Natural Capital Initiatives are Key to Promoting ESG Investment

In the field of ESG (Environment, Social and Governance) investment, global attention is focused on corporate initiatives for natural capital such as forests, soil, water, air and biodiversity, which support our lives and businesses. Yoshitaka Mari, a member of the Tokyo Green Biz Advisory Board, the Tokyo Metropolitan Government (TMG)'s initiative to increase the value of greening, and a fellow at Mitsubishi UFJ Research and Consulting, discusses the prospects for ESG investment in Tokyo and Japan in general.
Funds from the Tokyo Green Bonds issued by the TMG are used for projects to maintain and improve facilities at the Port of Tokyo and coastlines of Tokyo's islands. Image is Nagahama Beach, Kozushima Island. Photo courtesy of the Tokyo Metropolitan Government.

Protection, Development of Natural Capital Seen as Investment Decision Factor

ESG investment is designed to focus on companies and organizations which are conscious environmentally and socially, and conduct their business with appropriate corporate governance. The idea is based on the Principles for Responsible Investment, proposed by the United Nations in 2006. These are guidelines for institutional investors who manage vast sums of money from individual assets. This has led to the integration of the value of non-financial information into the investment process as well as short-term financial performance.

Yoshitaka explains how ESG investment has spread. "The importance of investing with a focus on a company's social responsibility has become recognized. In particular, at the time of the global financial crisis triggered by the collapse of Lehman Brothers, subprime mortgages-high-risk housing loans mainly for low-income groups-drove the entire financial system to the brink of collapse. This crisis led financial authorities in each country to recognize the need to manage funds from a long-term perspective, and to turn their attention to ESG investment."

In ESG investment, corporate commitment to natural capital is an important criterion. Climate change and biodiversity crises are seen as not only future risks but business opportunities, while companies are also expected to take legally and ethically responsible actions such as complying with environmental laws in the regions where they operate.

Yoshitaka provides consulting and advice on environmental finance and sustainable business related to factors including climate change to public authorities, institutional investors and companies.

At the G20 Finance Ministers and Central Bank Governors Meeting in 2015, it was noted that climate change poses a risk to the financial system, equivalent to the impact of Lehman's collapse. In response, the Financial Stability Board (FSB) set up the Task Force on Climate-related Financial Disclosures (TCFD), which fulfilled its remit and was disbanded in 2023. Financial institutions have started to assess climate change. In recent years, global warming-related disclosure has become mandatory. This has led to increased attention on reducing fossil fuel use and CO2 emissions. As a result, there is active investment in renewable energy and electric vehicles.

"Until now, companies have tended to see environmental measures as a cost and rely on taxes, subsidies and donations. However, taxes alone cannot address unexpected risks such as climate change. Incorporating environmental costs into corporate activities will lead to investment in environmental protection. The challenge for society is to incorporate this into the economic indicators of the future."

Public Sector's Initiative to Take Risks and Show Guidelines Can Encourage Corporate Action

In Japan, renewable energies such as solar, wind and biomass power generation have become established businesses, but the use of natural resources —natural capital— such as plants, animals, water, air, soil and minerals is still at the stage where companies disclose information. While there are funds investing in natural capital overseas, such activities are still not common in Japan. The reason why there are few funds investing in natural capital in the country is that climate change makes it difficult to predict and assess natural capital in Japan, and such investment is considered risky and difficult for Japanese financial institutions to evaluate.

However, Japanese companies are now beginning to show the value of their natural capital to the market, based on third-party assessments. "For example, Sumitomo Forestry Co. Ltd. has established a forest fund to demonstrate the value of forests to investors. Mori Building Co. Ltd. has gained support by quantifying the percentage of areas that are greened as an indicator of the value of its real estate securities and showing this to investors."

The TMG plans to establish a fund to promote the circular economy and natural capital in 2024. "I think public and private sectors should work together to promote such policies. The public sector's initiative to bear risk will reduce risk for the private sector and make it easier to invest. If the TMG issues guidelines, companies will be encouraged to take initiatives and provide open competition. Developers are expected to be involved in area management around public spaces such as metropolitan parks owned by the TMG. Once new standards are set, the environment will improve, and property values will increase."

The TMG has issued green bonds since 2017 when it became the first local government offering such bonds. Projects financed by green bonds include smart energy urban development, sustainable use of resources, conservation of the natural environment and measures against climate change. As information about the use of funds is disclosed, individual investors will have an opportunity to be actively involved in those projects that can affect people's lives directly. "The TMG organizes tours of the places where the funds are used. It is very important to convey information on how the funds will be used to investors both in Japan and abroad," Yoshitaka said. "I think that the TMG's initiative to lead in these kinds of financial policies will have a positive impact on other regions and countries."

Yoshitaka teaches in the Special Division of Environmental and Energy Sciences at the University of Tokyo's Graduate School of Arts and Sciences, College of Arts and Sciences.

High hopes for Digital Technology, Young Adults in Search of Nature

Yoshitaka is engaged in Tokyo Green Biz, a project based on the concept of creating a city with greenery over the coming 100 years. How does she envision an ideal Tokyo a century from now? Yoshitaka has high hopes for the growing emphasis on the natural environment in the lifestyles and values of the young people who will be responsible for future generations.

"For example, at the University of Tokyo, where I am currently teaching, students are trying to create a biotope where indigenous wildlife can live sustainably. For this purpose, they are creating a database and visualizing information that makes use of photos of insects and other organisms taken by local residents and business people. This kind of initiative deepens attachment to local areas and fosters a desire for more greenery. Digital technology can create new values beyond mere convenience. Some of our students are also interested in creating jobs in rural areas and have actually moved to the countryside while attending the University of Tokyo. What these students have in common is that they love nature. No matter how convenient the world will become, the desire for a humane lifestyle and nature should remain unchanged. That is why I hope that Tokyo will not just be a convenient place to live because of job availability, but a city chosen as a place where people can live healthy and safe lives in harmony with nature, both physically and mentally."

Yoshitaka Mari

After working at an IT company and a US investment bank, Yoshitaka joined Mitsubishi UFJ Research and Consulting in 2020 and became a Fellow (sustainability) in 2022. She advises and lectures governments, institutional investors and companies in the areas of environmental finance and sustainable business, including climate change. She is also a visiting professor at the University of Tokyo's Institute for the Advancement of Liberal Arts and Sciences, Special Division for Environmental and Energy Sciences.

Operating on the concept that envisions green urban development for the next 100 years, the Tokyo Metropolitan Government is pushing initiatives to protect, increase and maintain, and cultivate Tokyo's greenery. 
Through wide-ranging activities, including green business and sustainable finance, the efforts aim to transform Tokyo into a sustainable city that exists in harmony with nature.

Interview and written by Mori Hidenobu
Photos by Kaneko Satoshi
Translation by Ito Shingo