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Climate Change

Japan finance watchdog to oversee banks' climate change policies

FSA to help raise decarbonization funds while calling for more transparency

New guidance from the FSA is hoped to change banking policy in order to fund green initiatives by companies.   © Reuters

TOKYO -- Japan's Financial Services Agency will urge banks and companies to accelerate decarbonization by adding climate change measures to its bank guidance policy, favoring companies that want to invest in renewable energy.

The financial watchdog will also request companies to disclose information related to climate change.

On Thursday, the FSA will convene the first meeting of its Expert Panel on Sustainable Finance, which was established to discuss investments that promote sustainable growth and address climate change.

Chaired by Takeshi Mizuguchi, vice president of Takasaki City University of Economics, the panel comprises experts from the Japanese Bankers Association, the Japan Business Federation -- also known as Keidanren -- insurance companies and academics. The group plans to compile a set of proposals as early as this summer.

The government has pledged to reduce greenhouse gas emissions to net-zero by 2050 and will use the FSA to push banks and companies to accelerate decarbonization. Adding climate change measures to its bank guidance will facilitate fundraising by eco-friendly companies.

The FSA will also support companies that want to reduce emissions. For example, when a component maker for gasoline-fueled cars starts to transition to electric vehicles, the FSA will ask banks to support the shift through advice and funding.

In addition, the FSA will examine the climate change risks of borrowers. If a company has a factory that could be subject to flooding, the agency will urge the lender to analyze risks and help mitigate the danger.

The panel will focus on funneling funds to companies but is unlikely to push for divestment from major polluters.

Japan has been criticized by foreign activists for its reliance on thermal power to generate electricity, leading the nation's three megabanks to announce plans to end loans related to coal-fired plants.

The FSA will also encourage corporate disclosure of climate change-related information through such programs as the Task Force on Climate-related Financial Disclosures, established by the Financial Stability Board, an international body that monitors the global financial system.

Currently, the Corporate Governance Code -- a guideline set by the FSA and Tokyo Stock Exchange -- urges listed companies to disclose information about climate change that impacts their business. But the code is nonbinding, though listed companies need to explain if they do not comply.

In Europe and North America, some authorities are making the disclosure of climate-related information mandatory, a policy that could also be adopted in Japan.

Furthermore, the FSA will consider setting guidelines in cooperation with the Ministry of Economy, Trade and Industry as well as the Ministry of the Environment for companies that want to issue corporate bonds or take out loans to finance decarbonization.

Financial authorities are increasingly looking at climate change as a key factor for supervision in the finance sector. The Prudential Regulatory of Authority of Britain asked the sector in 2019 to take long-term risks of climate change into account when working out business plans.

Europe remains ahead of Japan and the U.S. in tackling climate change. In 2017, the Network for Greening the Financial System was founded by eight central banks and supervisors, including those in Britain and France. Japan's FSA and the Bank of Japan joined the NGFS in 2018 and 2019, respectively, and the U.S. Federal Reserve Board followed at the end of 2020.

More countries are addressing climate change ahead of the 26th United Nations Climate Change Conference to be held in November under the presidency of Britain.

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