Magazine issues » July 2021

Roundtable: How well geared are Japanese assets for a new world?

Funds Global – Japan’s leadership has stated its ambition to cut carbon emissions by 46% by 2030 (from 2013 levels) – a significant increase from its previous target of a 26% reduction. According to the country’s environment minister, this will require a doubling of renewables. Do you believe this target is achievable and what are you doing to reduce carbon emissions in your investee companies to reach that goal? Vail – It’s smart and also the right thing to do to have ESG as a part of our portfolio management exercise. It has been wrapped up into how our analysts make recommendations for a decade. It’s not like you have a choice anymore, to be honest. At least from an institutional investor perspective, if you want to get any institutional accounts globally these days, it has to be a part of what you do. It’s a constant source of added value. One reason why we should be optimistic on Japan hitting its target, which of course will be difficult, is that Japan is the world’s largest holder of international patents on decarbonisation – 15,000 patents in 2018 alone, which is 1.7 times the amount of the second place holder, and it’s taken the top place for ten straight years for patents on decarbonisation. Those are the numbers that back up the statement of Japan being such a green country. In particular, Japan filed the most international patents on hydrogen energy, and that’s since 2001, so it has been very busy on this and there’s great hope that hydrogen will help Japan achieve its goal. Temperley – It’s very easy for government officials and companies to come out with great targets, so my philosophy is watch what people and companies do, not what they say. I’ve been very gratified that the Japanese government and lots of companies are constantly making big headlines about how much they’re going to cut their emissions by. It’s also very important to actually engage generally with companies and make sure that they’re on track to achieve these quite ambitious targets. It’s very noble and honourable to have great targets like that, and of course that’s where the world is going, but by 2030 I’m sure there will be a differentiation between those companies that are on the way to achieving these goals and those that aren’t. It makes our lives more difficult in a way because we have to actively engage with companies on an additional level, but it also creates a bigger opportunity because there will clearly be more winners and losers and the market clearly is looking towards rewarding companies that can achieve meaningful emissions cuts. Funds Global – If you’re working towards a 26% reduction and setting pathways with investee companies to try and achieve that and then a sudden 20% is tacked on, you may have to potentially re-evaluate everything you have done. How big a challenge is that? Temperley – I recently spoke to a Japanese blast furnace steel maker and I was very impressed that they came out with quite an aggressive emissions reduction target – not by 2030, but by 2024. They said they were going to cut emissions by 18%, and I spoke to an analyst about that, because typically they’ll know more than me about that area of expertise. They said: “Actually, that’s very easy to achieve. You just shut down a couple of blast furnaces.” So, there’s a layer of complexity that we need to understand beyond the headlines. These targets are ambitious for sure, and in some cases, they will be achievable, but also there will be companies that are not able to achieve them. Then there’s an added debate – the world still needs steel, so how do we address that fact? We have to make cars, we have to build buildings, so there needs to be also a degree of realism about how we see and engage with companies in areas where there is clearly a conflict of interests. On the one hand the world needs plastic, steel, oil for a degree more time, but equally we need to work together with companies and engage with them. That’s a role a fund manager or CIO can do to try and make sure there’s helpful pressure on senior management to do the right thing – invest more in using sustainable fuel, invest more in necessary costs to cut emissions. There isn’t a simple solution, and it will cost money as well. Niihara – To answer whether we as a country or corporations in Japan meet the government target – the simple answer is it’s hard to say. I agree it’s ambitious, but I don’t think it’s impossible. It also depends on the pace of innovation and the price differentiation. State Street mostly manages indexing assets – and we have large assets. Our stance is to utilise the power of stewardship as much as possible. We emphasise stewardship, including engagement, voting and thought leadership. We also contribute to the policy regulatory funds. We require companies to disclose their own strategy and follow the standard format in the industry – Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB). In the engagements, we normally respect each company’s initiative and planning, and we don’t evaluate just from whether they meet the governmental targets. Ciganer – We are in a similar situation with regards to emissions specifically. I would say government or single nation targets aren’t factored in too much in our process, because our ESG work in the case of the environment is for the TCFD, and the way we operate and engage with companies is the same in every country. So, we have a proprietary responsible investing model, and we score every security in the world based on that, and we monitor carbon emissions for every company. The way it works in practice is that I conduct quarterly reviews of my portfolio with our ESG specialists and if we see something that is out of line from an emissions perspective, the analysts will engage with the company, and we try to evaluate what can be done and if there is a realistic solution. We are active investors, so if there is something that looks inappropriate, we can always walk away. From that perspective, I am interested in figuring out what will happen to all these very carbon-intensive industries because, as John Paul said, the world will still need to manufacture stuff, so what do we do if the targets are too aggressive and unrealistic and steelmakers can do whatever they want but they will always be steelmakers? What’s the future there? Do all these companies become unlisted and we then sweep the problem under the rug, or do we become more realistic and maybe there is a second wave of ESG which becomes more nuanced and takes into account the requirements of economic growth as well? Funds Global – Today, fossil fuels – including coal – are used to generate a significant portion of Japan’s electricity. Meanwhile, Japanese lenders have come under criticism for financing these types of projects overseas, such as Vietnam’s Vung Ang 2 coal power station project. How should asset managers be exercising their power when it comes to investee companies taking on transition risks that don’t align with the Paris Agreement and fall within the scope of planetary boundaries? Temperley – After the great Fukushima earthquake and nuclear disaster, Japanese people quite rightly put a huge amount of pressure on the Japanese government and power generation companies to not restart nuclear facilities, and the result is that about 30% of Japan’s current electricity production is with fossil fuels and coal. On that basis, you can say Japan is one of the bad guys, it’s polluting the world and so forth, but if you put it in the context that I’ve just mentioned, people can be a little bit more understanding of where Japan has come from, and we can also have a debate about the merits and demerits of nuclear power versus coal power. Vietnam is a fast-developing country. It can’t afford nuclear power. Yes, it would probably like to have 100% renewable sustainable energy/power generation, but that comes at a cost, so is it for us in the Western or the developed world to dictate the terms to developing countries in a pseudo-colonial way when Vietnam just wants to catch up? I agree, on the one hand we should be gently putting pressure on countries to try and do their best to generate power in the cleanest, most energy-efficient and sustainable way, but also, we have to look at ourselves. Vietnam, I think, would be pretty upset if Japanese lenders didn’t lend them the money for a coal-fired electricity project when Japan’s got 30% of its own power coming from coal. The world is full of contradictions, it’s about realism. There needs to be an informed debate within a context of where and how countries and companies and people can do their best for the environment and also for society, and clearly environmental concerns need to go hand-in-hand with societal development. I’m very happy for Vietnam to go through a transition process, much like the UK did. Vail – On this particular issue, we are engaged with both sides, including NGOs. We always encourage companies to set emission targets, and we monitor those, noting which ones are aligned with the Paris Agreement.

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