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Japan's banks face rising climate activism despite vetoed motions

Shareholder activism in Japan has been growing in recent years, mostly directed at corporate governance issues in large companies. Although activist investors failed to push through climate motions at two megabanks in Japan over the past year, pressure is building on lenders to rein in financing for fossil fuel projects and support an international effort against global warming.

A motion for Mitsubishi UFJ Financial Group Inc., or MUFG, to align its business to the Paris Agreement on climate change mitigation got about 23% of the votes from shareholders at the lender's annual general meeting June 29, according to a company spokesman. It fell short of the two-thirds vote that would have made it binding on the company's management.

The proposal, brought by Japanese nongovernment organization Kiko Network and three other individual shareholders affiliated with other NGOs — Market Forces, Rainforest Action Network and 350.org Japan sought to commit the nation's largest bank by assets to draw up detailed plans to align its investment and financing with the Paris goals of limiting global temperature increase to 1.5 degrees Celsius.

A similar climate resolution proposed by Market Forces at a shareholder meeting of Japanese trading company Sumitomo Corp. received 20% of the votes on June 18. In June 2020, a climate motion for Mizuho Financial Group Inc., also proposed by a Kiko Network-led group, also failed as it managed to get the support of only 35% of shareholders. That was the first climate-related resolution put to shareholders of a listed company in Japan.

But activists are influencing institutional investors and helping to raise more voices in Japan for climate change, said Tamami Ota, a researcher at Daiwa Institute of Research who focuses on environmental, social and governance issues. "Banks will likely remain a major target" for activist investors as Japanese lenders are still a key supporter for fossil fuel projects, Ota said.

Gaining ground

Growing shareholder activism in Japan has also had some success. Shareholders of Toshiba Corp. last week voted to oust the company's chairperson following a monthslong campaign by the largest shareholder Effissimo Capital Management Pte. In another example, ValueAct Capital, a U.S.-based hedge fund, grabbed a board seat at Olympus Corp. and helped turn it around from an accounting scandal.

Activists have, since last year, started taking aim at the climate-related exposure of Japanese banks. Unlike banks in the U.S. and Europe, where it is common for shareholders to force changes through their votes on environmental issues, climate activism among shareholders is still in its infancy in Japan, although investor attitudes are changing. Activist shareholders are hoping to ride on pledges by the world's major economies, including the U.S., China, Japan and Europe to bring greenhouse gas emissions to a net-zero by 2050 or 2060 with support from lenders.

"It won't be easy to push companies to create a new provision in their articles of incorporation" for further environmental action, Ota said.

The Japanese megabanks are active in funding coal projects, especially in less developed countries that have fast-growing energy needs. MUFG, Mizuho and Sumitomo Mitsui Financial Group Inc. were among the top five Asian financiers of the fossil fuel industry since the Paris agreement in 2015, according to Rainforest Action Network.

Despite a recent national pledge to achieve net-zero emissions by 2050, Japan is the only major industrialized economy that is significantly relying on the use of coal as an energy source.

Megabanks respond

The megabanks have unveiled plans to reduce their carbon footprint that are in line with the national goal.

MUFG said in May that it aims to reduce green gas emissions in its investment and loan portfolio to net-zero by 2050. The four environmental groups said they "welcome" MUFG's net-zero commitment. "However, MUFG refrained from setting short and medium term targets" to achieve the net-zero goal, they said on May 18.

Sumitomo Mitsui said earlier it would not finance new coal-fired power plants "in principle," while not ruling out funding for power plants that burn coal more efficiently. Mizuho said in May that it will not finance or invest in new coal projects.

A record 44 activist funds, which aim to make large enough investments in companies so as to be able to influence management decisions, entered the Japanese market in 2020, compared with 24 in 2018, according to data from IR Japan, which provides equity advisory services. Among the activist funds that started in Japan last year, 23 were from the U.S. and Europe, while 13 were Asian and eight were Japanese funds.

Proposals from activist shareholders to Japanese companies will possibly hit a record high this year, IR Japan estimates. Such proposals totaled 23 as of June 24, more than the 22 in the same time last year and close to 26 in all of 2020, it said.

"They [activist shareholders] will likely raise more voices about climate change and Japanese banks would have to launch stronger policy to respond to them," Ota said.