This paper examines the emergent role of sustainable finance and investment in Japan and scrutinises the need for the Japanese financial system to mitigate growing climate risks and support the transition of the Japanese economy to a low-carbon, sustainable pathway. It first illustrates Japan’s exposure to physical and transitional climate risks, before reviewing the developments and emerging practices in sustainable finance. These include the growing importance of environmental, social, and governance (ESG) criteria in financial decision-making; more rigid reporting and disclosure standards; the development of a green bond market; and the growing importance of sustainable lending by the banking sector. The paper also assesses the role of policies and regulations in scaling up sustainable finance and low-carbon infrastructure investments in Japan. Subsequently, it analyses transitional climate risks via scenario analysis, applying the Paris Agreement Capital Transition Assessment (PACTA) tool to examine the exposure of sub-sectors of the Japanese equity market over several of the International Energy Agency’s climate scenarios. The paper concludes with policy recommendations for aligning Japan’s financial sector with sustainable development and net-zero carbon emission goals.
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