Strategy: Creating Value Inside Your Company
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In November of 2021, the environmental NGO Climate Action Network International selected Japan for their infamous “Fossil of the Day” award at the 26th Conference of the Parties (COP26) to the United Nations Framework Convention on Climate Change (UNFCCC). The less-than-prestigious “award” is given to countries deemed reluctant to take action on global warming. The decision was made after Prime Minister Kishida’s speech at the COP summit mentioned thermal power plants and showed a general lack of urgency towards climate change.
The climate group criticized Japan for “believing in the dream of using ammonia and hydrogen for decarbonized power generation” and for “understanding that such immature and costly technologies are linked to the extraction of fossil fuels,” among other things. Japan was also specifically asked to withdraw from coal-fired power generation by other climate groups at the summit and came under severe criticism on the world stage.
What is the History of Climate-Based Shareholder Democracy in Japan?
Clearly, international scrutiny of Japan’s attitude towards climate change is building. In response, shareholders are not just taking notice—they’re taking action.
Climate-focused shareholder activism is still relatively new to Japan. Historically, the term “shareholder activism” has referred to any shareholder actions that are driven by activist funds and identify problems in corporate governance and financial dealings. Climate groups have more specific interests, aiming to bring attention to and spark conversation around the growing climate crisis.
In 2020, the Kyoto-based climate NGO Kiko Network made history by filing a shareholder resolution to Mizuho Financial Group, the third-biggest banking group in Japan. The resolution requested that Mizuho align their business practices with the 2015 Paris Agreement. Although just 35% of Mizuho shareholders voted in favor of the proposal, which was ultimately shot down, its message was clear: The time has come for corporate Japan to start paying attention to climate change.
In 2021, Mitsubishi UFJ Financial Group (MUFG), Japan’s biggest bank, and Sumitomo Corp, one of the country’s largest trading houses, were targeted with climate resolutions from NGOs. This came in response to involvement with a controversial coal power plant project in Bangladesh. As a direct result, Sumitomo withdrew from further operations of the plant and implemented a strategy to gradually abandon its coal-related businesses. They now hope to achieve carbon neutrality by 2050.
Strategy: Creating Value Inside Your Company
Have you ever wondered why certain companies are more successful than others? The answer is strategy: internal processes that control costs, allocate resources, and create value. This course from GLOBIS Unlimited can give you the tools you need for that strategic edge.
According to a survey by the US law firm Gibson Dunn, 83 of shareholder proposals submitted to listed companies during the last proxy season (early October 2020 to early June 2021) in the US were related to climate change—a significant increase from 56% in the previous season. The average shareholder approval ratio was 49.9%, up from 32.1% the previous quarter. In stark contrast, just 48 companies total faced shareholder proposals that same year in Japan—an actual decrease from 55 the previous year.
Needless to say, Japan has been slow to catch on to the rising call to action on climate change initiatives—but it looks like 2022 may be different.
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Climate-Based Shareholder Democracy on the Rise in Japan
In April of 2022, a group of international NGOs and shareholders (Market Forces, Kiko Network, FoE Japan, and Rainforest Action Network) announced that they had filed shareholder proposals to four Japanese publicly listed companies. These included Sogo Shosha (a trading company), Mitsubishi Corporation, SMBC Group (the second-larget banking group in Japan), TEPCO, and Chubu Electric Power.
The proposal to Mitsubishi Corp, submitted by Market Forces, Kiko Network, and Ayumi Fukakusa of FoE Japan, demanded that Sogo Shosha disclose both their short-term and mid-term greenhouse gas emission reduction targets to ensure they align with the Paris Agreement. The group also asked the company to report on a wider scope of emissions.
Individuals from two other NGOs—350.org Japan and the Rainforest Action Network—also filed a resolution to SMBC group, asking the company to provide more transparency on short- and medium-term greenhouse gas emission reduction targets in their investment and loan portfolios, as well as the disclosure of measures being taken to prevent new fossil fuel energy developments.
In addition, Tokyo Electric Power (TEPCO) and Chubu Electric Power faced shareholder proposals related to climate change from Market Forces and Kiko Network. They specifically called out the presence of JERA, a subsidiary of TEPCO, as well as Chubu. According to the climate groups, “JERA has twenty-seven thermal power plants, including the one in Yokosuka, which is under construction.”
Takayoshi Yokoyama, a representative of 350.org Japan, believes that those shareholder proposals will enhance the sustainability of these companies: “We hope that these four leading Japanese companies will accept this proposal and further strengthen their climate change initiatives to contribute to climate change mitigation, while at the same time increasing their corporate growth and shareholder value.”
Given that the proxy season has just begun and four climate resolutions have already been filed, it appears that climate-based shareholder action is on the rise here in Japan.
“What we have filed will create greater transparency for investors to see how exposed they are to climate-related financial risk in these companies. The resolutions will also require companies to better manage climate risk, and align their strategies and goals with the net-zero by 2050 commitments they have made.”
Julien Vincent, Market Forces
Stakeholders Have Big Shoes to Fill
The Tokyo Stock Exchange reorganized its market in April 2022, bringing about a new policy that will require companies in the top-tier Prime Market to disclose the risk their operations may impose on the climate. Companies are now required to explain their policies and communicate their social values through transparent dialogue with shareholders.
For publicly listed companies, focusing on ESG issues is not just about getting high scores from rating agencies. It takes long-lasting, constructive dialogues with vocal stakeholders to increase a company’s social value in this modern world.
Shareholders and stakeholders alike still need to hold companies accountable.
They must lob tough questions during annual meetings and fearlessly inquire about sustainability measures. It’s their right to cast their ballot for board members who will support proposals they feel passionate about. Every single stakeholder has the power—and the responsibility—to be a part of the discussion.
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