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Japanese megabanks face growing investor pressure to fight climate change

Japanese megabanks are under growing pressure from activist investors to fight climate change more aggressively, but the country's continued reliance on coal makes the mission more difficult than it could be.

In what was Japan's first shareholder-led climate change resolution on a listed company, Kiko Network, an activist group that owns 31,000 shares in Mizuho Financial Group Inc., filed a shareholder motion in mid-March to force the megabank to rein in lending to coal companies. A month later, Mizuho said it would stop issuing loans to new coal-fired plants from June and that it aimed to exit coal financing completely by 2050.

The next day, Sumitomo Mitsui Financial Group Inc., another megabank in Japan, also said it would no longer lend to new coal-fired plants from May 1.

"The ESG investment has been established," Makoto Kikuchi, CEO of Myojo Asset Management, said. "So the Japanese banks have no option but to show this stance to meet their [investors’] demand."

Despite the emission goals in the Paris Agreement, under which Japan is seeking an 80% reduction in greenhouse emissions by 2050, the world's third-largest economy still heavily relies on coal power. Largely because many of the nation's nuclear reactors were decommissioned following the Fukushima nuclear accident in 2011, the nation is building 15 new coal-fired plants and planning four more, according to the Ministry of Economy, Trade and Industry.

It is this national energy policy, which has coal as the second-largest energy source after LNG, that increases the challenge for the country's largest banks to meet environmental, social and governance commitments.

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Activist investors keep pushing

"What [the megabanks] are trying to do for decarbonization is not good enough to respond to the Paris Agreement," Kimiko Hirata, international director of Kiko, meaning climate, Network, told S&P Global Market Intelligence.

Mizuho's plan, over the next 10 years, is to reduce outstanding loans for coal-fired power generation projects by 50% from about ¥300 billion as of March 2020, before completely phasing them out in 2050.

But both Mizuho and Sumitomo added that they will still consider lending to coal-fired plants that are essential to the country’s stable energy supply, as well as ones that adopt environmentally friendly technologies to reduce emissions.

"They created a loophole to continue the financing," Hirata said.

She said the Japanese banks should consider disposing of shares in coal plant operators and halt bond underwriting for them, not just ending financing of new coal power projects.

"We'll keep watching and requesting them to take a stronger policy" in line with the global pact, Hirata said.

A Mizuho spokesman told S&P Global Market Intelligence that the bank will engage with its stakeholders to support measures to combat climate change and decarbonize the economy, without providing more detail.

Sumitomo declined to comment.

World's top coal financiers

Mitsubishi UFJ Financial Group Inc., Mizhuo and Sumitomo were the world's three biggest lenders to coal-power development between the beginning of 2017 and the third quarter of 2019, according to a December 2019 report by a group of NGOs that included Germany's Urgewald and the Netherland’s BankTrack.

The three banks collectively contributed US$39.35 billion, or a third of loans to all of the world's coal plant developers, the report said. Mizuho was the largest lender, offering US$16.80 billion of loans to the developers of coal-fired plants during the period, followed by MUFG and Sumitomo.

"Japanese banks have a bad reputation" among foreign investors in terms of coal financing, Yoshihiro Fujii, executive director of the Research Institute of Environmental Finance in Japan, said. "Particularly, Mizuho is coming under the fire." Fujii added that he expects investors to tighten scrutiny over the Japanese banks' ESG stance.

Japan is behind Europe and the U.S., which are shifting to renewables and shale gas from coal-fired power generation, respectively, Fujii added.

Japan's Ministry of Economy, Trade and Industry expects coal-fired power to generate 26% of its total electricity mix in the fiscal year ending in March 2031, almost unchanged from the pre-2011 Fukushima Daiichi crisis level. The coal portion of the mix is more than the 22% to 24% for renewables and 20% to 22% for nuclear power. Some experts, however, doubt that the ministry will achieve the nuclear power target due to public opposition.

"Coal is a necessity in Japan as a fuel source," Takeo Kikkawa, professor at the Graduate School of International Management at the International University of Japan.

"I believe the Japanese banks will remain involved in coal power projects using advanced environmentally friendly technologies because they have to make profits from there when super-low interest rates are squeezing their profits," said Kikkawa, who is also a member of an energy policy-setting committee at the trade and industry ministry.

As of June 9, US$1 was equivalent to ¥107.73.