August 28th, 2019
Japanese Megabanks – Mitsubishi UFJ, Sumitomo Mitsui, Mizuho
lacking concrete measures to address climate risks
International environmental NGO 350.org’s Japan branch (hereinafter 350.org Japan) announced today the responses it received to demands submitted to Japan’s three megabanks, Mizuho Financial Group (Mizuho FG), Sumitomo Mitsui Financial Group (Sumitomo Mitsui FG), and Mitsubishi UFJ Financial Group (MUFG), as well as the Japanese Bankers Association and the commissioner of the Financial Services Agency, on June 6th, in addition to its evaluation thereof.
The responses from the megabanks to 350.org Japan’s demands are as seen in the attached document. The Japanese Bankers Association responded that it will “refrain from commenting on responses and initiatives by individual banks.” The Financial Services Agency did not provide a written response, but agreed to a meeting with 350.org in order to exchange views on the matter.
The demands of 350.org Japan and of 1,002 bank account holders (with estimated bank deposits valued at 2,505,100,000 JPY, or approximately 23,750,000 USD) are as follows:
- Proactively disclose information about the greenhouse gas emissions associated with the banks’ lending and investment portfolios in a consistent, comparable and reliable format, in line with the Task Force on Climate-related Financial Disclosures (TCFD) proposals;
- Formulate business strategies and investment policies consistent with “keeping global temperature rise this century to below 1.5 and 2 degrees Celsius above pre- industrial levels” as per the Paris Agreement;
- Suspend new investment in coal-fired power plants which scientific research confirms emit the highest levels of CO2, as well as new fossil fuel developments, and implement investment and lending practices that promote a fair and equitable transition to a society based on clean and renewable energy;
- Encourage Japanese banks to endorse the UN’s Principles for Responsible Banking.
350.org Japan evaluated the responses of each of the megabanks to the above demands for concrete measures to tackle climate change, as evaluated against each company’s latest integrated report [*1].
- We can give credit to the banks for, following the TCFD proposal to disclose the percentages of carbon-related assets in their portfolios, as a part of their individual strategies in responding to climate change risk. MUFG disclosed that “6.6% of their total portfolio is comprised of carbon-related assets.” SMBC disclosed that “carbon- related assets (electricity, energy, etc.) comprise 7.8% of loans.” Mizuho FG disclosed that the combined ratio of “measured energy sector and utility sector credit exposure (EXP) makes up approx. 7.2% of the total credit EXP.” Regarding investment and lending in renewable energy, while we welcome each bank’s proactive approach and increased amount of money invested and lent, there is still room for improvement in terms of providing appropriate information to investors, beginning with disclosure of the funding amount of fossil fuel-related investments and loans in comparison with renewable energy.
In terms of scenario analysis, MUFG has stated that they are “working on financial impact assessments of the transition risks based on the ‘2°C (Sustainable Development) Scenario.'” We are still awaiting disclosure of concrete details. Mizuho FG does not specifically mention any scenarios based on the Paris Agreement. Sumitomo Mitsui FG conducted a scenario analysis on the physical risks associated with climate change. Although we can credit them for disclosing the specific results
of the impact assessment, we expect an expansion of the scope of the analysis, as it is currently limited to domestic partners, and does not take into account transition risks.With respect to risk management, we would also like to give credit to MUFG for stating that they will gradually scale back the amount they are lending for coal-fired power generation over the medium to long-term. No concrete commitments are present in the disclosures from Sumitomo Mitsui FG or Mizuho FG. TCFD cites climate change risk as “one of the most important risks organizations currently face. “By the end of this century, potential global operational asset losses due to the effects of climate change are estimated to be between $4.2 trillion to $43 trillion USD. Despite these future risks, it would not be fair to say that the banks are actively providing consistent and reliable information on the necessary preparations for a low-carbon economy, as would be indispensable to investors weighing their options. For example, none of the three financial groups make any concrete statement regarding the management of risks related to the transition of whole industries to a low-carbon footing, or tightened regulation, which could result in problems such as the emergence of stranded assets resulting from the switch to renewable energy or increases in carbon pricing.In terms of metrics and targets, Mizuho FG indicates that it is considering introducing SBT (Science-Based Targets) in its integrated report, as it did last year. Although MUFG touches upon its implementation of a total of 8 trillion JPY in sustainable finance by FY2030 in the environmental area, outside of this, they go no further than disclosing levels of CO2 reduction in direct business activities – and do not refer to the carbon liabilities associated with their lending and investment portfolios. Although disclosure of the volume of CO2 emissions in their lending and investment portfolios, and the establishment of reduction targets, are extremely important in order to align with the Paris Agreement’s 1.5 ° C goal, none of the three financial groups have made any statement to that effect.For example, we could compare the situation to that of overseas banks: the Commonwealth Bank of Australia, even with a national government somewhat reluctant to take measures in response to global warming, dedicates 8 pages to disclosures relating to climate change, and has declared that it will reduce the amount of financing it provides for general coal mines and coal-fired thermal power generation to zero by 2030. We hope to see a greater number of more detailed disclosures among the Japanese megabanks moving forward.
- Regarding business strategies and investment policies, seen in the messages from each bank’s CEO and CFO, we can give some credit to the CEO of MUFG for touching upon the TCFD. As messages from the CEO and CFO clearly set out a company’s policy internally and externally, carrying no mention of these issues inevitably raises questions regarding the seriousness with which the megabanks intend to take action on global warming.
While MUFG and Sumitomo Mitsui FG both addressed climate change or a low-carbon economy as societal issues in discussing the value creation process that lies at the heart of their business strategy, Mizuho FG made no specific mention of environmental change in their statement. Of the three banks, some credit should be given to MUFG for being the only one to touch on the Paris Agreement’s 2°C scenario. Neither of the other two megabanks explicitly reference the Paris Agreement. Looking at the content of their integrated plans, none of the banks appear to be adopting the 1.5°C scenario, which, based on last year’s IPCC 1.5°C report, is becoming global consensus on climate change.
- Regarding the suspension of new investment and financing for coal-fired power plants and fossil fuel developments, some credit is due to MUFG, which has declared that it will not “as a general rule, provide financing to new coal fired power generation projects.” That said, the phrase “as a general rule” suggests some level of continued coal-related financing on an exceptional basis, which would not conform with the Paris Agreement. What is required is limits not only for project finance, but also on the provision of corporate finance and general financial services to firms with high levels of exposure to high carbon dioxide emission sectors such as coal and fossil fuel development.On the other hand, Sumitomo Mitsui FG states, “to ensure a smooth transition to a low carbon society, limiting financial support to only coal-fired power plants that use USC (*) or more advanced technologies which are considered highly efficient.” These plants, however, USC or otherwise, emit even more CO2 than other fossil fuels, which is not consistent with a fair and equitable transition to a low-carbon society.
We see similar problems in the case of Mizuho FG as with Sumitomo Mitsui FG, as they state, “As a general rule, [financing] is limited to USC or other higher efficiency projects.” While both groups reference international guidelines such as those of the OECD and other national policies, they do not touch on compliance with the Paris Agreement, and there is room for concern about the seriousness of their efforts. From the perspective of fair and equitable transition, considering that environmental destruction resulting from large-scale renewable energy development has become a problem in recent years, we would also like to see the banks ensure adequate environmental assessment is performed, taking into account sustainability and social safeguards, for each individual investment decision.
- That said, we are pleased to see that the three megabanks have signed the “UN Principles for Responsible Banking,” officially scheduled to launch in September. However, the most important thing is adherence to the spirit of the principles. The principles clearly state that they are intended to align banking practices with the societal goals of the Paris Agreement, including taking responsible actions with clients.These principles also call for transparency in line with the recommendations set out in the TCFD. Not only will the disclosure of information contribute to appropriate decisions by investors and customers, but it will also contribute to achieving the Paris Agreement and the Sustainable Development Goals (SDGs), by facilitating accurate comprehension and appropriate action on the banks’ situations, contributing to business sustainability as well. Therefore, we hope to see proactive disclosure of information based on these principles.Responsible action based upon these principles is also necessary for overseas investment and lending. At the Van Phong coal-fired power plant in Vietnam–where the three megabanks are involved–there have been protests against local environmental destruction and forced relocation, and at the Cirebon 2 coal-fired power plant in Indonesia, bribery has become an issue. Financing for these projects should be reconsidered in line with the Principles for Responsible Banking.
Since last year, 350.org Japan has gathered individual and organizational signatories to the following pledge: “If my/my organization’s bank or financial institution continues to support businesses contributing to climate change, then I/our organization will choose to switch to an “Earth-friendly bank” by the time of the Tokyo 2020 Olympics. “The number of supporters of this divestment pledge has reached 1,002, and the public’s concern with the involvement of financial institutions in climate change, as well as divestment, is growing steadily.
The three megabanks have enormous influence over economic activities not only in Japan, but worldwide, and as such they have a significant role and responsibility in the shaping of our future society. We hope that, through investment and lending practices that conform to the Paris Agreement, the TCFD proposals, and the Principles for Responsible Banking, the banks can lead the world’s transition to a post-carbon society and can lead the effective solutions to combat global climate change.
For all inquiries please contact:
Representative of 350.org Japan, Takayoshi Yokoyama ( [email protected] )