Japan outbound investment back on track

The pandemic has pushed Japan from its reign as the world’s largest investor. As the global recovery rolls out, the country is ready to take back its position through various investments in the infrastructure sector and renewable energy projects.

Global foreign direct investment (FDI) flows dropped by 35% in 2020 to USD1 trillion from USD1.5 trillion in 2019, according to the latest UN Conference on Trade and Development’s (UNCTAD) “World Investment Report 2021”. As a key player in foreign direct investment, Japan is not an exception.

The report published in June last year showed that Japan’s FDI outflows significantly decreased by 49% to USD116 billion in 2020 from USD227 billion in 2019 and were the world’s second-largest FDI outflows after China, which remained high at USD133 billion in 2020, a slight decrease from USD137 billion in 2019.

However, the recent issue of UNCTAD’s Investment Trends Monitor as of January 2022 shows that global FDI flows showed a strong rebound in 2021, increasing 77% to an estimated USD1.65 trillion from USD929 billion, surpassing their pre-pandemic levels. The report also stipulated that investors are keen on investments in the infrastructure sector, and the financing of renewable energy and industrial real estate projects.

Japanese FDI outflows are recovering slowly but steadily. Japanese multinational companies had been facing unprecedented challenges, partly due to delayed vaccinations and prolonged severe border controls. However, as Japan’s economy rebounds to the pre-pandemic level, Japanese investors have begun to contribute considerably to growth in a post-pandemic recovery.

Investment in sectors relevant to the UN Sustainable Development Goals (SDGs) is one of the major motives for such a recovery, which is the same inclination as that of most of the investors of developed economies.

ESG COMPLIANCE

Japanese multinational companies are required to do business in a transparent and accountable manner in various issues, including environmental concerns, diversity and inclusion, and governance.

Principle No.2 of the Corporate Governance Code of the Tokyo Stock Exchange (the code) defines the importance of sustainability as a “commitment to sustainable growth with environmental, social and governance (ESG) aspects”, in conjunction with corporate social responsibility and engagement with stakeholders under the stewardship code.

Principle No.3 of the code also provides the disclosure rules, including ESG factors for listed companies, which are essential to ensuring transparency and accountability under the stewardship code. With growing awareness of the UN SDGs, the recent amendment to the supplementary rule to principle No.3 introduced disclosure requirements, including much more detailed information involving concrete growth strategies to achieve sustainability and the impact of climate change risks on their business activities.

Generally speaking, it is imperative that large corporations with worldwide exposure should recognise the importance of ESG elements and adapt their business activities to international norms. It is fair to say that some Japanese corporations, regardless of the size, are still struggling to raise their ESG profiles, although they are aware that the ESG initiatives would impact their corporate value in all sectors.

A July 2021 survey by the Teikoku Data Bank shows that the top three popular activities towards the UN SDGs are goal 8 (decent work and economic growth), goal 7 (affordable and clean energy), and goal 3 (climate action). Japanese multinational corporations are keen on investing in projects in the renewable energy sector, which would contribute to their ESG performance and recovery of Japan’s FDI outflows.

CARBON NEUTRALITY BY 2050

In October 2020, then Japanese prime minister Yoshihide Suga declared that the country would achieve carbon neutrality by 2050. The “Green growth strategy through achieving carbon neutrality by 2050” was implemented by the Ministry of Economy, Trade and Industry (METI), which was followed by the fifth reinstatement of the energy plan together with the 2050 energy mix in 2021.

Japan has shifted to decarbonisation, although at the 26th Conference of the Parties to the UN Framework Convention on Climate Change (COP26) in Glasgow in November 2021, Japan received the “Fossil of the day” award by the Climate Action Network (CAN) that recognised countries as being slow to act in the fight against climate change.

Japanese Prime Minister Fumio Kishida pledged at COP26 to support developing nations in Asia that promote power generation using ammonia and hydrogen to contribute to reducing greenhouse gas emissions. Recent Japanese FDI outflows are driven by this governmental initiative, which are mainly towards energy and infrastructure sectors in developing countries.

The national agendum for carbon neutrality as well as increasing pressure on ESG compliance would strongly suggest that Japanese corporations should make their business models and operations more environment-conscious in various sectors, not to mention in the energy sector. Investing in renewable energy power generation, which accounts for about 50-60% of Japan’s 2050 energy mix, is not the only solution.

A company might explore ways of fundamentally transforming business and operational models, which could be a lengthy process to become a stainable company in a carbon-neutral society. It should also be noted that Japan has not decided to abandon coal-fired thermal power generation (with green innovation technology, including carbon capture, utilisation and storage, and carbon recycling), which comprises 26% of the 2030 energy mix.

Masako Takahata is the vice president and chair of the international arbitration committee of the Japan In-House Lawyers Association (JILA) in Tokyo