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Opinion

Japan must not forget climate change as it plans COVID-19 recovery

Climate change seen as a core financial risk by investors, regulators and companies

| Japan
Electric Power Development's Nunobiki Plateau Wind Farm in Koriyama: Japan's energy mix will need to include 50% renewable power by 2030 for an orderly transition to net-zero emissions.   © Reuters

Rebecca Mikula-Wright is executive director of the Asia Investor Group on Climate Change.

When Japan's Environment Minister Shinjiro Koizumi sits down on Thursday to host a major global ministerial forum on sustainable recovery plans, his own country's response will undoubtedly be in the spotlight.

There has been much optimism that governments around the world would respond to the economic damage wrought by COVID-19 with stimulus measures that could help address our other great challenge -- climate change.

Support for a sustainable or green recovery from COVID-19 has come from a cavalcade of international economic heavyweights, including the World Bank, the International Monetary Fund, Asian Development Bank, International Energy Agency, OECD, Bank of International Settlements, World Economic Forum, institutional investors and 144 Japanese companies. Sadly, there is limited evidence that any Asian governments are listening.

One assessment by Dutch banking and finance group ING found that green measures have largely been missing from stimulus packages throughout the region. In Japan, there has been "virtually no concession to the environment in its COVID-19 stimulus projects" and green measures have constituted just 0.02% of overall economic support, ING said.

Minister Koizumi should be commended for convening Thursday's forum in partnership with the United Nations, which will bring together ministers from at least 40 countries -- including China, Indonesia and Australia -- to share their experiences of sustainable recovery policies and launch a digital platform to track them dubbed Platform for Redesign 2020. But the forum should also serve as a springboard for Japan to continue addressing its climate deficit.

Climate change has long moved beyond being understood as only an environmental issue. The physical risks posed by a warming planet, and the transitional risks associated with the necessary response, means climate change is increasingly recognized as a core financial risk by investors, financial regulators, and companies. In short, there is no resilient post-COVID economy without fully addressing economic climate risk and meeting the goals set by the Paris Agreement.

The dry bed of Manjara Dam in the Indian state of Maharashtra, pictured in May 2016: climate change is increasingly recognized as a core financial risk.   © AP

At the same time, the transition to net-zero emissions is a significant investment opportunity, which can in turn generate new jobs and growth for economies seeking to haul themselves out of COVID-19 recessions. Japan's Government Pension Investment Fund only recently projected that limiting global warming to 1.5 degrees Celsius would result in a net-positive result for Japanese companies and its overall portfolio to the tune of 17% when compared to what would occur under unconstrained global temperature rises.

This shows how companies that are well-positioned to contribute to the transition to net-zero emissions can benefit if the right policies are in place. Earlier this year, global investor networks urged Japan's outgoing Prime Minister Shinzo Abe to put in place a more robust and ambitious set of climate change targets and policies to help attract more clean investment to Japan.

This was followed by a letter from global investor networks to all Group of 20 leaders in May encouraging them to embrace a sustainable recovery from COVID-19, including matching stimulus spending with opportunities for fresh investment and job creation in clean energy and green infrastructure. In recent months we have seen several positive developments in Japanese climate policy, often led by Minister Koizumi. This includes tighter restrictions on public financing for new overseas coal-fired power plants and the accelerated planned retirement of aging domestic coal generators.

But this progress has been hampered by other setbacks. For example, earlier this year Japan decided not to increase its modest national emissions reduction goals, as required under the Paris Agreement. And nowhere is the gap between necessary climate action and current Japanese ambition starker than in current energy policy.

Climate scenarios produced by a number of central banks show that for an orderly transition to net-zero emissions, Japan's energy mix will need to include 50% renewable power by 2030, with only limited contributions from coal and gas that would both be phased out completely by 2040. However, Japan's current Basic Energy Policy still envisages an "ideal supply" of 27% gas and 26% coal power in 2030, with up to 24% coming from renewables. This means Japanese coal and gas capacity faces significant transitional risks as investors, businesses and the international community increasingly push for Paris-aligned outcomes.

Japan can address these issues with scheduled reviews of the Basic Energy Policy, climate targets and long-term global warming countermeasures expected over the next 12 months. Investors will be looking for all three to be realigned toward achieving net-zero emissions by 2050 or sooner. In the meantime, Japan can kick-start its necessary transition to net-zero emissions by heeding investors' calls and better integrating its economic stimulus with job and growth opportunities in clean technology and net-zero emissions energy.

Ultimately, there are hundreds of billions of dollars in private capital around the world ready to be deployed into clean technology, renewable energy and electrified transport projects -- with appropriately ambitious transition policies that provide investor certainty. Countries with Japan's technical expertise, ingenuity and economic sophistication should not be missing out on this enormous and timely opportunity.

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