Global trends of ESG investment - implication to energy industries & policies -

September 9th, 2019

Hiroshi HasegawaDirector, Energy Supply & Demand Policy Office

Agency for Natural Resource & Energy

1. Trend of ESG investment/sustainable finance

➊Increase in ESG investment & Divestment➋Moves to rule-making in environmental finance・EU rules (EU Sustainable Finance)・International Standardizations (ISO)

2. Implication to energy industries & policies

➊Current situation➋Environmental context➌Resilience context

1

European & US asset owners (Pension Funds & Insurances）consider ESG asrisk/opportunity elements in investment decisions recently.

Some institutional investors divest (withdrawal money from fossil fuels). Asset management companies are doing “engagement” by constructive

dialogue with invested companies in order to change companies’ behaviorthereby improving long-term corporate value, achieving risk-diversification &fiduciary responsibility

18.3

22.9

10.8 12.0

6.68.7

0.7 1.10.1 0.5 0.1 0.5

0%

20%

40%

60%

80%

100%

0

5

10

15

20

25

2014

2016

2014

2016

2014

2016

2014

2016

2014

2016

2014

2016

Global Europe UnitedStates

Canada Australia/NZ

Asia

資産規模

$ trillion

Increase in global ESG investment2014=>2016

出典：エネルギー情勢懇談会提言関連資料（平成３０年４月）

出典：Climate Bonds Initiative HPより環境省作成

x50 in 6yrs

2

$ 100 million

Expansion of global Green Bond issue2007=>2017

Current Situation

（出所）GSIA(Global Sustainable Investment Association) 「2016 Global Sustainable Investm nt Review」（注）GSIAレポートにおいては、 「ポートフォリオ選択・運用においてESG要素を考慮する投資（SRI）市場」のデータとして記載している。

ESG investment & Divestment

3

France～2022

UK～2025

Canada～2030

Germany～2038

announcing phase-out of traditional coal-fired power plant

* U.S.: No phase-out, yet foresee decrease in coal-fired power plant (<= shale gas)

forming global-platform related ESG-disclosure (exchange info etc)

80 of 90 SEs joined Sustainable Stock-exchange Initiative (SSE) (Dec. 2018)

41 SEs issued ESG-reporting guidelines (Dec. 2018)

17 SEs require ESG disclosure to listed companies

forming coalition to 100%-renewable energy / climate-related disclosureApple, Facebook, Google, Microsoft, Walmart, GM, BMW, Tata Motors etcSony, Panasonic, Sekisui House etc (2014～, 193 com (Sep. 2019))

* Apple requires suppliers to commit to 100% renewable energy use.

develops voluntary disclosure of climate-related risk factors(2015～, 833 supporters (July 2019))

Government

Stock Exchange (SE)

Business

Current Situation ESG investment & Divestment

4

2003: Equator Principle (voluntary guideline for environment/social risk assessment for infrastructures)

2006: UN Principle for Responsible Investment (PRI) (promote ESG investment)

2017: TCFD Recommendation (disclose risk factors related climate-changes)

2017: Climate Action 100+ (investors’ movement, -2022, attend 300 investors, operate $30 trillion)

Global movements

Multilateral Development Banks

2013, 2017: Word Bank’s coal policy (no investment in coal after 2019)

2018: EBRD’s coal policy (no investment in coal except CCS-ready)

* high impact due to huge investment amount & coverage as universal ownersPension Funds

2015: Norway’s Government Pension Fund Global divested coal by $8 billion.2017: California Public Employees’ Retirement System divested by $167 million.2018: Japan’s Government Pension Investment Fund stablished ESG index.

Current Situation ESG investment & Divestment

5

Principle for Responsible Investment (PRI)

PRI calls to consider ESG factors in investment decisions (Home of the word “ESG”). Launched in 2006 at NY Stock Exchange. UN supports PRI from the launch 2300+ signatories, $ 90 trillion assets under management

x28 in numbersx10 in asset amount

Current Situation ESG investment & Divestment

6

Powering Past Coal Alliance (PPCA)

Mission: Phasing out of coal-fired power plants capacity -2030 (OECD) & -2050 (World) UK & Canada launched in 2017 (COP23) 83 Members: 30 national gov, 22 local gov, 31 business org (Sep. 2019)

• Germany (Coal-fired power 37%), Norway (commercialized CCS) not joined• Canada continues coal-mining & exports.

Financial ServicesNo project-specific finance for coal-fired power plants (new & existing) No corporate finance resulting in coal-fired power plants building etc

InvestorsAvoid exposure from companies generating electricity from coal-fired powerAdvocate for companies to seek alternatives to coal-fired power plants etc

ReportingPromoting the PPCA

Current Situation ESG investment & Divestment

PPCA Declaration(Nov 2017)

“Government members commit to phasing out existing unabated coal power generation and to a moratorium on any new coal power stations without operational carbon capture and storage, within their jurisdictions”

Finance Principles(July 2019)

translation of PPCA Declaration for financial institutions

〇EU sustainable finance① Classification system (taxonomy as a common

language) for sustainable activities② Labels for green financial products complying

green/low-carbon criteria③ Portfolio regulation for asset managers &

institutional investors④ Reporting & disclosure rules of companies’

ESG policies to investors (linked with TCFD).⑤ Support EU financial institutions to increase fund

to sustainable projects etc

＜Related movement＞〇 Green Bonds Principle (International Capital

Market Association (ICMA), 2014)〇 Climate Bonds Standards (Climate Bonds

Initiative, UK NGO)〇 ISO (Green Bond (US), Green Finance (CH),

Sustainable Finance(UK), Climate Finance (FR))

〇TCFD• Final Recommendation on Jun 2017• Clarify risks & opportunities in

transition to a low-carbon economy. • 833 supporters (July 2019)

＜Related movement＞〇Intl Organization• May 2019: UNEP FI’s TCFD guideline for

insurance companies.• Nov 2018: US SASB’s TCFD guideline by

industries & by items• CDP’s evaluation report based on companies’

disclosure information〇Japan• Dec 2018: TCFD Guidance

〇Europe• Moves to mandatory disclosure (France,

Spain, UK etc)

There are 2 mega-trends in rule-making of environmental finance. (1) Climate-related disclosure to investors (mandatory or voluntary, yet being de-facto standard) (2) Regulations on financial institutions & products mainly driven by EU (spread to other countries as de-facto) + international standardization

7

Disclosure Rule-making

Rule-making of environmental finance Overview

Based on the global trends of disclosure of climate-change related information & request from G20, FSB launched TCFD in 2015.

TCFD issued final recommendation in June 2017, requiring disclosure of Governance, Strategy, Risk Management, Metrics & Targets.

【History/activities】 Michael Bloomberg (Chairman &

founder) + 35 members + 3 secretariat.

833 supporters (July 2019) 2017: Final recommendation,

reported to Hamburg G20 summit. Sep 2018: 1st Status report June 2019: 2nd Status Report

Final TCFD recommendation

Governance How to govern climate-change related risks & opportunities

StrategyAnalysis of actual/potential impacts on business/financial strategies from climate-change related risks & opportunities

Risk Management

How to recognize, evaluate and manage climate-change related risks & opportunities

Metrics &Targets

Metrics & Targets toevaluate/manage climate-change related risks & opportunities

【4 Items to disclose】

（出所）経済産業省 長期地球温暖化対策プラットフォーム「国内投資拡大タスクフォース」（第5回会合） 東京海上ホールディングス株式会社 長村氏資料より一部修正。

8

Current Situation ESG investment & Divestment

Task Force on Climate-related Financial Disclosures (TCFD)

9

Rule-making of environmental finance EU sustainable finance

EU Sustainable Finance Action Plan

Jun. 2018: DG FISMA launched New Technical Expert Group (TEG)• 35 members: 14 financial, 7 NGO, 7 industry org,

3 academia etc• 4 groups: taxonomy, EU green bond,

low-carbon benchmark, and disclosure Jun. 2019: TEG Report (subject to public

consultations – Sep. 13, 2019)• 3 repots: taxonomy, EU green bond, low-

carbon benchmark

Dec. 2016: DG FISMA launched Sustainable Finance High-level Expert Group (HLEG)

Jun. 2018: HLEG Recommendation

Mar. 2018: EU sustainable Action plan released

EU focuses sustainable finance as an important part to realize of the Capital Markets Union's (CMU) efforts.

Sustainable finance support international financial system to channel private capital to sustainable projects, thereby contributing to the EU's carbon-neutral agenda.

Background

10 Actions listed. Among them, 1st

priority is put on “Establishing a common language for sustainable finance (taxonomy)”

Making Taxonomy: definition with concrete criteria

To be implemented based on the Taxonomy

10

Establish classification system for sustainable finance

Make Standards & Label for Green Finance products

Promote finance to sustainable projects

Include sustainability into investment advisory

Develop sustainability benchmark

Include sustainability into credit rating & research

Clarify obligation of institutional investors etc

Incorporate sustainability to Bank’s prudential rules

Strengthen sustainable disclosure & accounting rules

Promote sustainable corporate governance & long-term investment

1

2

3

4

5

6

7

8

9

10

10 Action Plans

Rule-making of environmental finance EU sustainable finance

Multiple efforts/discussions in ISO develops simultaneously. De-duplication among those efforts is one issue.

11

ISO

TC207Environmental management

TC322Sustainable Finance

SC4/WG7Green Bond

SC7/WG10Climate Finance

WG11Green Finance

Chairman

Chairman

Propose

Convenor

ISO14100 General framework & concrete classification system

for “Greeness” for specific projects※※ ”criteria” depends on characteristics of specific projects based

on countries’ domestic/international regulation /standards /guidance /principles

ISO14097 Condition for monitoring, evaluation & reporting by

financial institutions when investing companies’ climate-change-related activities.

※ No taxonomy

ISO14030-1~4 Guideline for Green Bond, Green Loan (how to judge

& guarantee “Greeness” etc) Taxonomy for GB ratings category for GB External Evaluation for GB

Sustainable

Green

Climate

Green

＜Scope＞

Vice

Now Proposed

Rule-making of environmental finance ISO standardization

1. Trend of ESG investment/sustainable finance

➊Increase in ESG investment & Divestment➋Moves to rule-making in environmental finance・EU rules (EU Sustainable Finance)・International Standardizations (ISO)・Banking rules (NGFS: Network for Greening the Financial System)

2. Implication to energy industries & policies

➊Current situation➋Environmental context➌Resilience context

12

●Coal 165

●Coaｌ 35●Coal 25

（Nuclear●207)

●Oil 70

●Oil 70

●Oil 50●Hydro 40●Oil 7.4

Power interconnection 60

●Geothermal 2.5

●Bio

●Bio

●Hydro

（GAS● 57）

Power interconnection 30(*under construction)

Capacity(ten thousands of kW)

- Solar:133 / Wind:39 →Dairy peak demand in Hokkaido : 7pm→Capacity factor of the wind power : 2%～

- Nuclear:207(Under Nuclear Regulation Authority’s Review)- Gas:57(2019/02-)

● Fossil (Coal, Oil, Gas)● Renewable(Hydro,

Geothermal, Bio)● Nuclear

525

383

-Dec. 2018

Coal60

-----------------------------------Oil112

-----------------------------------Home generation

50

-Sep. 2018

386

Interchange60

Geothermal etc13

Hydro90

Coal+95Oil+70

566Fossil total

387 (Unit: ten thousands of kW)

Peak demand(Winter)

Peak demand(Summer)

13

Current Situation Electricity Demand and Supply (Hokkaido)

ElectricityProduction

(total)Renewable

Hydro

Int’l power connection(Net import)

1.04tril. kWh

17%→● × (0%)33%→●

Coal

France 0.57tril. kWh

17%→● ●(-11%)2%→×

Gas

39%→●

4%→●

1% →●

Nuclear

77%→●

United Kingdom 0.34

tril. kWh27%→● 30%→● ● (6%)23%→×21%→●

Japan

14

Current Situation electricity supply mix in Japan, UK & France (2015)

再エネ 水力 原子力 石油 天然ガス 石炭(EU) G20 イギリス 336 28% 2% 21% 1% 40% 7% ●(フランス、オランダ、アイルランド）EU G20 フランス 569 7% 10% 77% 0% 3% 2% ●(イギリス、ドイツ、イタリア等)EU G20 ドイツ 654 30% 3% 12% 1% 13% 37% ●(フランス、オランダ、ノルウェー、ポーランド、スイス等)EU G20 イタリア 295 23% 12% 0% 3% 49% 11% ●(フランス、ギリシャ、オーストリア、チェコ等)EU ポーランド 170 12% 2% 0% 1% 6% 79% ●(ドイツ、チェコ、リトアニア、チェコ等)EU ハンガリー 30 3% 1% 52% 0% 17% 19% ●(スロバキア、クロアチア、墺等)EU チェコ 84 3% 4% 32% 0% 3% 52% ●(ドイツ、ポーランドﾞ、オーストリア、スロバキア)

ウクライナ 157 1% 6% 54% 1% 5% 32% ●(ポーランド、ハンガリー、スロバキア等)G20 EAS ロシア 1091 0% 17% 19% 1% 49% 14% ●(中国、フィンランド、エストニア等)G20 トルコ 296 10% 20% 0% 1% 37% 33% ●(シリア、ギリシャ、ブルガリア)G20 サウジアラビア 376 0% 0% 0% 41% 59% 0% ●(UAE、カタール、クウェート、バーレーン)G20 南アフリカ 255 3% 0% 6% 0% 1% 88% ●(モザンビーク、スワジランドﾞ、ボツワナ等)G20 EAS 米国 4282 10% 7% 20% 1% 32% 31% ●(カナダ、メキシコ)G20 カナダ 693 7% 57% 14% 1% 11% 11% ●(米国)G20 メキシコ 315 6% 10% 3% 13% 57% 10% ●(米国)G20 ブラジル 591 17% 63% 3% 3% 11% 4% ●(アルゼンチン、ベネズエラ、パラグアイ等)G20 アルゼンチン 147 2% 28% 4% 8% 56% 1% ●(ブラジル、ウルグアイ、ペルー等)G20 EAS 日本 1020 10% 8% 3% 5% 39% 34% ×G20 EAS 中国 6495 7% 18% 4% 0% 3% 67% ●(ロシア、モンゴル、ベトナム、ミャンマー等)G20 EAS 韓国 572 3% 1% 26% 2% 21% 46% ×G20 EAS インド 1497 6% 9% 2% 1% 5% 76% ●(ネパール、ブータン）G20 EAS 豪州 259 10% 5% 0% 2% 21% 61% ×G20 EAS インドネシア 260 5% 7% 0% 9% 20% 58% ●(マレーシア）

EAS マレーシア 162 1% 15% 0% 1% 38% 45% ●(タイ、シンガポール）EAS ベトナム 190 0% 37% 0% 0% 23% 39% ●(中国、ラオス、カンボジア)

ー ー ー アジア太平洋 11463 7% 14% 4% 2% 12% 60% ーー ー ー 世界 25551 8% 16% 10% 3% 23% 38% ー

国際連系線発電電力量(tWh=10億kWh)

出所）BP Statistical Review of World Energy 2018フランス、ハンガリー、チェコのデータはIEA Electricity Information（※2015年データ） 15

Current Situation electricity supply mix across countries (2017)

Renew Hydro Nuclear Oil Gas Coal

7. We recognised the importance of promoting rules-based, open, transparent andcompetitive energy trade and investment markets to deliver resilient economic,energy security and environmental outcomes. We highlighted the need to promoteregional energy security, energy supply diversity, energy infrastructuredevelopment and the deployment of low-emissions technologies. We reiteratedthe importance of continued efforts toward improved energy access and affordabilityin order to address regional energy security and sustainability challenges.

9. We acknowledged the continued role of fossil fuels including natural gas andclean coal technologies in the region and called for deeper cooperation andconcrete efforts, including mobilisation of finance from a wide variety of sources,to contribute to the region’s growth, energy security and sustainable ecosystems.We also recognised the crucial role of natural gas in improving energy security andhelping the transition towards a low carbon future, and noted the importance ofhydrogen as low emission energy source and decarbonisation of transportationsector.

（URL：https://www.mofa.go.jp/mofaj/files/000420392.pdf）

16

Current Situation Needs for energy resilience &coal-fired power

East Asian Summit chairman’s statement (Nov 15th 2018)

CR: CO2 as a new energy resource / capture CO2 from power plants and factories / promote innovation to utilize CO2 as fuels or raw materials

CR contributes to improvement of energy access & responding to challenges of climate-change as well as securing new energy source.

Carbon Recycling

EOR

CO2 direct use

CCUS

利用Utilization

貯留Storage

回収Capture （溶接・ドライアイス等）

２．Fuels・微細藻類バイオ燃料（ジェット燃料・ディーゼル）

・CO2由来燃料またはバイオ燃料（メタノール、エタノール、ディーゼル等）

・ガス燃料（メタン）

１．Chemicals・含酸素化合物（ポリカーボネート、ウレタン等）・バイオ化学品汎用物質（オレフィン、BTX等）

４．Others・ネガティブ・エミッション（BECCS、有用水生植物等）

３．Mineral・コンクリート製品、コンクリート構造物・炭酸塩 等

Carbon Recycling

CO2 amount

2030年頃からの消費が拡大・化学品（ポリカーボネート等）・液体燃料（バイオジェット燃料等）・コンクリート製品（道路ブロック等）

Phase２

◆2030年から普及する技術の低コスト化◆安価な水素の調達が可能となる2050年以降に普及を見込む技術のうち、特に需要の多い汎用品の製造技術に重点化◆2050年以降のエネルギー・製品と同等のコストを目指す

CO2分離回収技術 低コスト化 現状の1/4 以下

Phase 3

◆あらゆる可能性を追求◆特に2030年頃の普及を見込む、水素を使わない技術や高付加価値製品を製造する技術に重点化

Technology Roadmap for Carbon Recycling

2050年頃から普及・化学品汎用品（オレフィン、ＢＴＸ等）・燃料ガス、液体

・コンクリート製品汎用品

2030年頃から普及・化学品（ポリカーボネート等）ポリカーボネートはCO2排出量の更なる削減

・液体燃料（バイオジェット燃料等）現状の価格から1/8~16程度に低コスト化

・コンクリート製品（道路ブロック等）現状の価格から1/3~5程度に低コスト化

Phase１

水素 20円/Nm3 （プラント引き渡しコスト）

◆更なる低コスト化に取り組む

Now 2030 2050-

17

Environmental context CCUS & Carbon Recycling (CR)

Coal-firedPower Plant CO2

Extra Electricityor Coal

H2 (Hydrogen)

Water-Splittingor Gasification

Carbon Capture

MethanationCO2+4H2 → CH4+2H2O

CH4(Methane)

Coal

EOR

Others

Gas Utility

CO2 Pipeline

Others facilities

Gas Pipeline

18

Environmental context Hydrogen & Carbon Recycling (CR)

We must invite more and still more disruptive innovations before it's too late.

CO2, ladies and gentlemen, could well be the best and most affordable resource for multiple uses.

There is artificial photosynthesis, for which a key discovery, one for photocatalysis, was made by Akira Fujishima, a Japanese scientist.

An old technology of methanation is getting attention anew to remove CO2.

It's time now to think about CCU, Carbon Capture AND Utilization.

Hydrogen, as both a primary source, and more importantly, a carrier of energy, must become cheaper and more easily affordable.

My government is aiming to reduce the production cost of hydrogen by at least 90 per cent by the year 2050, to make it cheaper than natural gas.

We will be inviting to Japan topmost experts in science and technology from G20 member countries to combine forces in accelerating innovations.

19

PM Abe’s speech at WEF annual meeting (Jan 23, 2019)

Environmental context CR as Japan’s priority investment area

Torrential rains in July 2018Downpour from typhoon #7 and rain front

Typhoon #21 in 2018Landed with very strong power and caused large-scale blackout mainly in Kansai district

Hokkaido Eastern Iburi earthquakeBlackout in entire Hokkaido area

Power failure: 80,000 houses (areas such as Chugoku/Shikoku）Note：To prevent heatstroke, 541 air conditioning units installed at evacuation sites. Staff of 352 sent from 4 power companies.

大阪府東大阪市

和歌山県田辺市

Power failure:2.4 million houses（areas such as Kansai/Chubu）

Note: More than 1000 utility poles went down, which required a long time for restoration.

From Other EPC’s63 high voltage mobile generators82 other vehicles341 workers

From other EPC’s40 high voltage mobile generators113 other vehicles377 workers

Power failure:2.95 million houses (entire Hokkaido area）Note：Large-scale blackout after the earthquake. Restart power stations one by one for recovery. However, due to severe supply/demand situation, saving of electricity requested.

From other EPC’s151 high voltage mobile generators217 other vehicles1706 workers

苫東厚真火力発電所

Typhoon #24 in 2018Moved across Japan causing power cutsin the whole country.

Power Failure: 1.8 million housesNote: The typhoon passed through Japanese Archipelago causing power cuts throughout the country, with severest damage on the western part of Shizuoka prefecture.

From other EPC’s10 high voltage mobile generators102 other vehicles201 workers 20

Resilience context Major Disasters Experienced in 2018

21

Ensure access to affordable, reliable, sustainable and modern energy for all• Target 7.1: By 2030, ensure universal access to affordable, reliable and modern energy services• Target 7.a: By 2030 enhance international cooperation to facilitate access to clean energy research and

technologies, including renewable energy, energy efficiency, and advanced and cleaner fossil fuel technologies, and promote investment in energy infrastructure and clean energy technologies

Build resilient infrastructure, promote inclusive & sustainable industrialization & foster innovation

• Target 9.1: Develop quality, reliable, sustainable and resilient infrastructure, including regional and trans-border infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all

Make cities and human settlements inclusive, safe, resilient and sustainable

Improving electricity access since 2000 has been largely achieved by fossil fuel, most notably, coal (45%). (IEA Energy Access Outlook 2017)

Japan, experiencing number of natural disasters, has rich knowledge on disaster-response and thereby securing energy resilience

Japan will share knowledge on energy resilience with other countries, hoping to establish “energy resilience” as an important international value of energy.

Energy resilience contributes SDGs goal 7, 9 and 11, thereby leading to sustainable development of the world.

Resilience as another important value of energyResilience context

Bilateral relationsWe confirm our intention to strengthen coordination on sustainable, affordable and secureenergy supplies, both globally and domestically, including the joint efforts towards a flexibleand transparent LNG market development as well as on energy innovation such as hydrogen,energy efficiency and renewable energy technologies, in support of transformation to lowcarbon energy systems. We also welcome working together to mobilise finance and improvethe market and investment environment with a view to enhancing sustainable energyaccess and resilience.（URL：https://www.mofa.go.jp/mofaj/files/000472828.pdf)

Working Party 4 Environment and Sustainable Development・Support of sustainable finance

The BRT believes that sustainable finance should be comprised of comprehensive initiatives that can encourage necessary investment in not only activities related to realizing a low-emissions society but also solutions to issues caused by urbanization and the enhancement of resilient infrastructure and associated services that are fundamental for our lives and social and economic activities as well as to realize an efficient and stable society with the appropriate energy mix. 22

Joint Declaration of Japan-EU summit (April 25th 2019）

Growing consensus on energy resilienceResilience context

Japan-EU Business Round Table recommendation (May 15th 2019)

Chapter 2. Long-term Vision of Each Sector and Direction of Policies and MeasuresSection 1. Policies and Measures for Emissions Reductions１．Energy(3) Direction of policies and measures for the future visionb. Thermal power（ｃ）Coal

The Government will work to reduce CO2 emissions from thermal power generation to realize a decarbonized society and consistent with the long-term goals set out in the Paris Agreement. In this regard, the Government will work to reduce reliance on coal-fired power generation as much as possible by fadeout inefficient coal-fired thermal power generation.

Chapter 3: Cross-sectoral Measures to be FocusedSection 3: Business-led promotion of Int’l Application, and Int’l Cooperation1. Current Status(4) Investment in Climate Change Measures by Private Finance, Including Use of Public Funds

The potential of climate change measures is particularly vast in developing countries where demands for infrastructure are expanding. Bearing in mind that enhanced resilience by introducing sustainable and resilient infrastructure will improve the investment environment for the private sector, it is also important, in the context of international cooperation, for the private financial flow towards addressing climate change issues in developing countries to activate.（URL：https://www.env.go.jp/press/111781.pdf） 23

Japan’s Long-term Strategy under the Paris Agreement （Cabinet Decision, June 11th 2019）

Importance of coal & energy resilience in JP policyResilience context