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Japanese Banks Pour Billions Into Fossil Fuel Industry

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Japanese Banks Pour Billions Into Fossil Fuel Industry

Analysts warn that the continued fossil fuel support from the Japanese financial industry, showcased by the actions of various banks, insurance companies, asset owners and asset managers, is enabled by loose policies or loopholes. Fixing them is critical for addressing the climate crisis.

24 April 2024 – by Viktor Tachev   Comments (0)

The world is heading towards catastrophic levels of warming, and while many global public and private banks, asset managers and insurance companies have announced that they will stop supporting fossil fuel projects, many institutions, including Japanese banks, continue to fund fossil fuel projects. Financial institutions must realise that they are pivotal in protecting the planet. Adopting ambitious policies is a crucial first step in the mission to act urgently and decisively on the climate crisis.

The G20 Continues to Finance Fossil Fuel Projects

With current pledges, humanity is heading for a 2.9°C temperature rise by 2100. The G20 holds the keys to holding temperature rise to 1.5°C. Yet, seven countries, including China, Japan, South Korea and the United States, haven’t unveiled any coal phase-out strategies. According to Oxfam research, G20 nations’ current carbon reduction pledges will keep their per capita GHG emissions in 2030 at similar levels as they are today. These are close to double the amount needed to avoid catastrophic impacts.

The G20 countries, responsible for 80% of global emissions, continue to pump billions into fossil fuel infrastructure, mainly in poor nations. According to a Price of Oil and Friends of Earth study, between 2020 and 2022, they invested USD 142 billion into fossil fuel projects. The leading financiers were Canada, Korea and Japan. For comparison, the G20 nations invested USD 104 billion over the same three-year period in overseas clean energy projects. 

Top 10 G20 Country Providers of International Public Finance of Fossil Fuels Compared to Clean Energy, 2020 - 2022, USD Billions, Source: Price of Oil
Top 10 G20 Country Providers of International Public Finance of Fossil Fuels Compared to Clean Energy, 2020-2022, USD billion. Source: Price of Oil

Japan: A Leading Fossil Fuel Financier

Aside from being among the biggest emitters, Japan is also one of the countries with the largest shortfall in planned emissions reductions. The country is among the leading financiers and proponents of extending the life of coal infrastructure across Asia, as well as building new gas capacity.

According to Oil Change International, Japan is also among the governments blocking the clean energy transition, with billions in international finance for fossil fuels. The analysts say that despite joining the rest of the G7 to announce a moratorium on foreign coal financing in 2021, it has continued to make new fossil fuel investments overseas. This is possible due to existing loopholes in Japan’s current policy, creating circumstances to continue financing dirty projects.

Furthermore, Japan is second only to Canada regarding the discrepancy between donations to the Loss and Damage fund at COP28 and its annual average fossil fuel investment. The country remains the largest upstream fossil exploration and extraction financier, accounting for almost half of all G20 upstream finance.

G20 Country Pledges at COP28 to the Loss and Damage Fund Compared to Annual Average Fossil Fuel Finance, USD Billions, Source: Price of Oil
G20 Country Pledges at COP28 to the Loss and Damage Fund Compared to Annual Average Fossil Fuel Finance, USD Billions. Source: Price of Oil

According to Makiko Arima, senior finance campaigner at Oil Change International, Japan is derailing the global renewable energy transition.

“Japan needs to put people and planet over profit and shift its finances from fossil fuels to renewables,” Arima says.

Furthermore, Japan advances technologies like ammonia-coal co-firing, hydrogen and CCS and promotes their adoption across Southeast Asia to perpetuate fossil fuel use. 

Japanese Banks in the Driver’s Seat of Fossil Fuel Expansion

According to Fossil Free Japan, private banks and insurers like SMBC, MUFG, Mizuho, Tokio Marine, SOMPO, MS&AD and others are among the prominent supporters of fossil fuel expansion.

The Banking on Climate Chaos 2022 report suggests that between 2016 and 2021, Japanese banks MUFG, Mizuho and SMBC accounted for almost 10% of all fossil fuel financing made by the world’s top 60 banks. 

In a separate analysis of the banks and asset managers involved in the biggest fossil fuel bond issuance in 2023, Reclaim Finance singles out two Japanese entities: Mizuho and MUFG. Through the bonds program, they have supported fossil fuel projects by Greensaif Pipelines, Conoco Phillips, BP Duke Energy, and ENI.

A January 2024 report by BankTrack finds that major Asian banks, including Mizuho, SMBC and MUFG, remain open for business in coal.

Furthermore, another report by Reclaim Finance shows that four of the top five banks supporting metallurgical coal expansion worldwide are Japanese. Due to the use of metallurgical coal, steelmaking is the biggest industrial emitter of CO2 globally. According to the findings, Mizuho Financial, SMBC Group, Mitsubishi UFJ Financial and Sumitomo Mitsui Trust have provided over USD 66 billion to the 50 biggest companies developing metallurgical coal projects for steel production outside China. Between January 2016 and June 2023, they accounted for over 29% of banking support to such companies. The report also finds that Japanese investors, including the Government Pension Investment Fund, Mitsubishi UFJ, Nomura and Sumitomo Mitsui Trust, held 16% (USD 25 billion) of the investments in the top 50 metallurgical coal developers as of June 2023. 

Loose or Lacking Policies Enable the Support of Japanese Banks For Fossil Fuel Projects

According to the Coal Policy Tracker, the thermal coal policies of the 33 Japanese financial institutions subject to its analysis remain highly insufficient to meet the Paris Agreement. No entity has adopted any best practices, with the majority having no coal policy at all. 

While leading financial institutions like Mizuho, MUFG, and SMBC have all pledged to stop funding new coal mining projects as of 2022, studies find that existing lax restrictions in corporate finance to coal developers are creating loopholes that allow the continuation of business as usual. 

350 Asia notes that while Japan’s banks aim to divest from coal power by 2040 and achieve net-zero emissions across their portfolios by 2050, their reduction targets for oil and gas focus on reducing carbon intensity rather than absolute emissions. As a result, they fail to account for the total amount of emissions on the ground.

Furthermore, banks remain open to supporting projects with CCS, or those that utilise mixed hydrogen or ammonia combustion.

While Japanese banks are often under the spotlight, they aren’t the only ones with loose policies or loopholes to be exploited. These practices reflect the global trend. Although there has been traction across the international finance and insurance industries against new fossil fuel project support, major loopholes exist. Institutions disregarding the climate emergency can exploit them. For example, the Science Based Target initiative (SBTi) recently weakened its net-zero targets standard in the financial sector to enable banks, investors and insurers to continue to support fossil fuel project development. According to Reclaim Finance, 96% of the financing for oil and gas and up to half of the companies developing new coal projects would not be affected by the initiative. 

According to BankTrack, the new version of the Net-zero Banking Alliance guidelines that will be enforced from April 22 also fail to address the problem, leaving too much leeway for member banks to not have to achieve net zero by 2050. Describing the guidelines as “too little, too late, too slow,” the analysts identify various loopholes, including their non-binding nature, the enabling of extended oil and gas production, the discrepancies between targets by member banks, the lack of consistency between member banks’ targets and their net-zero commitments and more.

Criticism Against Japan and Its Banks is Mounting

Japanese banks funding fossil fuel projects in Indonesia, the Philippines and Bangladesh are now facing increased opposition from activists and civil society groups in affected communities. According to 350 Asia, low-income communities in those countries are “reeling from the impacts” of coal plants supported by countries like Japan. They suffer from health impacts, loss of livelihoods and human rights violations.

Experts have jointly criticised Japan’s efforts to promote technologies like CCS, hydrogen and ammonia for energy use across Southeast Asia. These technologies have been described as “a way to legitimise coal in the eyes of financiers and lenders”. The country has been subject to criticism from civil society groups and even its G7 peers. According to experts, the push for these technologies is influenced by corporate interests and the country’s fuel lobby. Analysts suggest that some of their biggest supporters are also among Japan’s leading emitters.

A group of 67 organisations sent a letter to 50 global banks, including some of the leading Japanese financial institutions, to end all financial support for new metallurgical coal production and expansion. In December 2023, 96 civil society organizations called on banks to transition in line with the Paris Agreement and halt financial provision to actors whose supply chains or operations have a negative impact on natural ecosystems, climate or Indigenous peoples’ rights.

Addressing Policy Loopholes and Prioritising Clean Energy Investments Is Crucial

Fossil fuel expansion is incompatible with a 1.5ºC world. The financial industry should acknowledge its support has major impact. 

Changing course requires voluntary action from coal financiers and a regional and global push to fix the existing regulatory loopholes that allow doing business as usual. Going forward, it is imperative for existing standards like the SBTi to cover both oil and gas projects and ensure that all coal developers are excluded from project and corporate financial support.

According to BankTrack, banks should adopt exclusion policies for project financing covering all coal mining and power projects, including addressing loopholes like captive coal power. Furthermore, they should exclude corporate finance for companies on the Global Coal Exit List.

On a regional and global level, BankTrack advises banks to adopt a full-scale coal phase-out plan by 2040. Reclaim Finance recommends introducing decarbonisation targets for financed and invested emissions and giving priority to the highest-emitting sectors.

Japanese banks have astrong incentive to switch from financing fossil fuels to investing in renewables. Renewable energy projects are less capex intensive, less complex and have a much shorter time-to-market. They are about to experience an exponential boom, and their use is limited only by the natural resources they rely on. Paired with the stranded asset risk and the reputational damage associated with fossil fuel projects, financiers have sufficient reasons to shift financial flows toward clean energy.

by Viktor Tachev

Viktor has years of experience in financial markets and energy finance, working as a marketing consultant and content creator for leading institutions, NGOs, and tech startups. He is a regular contributor to knowledge hubs and magazines, tackling the latest trends in sustainability and green energy.

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