Haruhiko Kuroda: Sustainable finance - entering a new phase of
implementation
Remarks by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at the Paris
EUROPLACE Tokyo International Financial Forum 2022, Tokyo, 15 November 2022.
* * *
Introduction
It is a great pleasure to be invited to the Paris EUROPLACE Tokyo International
Financial Forum.
Paris EUROPLACE brings together a wide range of participants in the financial sector,
and it has contributed greatly to the development of financial services and financial
markets. The influence of Paris EUROPLACE is not limited to France and Europe; it is
actively engaged in communication on a global basis. At today's forum, I believe you
had very meaningful and lively discussions among financial professionals from Japan
and France. I understand that this is the 25th edition of the Paris EUROPLACE Tokyo
International Financial Forum, and it is my great pleasure and privilege to have the
opportunity to speak at such a memorable occasion.
In relation to "France-Japan: New Developments in Sustainable Finance," one of the
themes of this forum, I would like to share my views on recent initiatives in sustainable
finance to address climate change, while also touching on the progress made in Japan.
I. Role of Finance in Addressing Climate Change
Climate change is a global issue that will have long-term and far-reaching implications
both for society and for economic activity. Given its "negative externalities," all entities
-individuals, firms, and governments -- have to take responsible actions beyond their
individual interests. To address climate change, we need a multi-pronged approach
across a wide range of fields. In particular, sustainable finance has a crucial role to play
in our efforts to address climate change and steadily achieve decarbonization in society
as a whole. This is because finance functions as an intermediary, bringing all these
various social agents and entities together through services and markets.
At last year's forum I talked about three essential elements for finance to successfully
fulfill this role, that is, (1) making the financial system more resilient against
climaterelated risks, (2) mobilizing financial resources to facilitate a smooth transition to net
zero, and (3) making the most use of market functions with enhanced disclosure.
Looking back over the past year, I feel that financial institutions and financial markets
around the world, as well as related policy bodies, have made great progress in various
initiatives that promote these three elements, despite increased geopolitical risks and
the rise in energy prices. The same can be said for Japan. At the same time, through
these initiatives, a number of challenges have been identified. From now on, it is
important to work on these challenges and steadily make further progress toward
decarbonization.
II. Recent Initiatives in Japan and Future Challenges
Today, I would like to introduce three ongoing initiatives as prime examples of recent
efforts in Japan: (1) assessment of climate-related financial risks in a systematic
manner, (2) enhancement of market functioning, and (3) support for firms'
decarbonization efforts. Let me also present my views on future challenges identified
through these initiatives.
A. Assessment of Climate-related Financial Risks in a Systematic Manner
The first initiative is an assessment of climate-related financial risks in a systematic
manner.
Significant progress has been made in scenario analysis, which is useful in
comprehensively understanding climate-related financial risks. The Network of Central
Banks and Supervisors for Greening the Financial System (NGFS) has been updating
its climate scenarios every year since the first set of scenarios was released in 2020; it
has also been working on bridging data gaps. Several jurisdictions have already
released the results of scenario analyses using the NGFS scenarios.
In this regard, let me highlight the fact that, in line with the recommendations of the
Task Force on Climate-related Financial Disclosures (TCFD), the three major Japanese
banks have been disclosing the results of their own scenario analyses in their TCFD
reports. This is a pioneering initiative even among global systemically important banks
(G-SIBs).
In addition, the Financial Services Agency and the Bank of Japan jointly conducted
scenario analysis as a pilot exercise using common scenarios in cooperation with major
1
financial institutions. The objective of this exercise was to identify issues for future
improvement of the analytical method rather than to make a quantitative assessment of
climate-related financial risks. Scenario analysis has its limitations in the level of
sophistication and accuracy, as climate change and decarbonization will have a
longterm and far-reaching impact on society, the economy, and on finance. The impact will
also be complex and highly uncertain. Recognizing such inherent uncertainties,
financial institutions should carry out a comprehensive assessment of climate-related
financial risks through scenario analysis, and make use of the findings in encouraging
their client firms to take necessary steps to address climate change. In fact, in the pilot
scenario analysis exercise, the authorities and financial institutions cooperated closely
and gained useful insights after having a series of intensive discussions.
B. Enhancement of Market Functioning
The second initiative is enhancement of market functioning in financial and capital
markets.
Disclosures are essential for smooth market functioning. In this regard, climate-related
financial disclosures based on the TCFD recommendations have been widely adopted.
In addition, international standards for climate-related disclosures are currently being
discussed. Following the establishment of the International Sustainability Standards
Board (ISSB) in November 2021, the Sustainability Standards Board of Japan (SSBJ)
was launched in July 2022. The SSBJ is expected to serve as the focal point of
discussing international standards and their domestic application.
For markets to function smoothly, risks and opportunities arising from climate change
should be reflected properly in the price of financial instruments such as stocks and
corporate bonds. This will facilitate smooth funding and investment in financial markets
and thus promote efforts to address climate change. Against this background, the Bank
of Japan launched and conducted a new survey called the Market Functioning Survey
2
concerning Climate Change. Compared with previous surveys, the Market Functioning
Survey is unique in collecting responses from a broad set of market participants, not
only financial institutions but also business firms and rating agencies.
The results of the survey suggest that climate-related risks and opportunities are
reflected in the price of financial instruments to a certain degree, but there is still room
for improvement in pricing. Challenges include increasing the availability of information,
such as enhancing information disclosure and bridging data gaps on climate-related
data. Efforts could also be made to improve transparency in evaluating activities related
to Environmental, Social, and Governance -- or ESG -- and to further develop the
assessment methodologies of climate-related risks and opportunities. Many business
firms emphasized the importance to their business strategy and investor relations,
including earning a good reputation and diversifying their investor base, as motivation
for issuing ESG bonds. As for investors, investing in the ESG bond market seems to be
motivated by the importance of making social and environmental contributions. Raising
awareness of these benefits of ESG bonds is one of the challenges in further expanding
the ESG bond market.
The findings of the survey should be used in promoting initiatives to develop
climaterelated financial markets. The Bank of Japan will continue to conduct the surveys and
deepen the dialogue with the relevant authorities and market participants.
C. Support for Firms' Decarbonization Efforts
The third initiative is financial institutions' support for their client firms' decarbonization
efforts.
Large firms in particular have recently been drawing up business strategies on climate
change and setting decarbonization targets, with TCFD further encouraging
disclosures. There also remains growing interest in the areas of renewable energy and
electric vehicles. That said, there are a number of issues that need to be addressed if
we are to accelerate decarbonization. From a financial perspective, I would like to
highlight two issues: transition finance and support for SMEs.
At international forums such as G20, there is growing recognition of the importance of
phased and strategic approaches toward decarbonization, depending on economic and
industrial structures. Frameworks and principles for transition finance are being
discussed on a global basis. In Japan, the government has formulated basic guidelines
and sector-specific roadmaps. There has also been progress in initiatives in the private
sector. For example, the Net-Zero Banking Alliance (NZBA), which is a global alliance
of banks convened by the United Nations, has compiled practical guidelines for the
implementation and promotion of transition finance by financial institutions. The Asia
Transition Finance Study Group (ATFSG), led by major banks in Asia, has also
published similar guidelines. It is important to solve practical challenges in transition
finance by building up successful cases and learning from them.
SMEs are becoming increasingly aware of the impact of climate change on their own
business. This is partly because global enterprises are trying to reduce their
greenhouse gas emissions throughout the supply chain, requiring SMEs in the supply
chain to take necessary steps. With limited management resources and information,
however, SMEs are facing a variety of challenges. These include the lack of technology
for decarbonization, additional cost burdens and the difficulties of passing on those
costs to sales prices. To address these challenges, regional financial institutions are
expected to provide not only financial assistance but also multi-dimensional support,
such as comprehensive consulting and advice on the recruitment of skilled personnel
and introduction of relevant technology.
The Bank of Japan introduced the Climate Response Financing Operations last year,
which provides funds to financial institutions against their investment or loans that
contribute to addressing climate change. Since Japan's financial system is bank-centric,
I believe that this is an effective measure to provide financial support for the
decarbonization efforts of large firms as well as SMEs. We also devised ways to
exercise market discipline by requiring financial institutions to disclose adequate
information. The Bank already provided funds through the operations last December
and this July. At present, there are 63 eligible financial institutions, including regional
ones, and the total amount outstanding of loans stands at 3.6 trillion yen. The Bank
expects that the operations will continue to function as a catalyst and encourage
decarbonization efforts in Japan.
Concluding Remarks
Let me close my remarks. During the past few years, there has been growing
awareness of climate change, and a broad consensus has been established on the goal
of addressing
decarbonization in society as a whole. Even as we face the hardship of surging energy
prices, we are now entering a new phase of implementing a variety of initiatives to
achieve this goal. The progress made in Japan that I have mentioned today is a part of
these endeavors. In order to accelerate decarbonization, all entities should play their
part steadily, while keeping their eyes on the long-term goal.
The Bank of Japan will continue to work together with financial institutions and market
participants, and thereby strongly support initiatives to address climate change.
Thank you for your attention.
1
See "Pilot Scenario Analysis Exercise on Climate-Related Risks Based on Common
Scenarios" (August 2022) at https://www.boj.or.jp/en/announcements/release_2022
/rel220826a.htm/.
2
See "Results of the First Market Functioning Survey concerning Climate Change"
(August 2022) at https://www.boj.or.jp/en/research/brp/ron_2022/ron220805a.htm/.