Japanese Law Update #7: Japan to Launch an Experimental Carbon Market in 2022
1. The Rise of ESG Investment in Japan
We are now seeing a rapid expansion of ESG investment in Japan. In 2014, ESG investment in Japan was merely $7 billion. However, the investment landscape has been quickly changing over the years. The Government Pension Investment Fund (GPIF) has played a significant role in this process. GPIF is the largest of its kind in the entire world, and as of August 2021, assets under its management amounted to approximately 191.6 trillion yen.
In 2015, the GPIF signed the Principles for Responsible Investment (PRI), becoming the first signatory in Japan. After this event, Japan’s ESG investment rapidly took off. While the amount of ESG investment in 2016 was $474 million, GPIF began allocating its funds to ESG investment in 2017, followed by a huge expansion of investment that reached approximately $2 trillion in 2018, and up to $3 trillion in 2020.
Japan’s investment growth in the last two years was 32%, compared to 15% for the rest of the world. In addition to the GPIF, a number of Japanese companies have their own corporate pension funds. These corporate pension funds are also large players, with a massive 114 trillion yen in total assets. Since they have not signed the PRI yet, they have not transitioned towards ESG management in general, indicating that there is still plenty room for further expansion of ESG investment in Japan.
2. Launching an Experimental Carbon Market in 2022
On the other hand, in terms of regulating ESG investment and achieving carbon neutrality, Japan is still behind the curve. For example, Japan does not have a unified carbon market at present. However, there are signs of change. In November 2021, the Study Group on Economic Methods for achieving Worldwide Carbon Neutrality (the Study Group) at the Ministry of Economy, Trade and Industry (METI) discussed the steps to implement an experimental carbon credit market.
According to the discussion paper by the Study Group, the experimental carbon credit market will be a voluntary market. METI plans to invite companies to participate in a pilot project called the Carbon Neutral Top League (Top League), and a total of 500 companies in Japan and overseas are expected to participate. The details of the Top League are still under discussion, but the Top League is expected to be a platform for a voluntary market for carbon credit.
How does it work? The participating companies will set their own targets which are to align with the government’s 2050 carbon neutrality plan and its pledge of 46% reduction in greenhouse gases by 2030. The companies will work to reduce their carbon emissions based on their own targets and conduct an annual review of their efforts. It will be a pledge-and-review approach. As part of their efforts to reduce carbon emissions, the companies are expected to use the experimental carbon trading system that will allow them to trade emission credits among the market participants. Through verifying the results of this experimental market, the government plans to create a formal carbon credit market in the near future.
The Study Group plans to present the outline of the Top League by the end of 2021. Based on the outline, the government would invite the participants for the Top League starting in early 2022, and create the rules for governing their transactions. The experimental market is expected to be launched in 2022.
Yoshie Midorikawa, Partner
Yoshie Midorikawa has extensive experience in complex disputes and arbitration under the rules of the ICC, SIAC, UNCITRAL, LCIA, and ICSID. Having worked with leading law firms in Japan and Singapore, she has handled parallel proceedings across multiple jurisdictions as well as domestic disputes before Japanese courts. Through learning in the United States, practicing in Singapore, and serving on an international law firm’s arbitration team, among other accomplishments, she has developed expertise operating in diverse international environments. She has also served as a board member of listed companies in Japan, improving their corporate governance. Her deep understanding of the civil law system, her working experience in international environments, including common law jurisdictions, and her knowledge of business, enable her to bring practical and nuanced legal solutions to international commercial disputes. She is listed among “Best Lawyers in Japan 2022(Litigation)”, “Best Lawyers in Japan 2021(Litigation)” by Best Lawyers.