MUFG’s take on a net-zero Japan

There are two reasons MUFG’s latest transition white paper, released on September 22, is interesting. One: it’s thorough, a 182-page study of how Japan will meet its commitment to hit net zero by 2050. But two: look at the size of the bank! It has a $3 trillion balance sheet; its exposures cover every sector and every kind of client.

As MUFG itself says, the size of its loan book means that its balance sheet reflects the economies of Japan, Asia and the rest of the world.

Given that scale and reach, the bank’s conclusions on what needs to be done by commercial banks to assist with getting to net zero are worth examining. Japan has a clear plan for transition, known as the GX Basic Policy, filled with 10 years of action plans and roadmaps, but it won’t get far without commercial banking onside.

The obvious answer, MUFG asserts, is to provide new money to support emissions reduction. “The money needs to flow where emissions are,” the bank says.

This is not always a popular view: many banks that continue to lend to high-emission areas catch flak for it and get accused of greenwashing. But the truth is that alternative energies will only get us so far in the net-zero journey, and polluters must be engaged to help them shift their models.

“Our clients’ emissions reduction is our emissions reduction,” says MUFG.

And it goes further, arguing that the idea of cherry-picking certain sectors or divesting its existing exposures for the purpose of achieving carbon neutrality is merely “paper decarbonization”.

Instead, it says, the bank must engage through the origination lifestyle. That means understanding transition plans, identifying financing opportunities, and then the rest of the classic lending model. It argues that commercial banks have an outsized role and responsibility to finance the net-zero transition, and that capital reallocation in the secondary market just isn’t the same.

MUFG says one of the most pressing questions it faces is how to finance the development of technologies, particularly those that require a lot of capital to get moving. It says it is committed to providing that funding, so long as the technologies are going to be economically viable.

For this, MUFG uses what it calls a business viability lens, with three components: legitimization; incentivization; and evidence with integrity.

Legitimization means, in effect, the rules: the framework to encourage the private sector to respond to climate change through binding regulation. That might mean an emissions trading scheme or a carbon tax. Legitimization might mean increasing the mixing amount of hydrogen-based or biogenic fuel, for example, and it increases awareness and predictability among stakeholders.

Incentivization means attracting external capital. That might indicate the use of public funds for the roll-out of new technologies that will contribute to carbon neutrality. In practical terms, Japan’s GX economic transition bonds are an example, a Y20 trillion debt capital markets programme to support capital mobilization towards transition finance.

It can also mean tax credits or financial assistance to address the cost disadvantages of cleaner technologies. That gives banks a clearer picture of the financial viability of a new technology by providing more predictable future cashflows.

‘Evidence with integrity’ refers to monitoring and reporting a company’s commitments to carbon neutrality: providing evidence of emissions reductions, for example. What banks can monitor, they can have confidence in financing. The evidence also rolls through to the bank’s own disclosed finance emissions.

All of this speaks to the need for policy and financial support at the government level, and in this respect, Japan is already some way along. The country’s energy transition strategy mobilizes renewable-energy deployment, the technology for hydrogen-based fuels, and (rather more controversially) nuclear power.

It promotes the repurposing of coal-fired power plants and the ramp-up of carbon capture, utilization and storage (CCUS) technologies, which will help to keep the electricity supply affordable and stable while emissions reduce.

So, if the government is keeping its side of the bargain, what about private finance? MUFG likes to paint itself as a facilitator here, identifying linkages and interdependencies between industries and then creating markets around them, de-risking the technologies that can help them move to lower emissions.

Then it says it will help markets to scale up by providing debt and lending, including corporate and project financing. And then, hopefully, the market achieves sufficient maturity for rollout, at which point underwriting skills become useful to mobilize private capital from international markets.

Being some sort of a show-running powerbroker isn’t enough, of course – MUFG needs to be lending money right now, and to be fair, it appears to be. It says it provided financing for renewable-energy projects worth $55 billion between the 2010 and 2021 financial years, equivalent to about 210 million tons of CO2 emissions, which in turn is roughly equivalent to the annual emissions of Spain.

It has committed to providing a cumulative Y35 trillion in sustainable financing by 2030 (it was up to Y14.5 trillion by 2021). And it is actively pursuing floating offshore wind projects requiring technological innovation.

But perhaps the bigger impact will truly be the dialogue side: trying to get high-polluting clients to do something different. MUFG says it is focused on materials and energy as priorities. Using the MUFG balance sheet to effect change rather than to maintain the status quo will be tricky to measure. But it is what banking will ultimately be judged by.