Japan’s Green Accounting Agenda: Climate Commitment or Reputation Management?
On October 5th, Japan’s Ministry of Economy, Trade and Industry (METI) hosted the third annual Task Force on Climate-related Financial Disclosures (TCFD) summit. Officials and industry leaders gathered in Tokyo to discuss how the TCFD guidelines can improve the transparency of climate engagement. Green accounting, a regulatory practice of increasing interest, might provide a shortcut for Japan to improve its global standing as an international climate actor.
Free-riding and Green Accounting
Despite urgent attempts to foster international cooperation to tackle climate change and reduce emissions, the climate agenda is still struggling. Free-riding, a phenomenon where countries rely on the emissions reductions of others without taking reciprocal steps in their domestic strategies, remains a major obstacle for climate efforts. Emission reduction attempts by one country are likely to benefit others as the threat of climate change ignores borders, yet the cost of reduction is not shared. Green accounting can help mitigate free-riding by increasing the transparency over how states and companies are impacting the environment. By providing an assessment of a company’s environmental performance in the form of a sustainability report, green accounting can identify climate-related risks and estimate the costs and benefits of different measures.
Both states and companies have good reasons to promote green accounting practices. Policymakers have introduced mandatory and voluntary reporting schemes, as they want to encourage climate-related transparency in the business sector. Companies, meanwhile, want to communicate their environmental performance through corporate social responsibility and advertising schemes, which tap into narratives popular among increasingly climate-conscious investors and consumers. The TCFD was born out of the efforts to harmonize governmental and corporate interests in 2015 and has since become an integral part of the regulatory framework in many jurisdictions. It aims to provide recommendations for governments and companies to disclose and disseminate “clear, comparable and consistent information” on their environmental impact. TCFD has been enthusiastically promoted in Japan, which hosts the TCFD summits and boasts most companies signing up as ‘TCFD supporters’.
Climate Leader Turned Laggard
However, Japanese energy demand remains dependent on imported fossil fuels. The world’s fifth-largest emitter, Japan, led global efforts to reduce greenhouse gas emissions in 1997 with the Kyoto protocol. However, Tokyo later rejected participation in the second commitment period under the Doha Extension, forfeiting its climate forerunner position. The 2011 Fukushima disaster and subsequent domestic opposition against nuclear power further lowered Japan’s ambitions to shift away from fossil fuels, triggering international criticism. This declining reputation is particularly alarming for a country sensitive about its role on the global stage.
Questions about Japan’s capability to contribute to the international society lingered as Japan maintained a low profile in the post-war era, limited by its pacifist constitution and security dependence on the US. The criticism Japan faced for its ‘checkbook diplomacy’ following the Gulf War precipitated Tokyo to reconsider its priorities. The rejection of Japan as a “tier-two country” reflects the strong sentiment among political leaders for Japan to take a leading role on issues of global importance. In the past decades, Tokyo has proactively promoted agendas compliant with its pacifist constitutional identity, including human security, “Quality Infrastructure”, and business-led innovation towards a decarbonized society.
Building a Greener Reputation
Engaging with climate change issues also presents Japanese diplomacy with an avenue to express a commitment to its global development profile. The cultivation of an international image as a climate leader has served the soft power purposes of other high-emitting countries such as China and could do the same for Japan. Given the increasing rivalry between Tokyo and Beijing in developing regions, capitalizing on opportunities in infrastructure developments through performing well in sustainability issues provides a tangible example of potential gains from a greener, more transparent profile.
The Japanese government appears to be cultivating a niche by playing to strengths inherent to its business-friendly policies and by focusing on business engagement, where Japanese companies have been proactive in adopting climate change mitigation targets. Government initiatives such as the Mandatory Greenhouse Gas (GHG) Accounting and Reporting System in 2006 reflect early attempts to incentivize businesses, and earlier this year, the Tokyo Stock Exchange introduced a revised Corporate Governance Code incorporating TCFD recommendations. Events such as the Tokyo “Beyond-Zero” Week and the TCFD summits are ways in which the government has been able to showcase its greener profile and leadership.
Green accounting is a relatively painless strategy for reputation management that both states and companies can use, as it does not necessarily demand actual changes or emission reductions. In the absence of regulatory frameworks, companies cherry-pick information that will appear favorable in their sustainability reports. Compared to costly transitions away from existing energy sources, implementing and promoting green accounting frameworks can provide an attractive shortcut for Japan to further improve its brand. With irregular frameworks between jurisdictions and a current lack of leadership, this provides Japan with an opportunity.
Potential Outcomes
With a lack of established regulatory frameworks, engaging in green accounting currently presents an opportunity for companies to shape future guidelines with relative ease. Yet, to achieve transparent and reliable climate-change related information in the business sector, support is necessary from all levels of society. If like-minded countries can cooperate on implementing region-wide regulations that others would follow, perhaps the international comparability that green accounting aims to achieve would motivate other countries to follow pollution reduction schemes too. This could help to mitigate free-riding.
In recent years Japan has played key roles in mega-free trade agreements (FTAs) such as CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) and RCEP (Regional Comprehensive Economic Partnership). Tokyo is in a position to merge its agenda-setting experience with its desire to score political points on climate action, ensuring that environmental protection tenets are enshrined in future multilateral agreements. Wielding such influence could allow Japanese leaders to implement directives that simultaneously green their economy, retain their competitiveness and address the problem of free-riding.
Nevertheless, Tokyo needs to do more to lower its emissions and change its energy mix to be credible in climate politics andshow that climate commitments and reputation management are not mutually exclusive.Steps towards this direction are already being taken, as in 2020 when the then-prime minister Suga Yoshihide announced a plan to achieve carbon neutrality by 2050.To do this METI has formulated a “Green Growth Strategy”, emphasizing government support for the private sector to tackle ambitious goals, as well as decarbonizing energy through renewables, hydrogen, nuclear and thermal power. The recent decision by Japan’s Financial Services Agency (FSA) to demand mandatory climate-related reporting from 4000 companies by April 2022, in line with the TCFD recommendations, shows that Japan is serious about continuing to engage business in climate change. But there are several steps to be made to realize these ambitious goals and it looks like the newly appointed PM Kishida will not have an easy task ahead. During the COP26-summit, the announcement that Japan will continue using thermal power plants was met with disapproval and the embarrassing Fossil-award.
This raises questions about what implications a stronger role for Japan in the climate agenda would have globally. As the third-largest economy and a technological powerhouse, a more dedicated Japan could not only create new momentum for climate action but it would also impact global emissions critically. A proactive Japanese approach to climate issues would resonate with Tokyo’s international partners which in turn might translate into closer cooperation in other areas. The reference and inclusion of climate targets in FTAs such as the recent agreement between Japan and EU reflect this entwining of climate action and international relations. In addition, green policies help differentiate the Japanese governance and development model from others. Such efforts illustrate how a desire for a greener reputation can intersect with other diplomatic aspirations.