonetheless, considering that the government now aims to boldly move to renewable energy while making the transition a pillar of its growth strategy, it should seriously consider introducing a full-fledged carbon tax.

Once such a full-fledged tax is adopted, it would help reduce activities hampering the green transition and, thanks to the so-called carbon pricing effectiveness of a tax incentive, the introduction would likely spur innovation, including new climate change technologies and alternative energy sources. Also, if a full-fledged carbon tax was levied on a wide range of business and individual activities, the government’s tax revenue would hugely increase. If this happens, the government should think about how to use this new revenue to effectively accelerate the shift to renewable energy. It should use the carbon tax as a carrot-and-stick policy to ensure that Japan can attain the 2030 and 2050 goals.

Motoshige Itoh

Itoh is a professor at the Faculty of International Social Sciences of Gakushuin University. He was a professor of economics at the University of Tokyo until March 2016.