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【The G20 - More than just a Summit Meeting!】Japan Has Become the World Leader in Climate-related Financial Disclosures

Possibilities of the TCFD by Mr. Kunio Ito, Professor, Graduate School of Hitotsubashi University

“The Lehman Shock plunged the global economy into chaos… climate change could be worse.”: The G20 Finance Ministers and Central Bank Governors’ Meetings in 2015 deemed climate change an economic risk and asked the Financial Stability Board (FSB), an international body working to maintain order in global financial markets, to take action. In response, the private-sector-led Task Force on Climate-related Financial Disclosures (TCFD) was established. Four years have since passed. Over this period, Japan has become a global leader in information disclosure based on TCFD Recommendations. The coming G20 meetings, for which Japan serves as chair, offers an excellent opportunity for Japan to communicate its commitment to addressing climate change to the world. Additionally, an international conference to introduce Japan’s initiatives is also scheduled to be held this autumn. Professor Kunio Ito of the Graduate School of Business Administration at Hitotsubashi University and a leading advocate for actions against climate change says now is the time for Japan to communicate its edge to the world. Here, he explains why.

Crisis Triggered by Potential Risks

While the TCFD was officially established in December 2015 in response to G20 request, the wheels had been set in motion at least three months earlier. Dr. Mark Carney, Governor of the Bank of England and former Chairman of the FSB at that time, delivered a lecture on the essence of climate change at Lloyd's of London.

He asked, “The challenges currently posed by climate change pale in significance compared with what might come. The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security. So why isn’t more being done to address it?” He warned that potential risks of climate change, which have been left unaddressed by financial institutions, might quickly materialize and exert enormous negative influence on the financial system.

The TCFD publicized a uniform framework for information disclosure in 2017. While this marked an important step, certain aspects of the framework leave much to be desired. In particular, the concept of “scenario analysis” to disclose strategies for maintaining business, which are to be established based on envisaged future society, is rather difficult to understand and implement. A study group of the Ministry of Economy, Trade and Industry, which I chair, formulated a guidance at the end of 2018 to interpret this concept in order to encourage information transmission in light of global trends seeking climate-related disclosures.

We placed the focus on explanations of preferable ways of presenting strategies and key points and perspectives for disclosure for each type of business having different risks and opportunities concerning climate change. As a result, efforts by industry expanded at an accelerated pace. At the same time, the Japanese government drastically shifted its policies. Momentum to consider the TCFD as an opportunity to communicate Japan’s strengths and make an all-out collaborative effort between the public and private sectors increased.

Supply Chain Revolution Expected

Exemplifying these changes in both government and industry, Japan became the top supporter of the TCFD this May in terms of the number of supporting organization. It was a notable achievement for Japan, which had lagged behind several other countries.
 
What should be noted is not simply the increase in number of supporters from Japan, but even more importantly, the characteristics of those supporters. That is, Japanese supporters are increasingly and importantly represented by a large number of organizations in non-financial sectors. For example, companies in the manufacturing industry, that exert significant spillover effects on global supply chains, are coming together with financial institutions that do business with companies of diverse size and focus, to support the purport of the TCFD. This vastly expands the future possibilities. I feel that such broad participation in the TCFD will bring about a revolution in the supply chain.

Platform for Dialogues between Industry and Financial Community

The TCFD Consortium inaugurated on May 27 serves as a platform for dialogues between industry and finance, where the side disclosing information and the side utilizing disclosed information get together. Initiatives in relation to the TCFD are expanding but there still are challenges. Japanese companies are apt to strive to ensure complete information disclosure from the very beginning, but such completeness is not necessarily required. Some may consider that profit projection as a result of a scenario analysis must be accurate and quantitative, but it would be an acceptable approach to start with a qualitative scenario analysis and go on to a quantitative projection when an in-house system has been established and momentum has risen. The TCFD Consortium will promote the sharing of best practices and other information and proceed with the addition and revision of the guidance by business type.

At the general meeting to inaugurate the TCFD Consortium held on May 27, it was announced that the number of Japanese organizations supporting the TCFD has reached 162, and that Japan has the most.

Mr. Michael Bloomberg, Chairman of the TCFD, pointed out that discussions on the future, 100 years from now, do not lead to action. What we need to do is take action against climate change from the perspective of determining what actions taken at present will bring about economic growth. I quite agree with him. I hope that Japan will lead international discussions, while sharing awareness of related issues with other countries, towards global growth and innovation.

Last updated:2019-06-14