ESG

Money demanding decarbonization. Swedish pension funds have invested 1 trillion yen and are pushing for a phased-in approach rather than zero emissions. Flow may intensify Institutional investors around the world have begun to explore more realistic decarbonization realities with respect to ESG (environmental, social, and corporate governance) investing.

Instead of excluding companies with high greenhouse gas emissions from investment, encourage "transitions" to gradually reduce emissions through stock ownership and other means. Sweden's public pension program has revised its conditions and will invest a trillion-yen scale fund in high-emitting companies. With high energy prices following Russia's invasion of Ukraine, ESG investments are also at a tipping point.

Institutional investors, such as pension funds, have been promoting "Investment Withdrawal", selling stocks and bonds of companies with high emissions in order to achieve virtually zero greenhouse gas emissions by 2050. It was believed that withdrawing funds and putting pressure on companies was the quickest way to get to virtually zero.

But the shift in energy structure has not kept pace with the demand for hasty decarbonization. While oil companies and others lack investment in development, the spread of renewable energy is underway. Concerns about not being able to provide enough energy have led to soaring prices for crude oil and liquefied natural gas (LNG). Industries such as steel and chemicals also emit large amounts of greenhouse gases, making early decarbonization difficult. Investors began to take direction toward supplying the necessary money to companies that are gradually decarbonizing through technology development and other means.

The Swedish public pension program AP7 will invest 10% of its assets invested in equities in emission-intensive companies by 2025. As a shareholder, encourage investment destinations to adapt their business to decarbonization. The most recent equity assets are approximately EUR 75 billion (approximately 11 trillion yen). Specific selection criteria will be developed, and within a year it will begin investing in high emitting companies on a full scale. Assets under management could be on the scale of 1 trillion yen.

Canada's Ontario State Teaching Staff Pension Fund also plans to invest about C$5 billion (about 540 billion yen) in high-emitting companies over the next few years. It will be contingent on a credible reduction plan. If reductions proceed as expected, in addition to contributing to the decarbonization of society, it sees this as "It brings an attractive (investment) return."

Investment destination is not only stocks. The Dai-ichi Life Insurance plans to invest aggressively in "transition bonds" that companies issue to finance emission reductions. According to Mizuho Securities, global transition bonds issued from January 2021 to July 2022 totaled about $6 billion (about 88 billion yen). Japan accounted for 40% of the total.

The trend toward gradual reduction of greenhouse gas emissions through investment activities may strengthen. According to the Glasgow Alliance of Financial Alliance for Zero Emissions (GFANZ), a group of financial institutions that aim to achieve virtually zero emissions, and other organizations, The amount of investment needed to decarbonize the world will be $3.8 trillion per year between 2026 and 2030, about four times the amount needed between 2016 and 2020.

GFANZ says global financial institutions can contribute $100 trillion toward decarbonization. On 1st, the company presented a strategy that includes investing in and financing companies that are transitioning to decarbonization and supporting companies that are developing transition plans.

The policy was revised to distance itself from UN standards that strictly regulate investments in fossil fuels. Efforts to meet the transition phase will be left to the initiative of financial institutions. The role of finance will also be a theme at the 27th UN Climate Change Conference of the Parties (COP27), which opens 6th in Egypt to discuss global climate change measures. The question is whether companies can be effectively encouraged to reduce emissions.

The increased presence of investment money is also due in part to the acceleration of energy prices due to Russia's invasion of Ukraine. Governments are required to reduce the burden of people's lives through subsidies and other means, and cannot afford environmental measures. According to Belgium's Bruegel, the cost of high energy measures in European countries amounts to 674 billion euros.

However, there is a persistent negative attitude toward investing in companies with high emissions. In the United States, approximately 300 TIAA members alleged that TIAA (All American Teaching Staff Annuity Insurance Association) and its affiliated asset management companies are violating the Principles for Responsible Investment (PRI) by investing large sums of money in fossil fuels. They are seeking to divest from fossil fuel investments.

Pensions risk being sued by their members and others if they invest in high-emitting companies, so they need to be effective in decarbonizing investments. The Norwegian Government Pension Fund's management body will ask about 9,000 investment destinations to develop a transition plan to decarbonization. It excludes from the investment destination if no progress is made in the dialogue. The company's attitude toward phased emission reductions will also be questioned.