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Why is Japan embracing ESG investing?

David Runacres
David Runacres
Head of Japan, Data & Analytics, London Stock Exchange Group

A few years ago, it seemed as though the financial services industry in Japan had missed the boat on ESG. In this blog, we explore how the Asian nation has become one of the most enthusiastic adopters of ESG measures and sustainable investing, and analyse the main drivers of that change.


  1. Government Pension Investment Fund (GPIF) in Japan is the world’s largest single pension fund. Since 2017, it has been allocating funds to ESG investments.
  2. As a consequence, more firms in Japan are using ESG scores to illustrate their ESG credentials to investors.
  3. The Japanese government has set a goal of achieving carbon neutrality by 2050. This has put pressure on industry to follow suit in pursuing sustainable development goals through investment decisions.

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Japan has the world’s largest single pension fund in GPIF, which accounts for US$1.6trn in assets. This is the result of decades of industriousness and effort from Japanese workers.

Naturally a store of assets this large has the power to move markets and drive standards in the markets it operates. Additionally, the well-known Japanese demographic challenge of an ageing population means the fund needs to take an extremely long view of investing, given its need to pay the pensions of an increasingly ageing population over the next century.

Refinitiv ESG scores reflect the underlying ESG data framework and are a transparent, data-driven assessment of companies’ relative ESG performance and capacity

The sign of Japan's Government Pension Investment Fund (GPIF) is seen in Tokyo, Japan. Why has Japan embraced ESG?
Government Pension Investment Fund (GPIF) in Japan, the world’s largest single pension fund, has begun to invest in ESG projects

How did GPIF begin investing in ESG?

GPIF first took steps into sustainable investing with the signing of the Principles for Responsible Investing (PRI) in 2015, along with publishing its own investment principles in line with that.

However, it took until 2017 for GPIF to start allocating funds to ESG investments with an initial ¥3trn (US$27bil) allocated to shares with good ESG scores and into three ESG indices including the FTSE Blossom Japan Index with a further ¥1.0trn (US$8.8bil) funding.

The following year saw low-carbon indices being funded to the tune of ¥1.2trn (US$10bil) – further underscoring a marked shift to ESG as a measure of asset quality. Additionally, GPIF has asked all of the external asset managers it uses in Japan to “take ESG into consideration” as a fundamental measure of investment strategies. It also revised its evaluation criteria in 2017 with significantly higher scores for good stewardship and ESG-related activities.

Given the scale of the GPIF investments, this activity has garnered huge attention domestically, and more broadly across Asia. The very open approach taken by GPIF in publishing allocations and indices used has created a huge impact, especially among domestic Japanese firms – the largest concentration of major corporations outside of the United States.

Growth in use of ESG ratings

A recent GPIF survey of listed Japanese firms showed that nearly all firms of mid-cap or higher were aware of the funds activities in this area and the indices being used. A few having made structural changes as result.

Some larger manufacturing firms have started using ESG ratings to measure the scores of the often labyrinthine supply chains common among large Japanese manufacturers, in the hope of illustrating strong ‘ESG credentials’ to an investment market that is starting to pay closer attention these factors.

Momentum in this broader use of ESG principles – to measure the firm and its activities – rather than just as a means of investment allocation and asset quality measure will continue to increase in Japan in the coming years.

Government aims for carbon neutrality

The Japanese government has now taken a leading role. Once seen as a bastion of consistency and highly resistant to change, Prime Minister Suga announced an ambitious goal to achieve carbon neutrality for Japan by 2050 – with calls from within the country to aim for a probably impossible 2030 target.

In addition, the government announced Japan’s sustainable development goals to show how energy and environmental solutions go hand-in-hand with economic development. These activities and promotions put pressure back on industry to do likewise.

There has been recent evidence that this government leadership has made progress. Dai-Ichi Life Insurance and Nippon Life Insurance have both announced they will not lend money to build new coal-fired power plants internationally. Likewise, Sumitomo Mitsui Trust Bank and Resona Bank have made similar statements regarding funding such ventures.

Japan's Prime Minister Yoshihide Suga speaks during a press conference at the prime minister's official residence in Tokyo. Why has Japan embraced ESG?
The government of Prime Minister Yoshihide Suga is taking a leading role in Japan’s goal to achieve carbon neutrality by 2050

Influencing investor behaviour

Clearly it can be seen that the actions of a major investment pool within a market can have profound “ripple effects” in that market – changing the behaviour not just of investors, but of governments and industry itself.

While the ESG activities of GPIF are clearly not the only driving factor, they certainly created a sense of urgency not commonly seen in Japan. And quite possibly Japan and the world will be all the better for it.

Refinitiv ESG scores reflect the underlying ESG data framework and are a transparent, data-driven assessment of companies’ relative ESG performance and capacity