C-2022-001-1WE

The Tokyo Foundation for Policy Research’s CSR White Paper 2022 points to the challenges ahead in reaching Japan’s goal of achieving carbon neutrality by 2050.

About the White Paper

The Foundation has been conducting an annual survey of CSR activities among Japanese companies since fiscal 2013 and publishing a white paper that includes not only a detailed analysis of the survey results but also commentary on the findings by experts and case studies of CSR initiatives by Japanese companies.

Climate change has a prominent place among the societal issues the corporate sector is addressing. The questionnaire survey conducted by the Foundation for the 2021 CSR White Paper found that 76% of responding companies cited “climate change and disasters” as key issues affecting society, indicating that businesses view environmental issues as a pressing concern. During a policy speech in October 2020, then Prime Minister Yoshihide Suga declared Japan’s goal of achieving carbon neutrality by 2050, with concrete steps toward decarbonization being announced at the virtual Leaders Summit on Climate—hosted by US President Joe Biden in April 2021—and in the Sixth Strategic Energy Plan issued in October.

Since June 2021, companies listed in the Prime section of the Tokyo Stock Exchange have been required to disclose climate-related information in accordance with the standards established by the Task Force on Climate-related Financial Disclosures. This has compelled many firms to prioritize the gathering of environmental data and implementation of related measures. Given that many environmental standards adopted by the European Union, such as the Carbon Border Adjustment Mechanism and the EU Taxonomy for sustainable activities, could eventually become global standards and that the conflict in Ukraine has exposed Japan’s need to strengthen its energy security, Japanese companies will be compelled to increasingly shift to domestically produced clean energy sources.

For these reasons, this year’s CSR White Paper focuses on carbon neutrality and measures to facilitate the shift to renewable energy. We surveyed companies on their decarbonization efforts and asked experts and practitioners to discuss specific, relevant themes likely to be of interest to the business sector. The White Paper also introduces specific corporate case studies and, in a separate supplement, outlines a number of model decarbonization initiatives.

Major Decarbonization Themes

1. Formulating Carbon Neutral Strategies

Results of the Questionnaire Survey

The survey found that 51% of responding companies have already established some kind of carbon neutrality plan or target and are taking measures, with another 23% reporting they are currently developing a plan or target.

As to the reason for considering carbon neutral initiatives, the highest share, at 61%, cited the aforementioned October 2020 announcement by Prime Minister Suga. This was followed by 20% to 30% that pointed to the adoption and entry into force of the Paris Agreement in 2015 and 2016. With its head start, the latter group was more likely to have established plans and targets and taken concrete action, while the group that only recently began giving serious attention to this issue was still in the process of exploring measures and strategies.

Tellingly, only around a third of surveyed companies regarded carbon neutrality as a business opportunity or potential market, as gleaned from their responses to various questions. A large majority saw it, instead, as a social responsibility they felt compelled to fulfill.

Another key factor in advancing carbon neutrality is corporate governance. Companies with departments dedicated to environmental issues or where senior management takes the lead in addressing such issues are more likely to be implementing initiatives under a decarbonization strategy. In addition, 42% of companies that have adopted carbon neutral measures have made alterations to their governance structures, either setting up a dedicated department or enabling management to exert leadership in implementing company-wide initiatives.

Expert Commentary and Case Study

Japan’s National Institute of Science and Technology Policy (NISTEP) conducts a large-scale survey of anticipated science and technology developments every five years. Recent surveys have analyzed not only major technology trends but also developments in the basic sciences and the social and economic needs that science and technology must keep in mind. The latest NISTEP survey, conducted in 2019, is based on four components: horizon scanning to collect research-related insights from the websites of major domestic research institutes using AI technology; visioning workshops attended by experts from a wide variety of backgrounds on the desirable society of the future; an S&T perspectives questionnaire of 5,352 experts in each scientific and technological field; and scenario planning in each of the key domains gleaned from the questionnaire.

Among the topics covered were technologies that could contribute to carbon neutrality, such as those relating to hydrogen, renewable energy, and energy storage. Scores were assigned for importance and competitiveness, and policy measures needed for the technology’s development and realization in society were identified. The findings were analyzed both quantitatively and qualitatively, revealing which scientific and technological areas should actively be promoted.

Companies have been implementing a variety of initiatives to reduce CO₂ emissions, but in the future, completely new approaches from different angles will be needed, not just extensions of existing measures. Social change and future technological developments may bring about unexpected problems and impacts, and efforts to raise the interest of individuals, in addition to corporate entities, will be required.

Ishii Zouen is a small but socially engaged company in the city of Yokohama whose main line of business is landscape gardening and civil engineering. It has been implementing decarbonization initiatives from an early stage and has a strong track record, as attested by its many local and international awards. Ishii Zouen’s case study highlights the need to gain insights from corporate initiatives on an ongoing basis and to align them with core business operations to ensure their sustainability.

2. Calculating Value Chain Emissions

Results of the Questionnaire Survey

When asked about issues in achieving carbon neutrality, the highest share of companies implementing measures toward such a goal, or 67%, selected “difficulty in coordinating carbon neutral initiatives with the upstream and downstream supply chain.”

On a question about 2030 and 2050 reduction targets for greenhouse-gas emissions, only 18% said that they are already taking measures to achieve a scope 3 target for 2030, considerably lower than the 56% for scope 1 and 53% for scope 2 emissions. On the other hand, 58% said that they were planning or considering such measures, indicating that while many companies are interested in reducing scope 3 emissions across the value chain, they have not yet taken concrete steps to do so.

Companies whose environmental policy is guided by a dedicated department or top management were found to be likelier to have established or plan to establish a scope 3 target. This is because meeting such targets necessitates the participation of all corporate departments, not just those involved in CSR or sustainability, and requires a corporate structure whereby total emissions can be centrally managed.

Expert Commentary and Case Study

Under the GHG Protocol’s Corporate Accounting and Reporting Standard, double accounting of emissions is often inevitable for scope 3, although it is avoided in principle within either scope 1 or scope 2.

The scope 3 standard sets forth five principles, namely, relevance, completeness, consistency, transparency, and accuracy. Where these principles come into conflict with one another, companies are called upon to balance the trade-offs between these principles depending on their individual business goals, with the expectation that the accuracy and completeness of scope 3 GHG data will increase over time.

The rise of digital life cycle assessment platforms using the latest primary data provided by suppliers has spawned the misconception that scope 3 accounting is only possible after all pertinent LCA data has been acquired. In fact, LCAs may not be required for scope 3 accounting. When facility-level primary data is unavailable, companies can attain rough estimates of total emissions using secondary data, combining these, where possible, with available primary data. Rather than insist that they cannot begin scope 3 accounting because they lack facility-level LCA data, companies can first grasp the big picture and then strive for more granularity over time.

Sumitomo Metal Mining is among the minority of companies that regard the goal of carbon neutrality as a business opportunity, having pioneered a method of recycling rechargeable batteries and actively engaging with industrial alliances to ascertain its emissions across the value chain.

3. Introducing Carbon Pricing

Results of the Questionnaire Survey

Asked about conditions that would facilitate efforts toward carbon neutrality, 42% of responding companies cited the introduction or expansion of carbon pricing schemes.

But when questioned about the desirability of commonly employed schemes—carbon taxes, emissions trading, and carbon credits—the shares claiming they “don’t know” if they would support such measures were quite high: between 30% to 40% for each scheme. The results suggest that while companies realize that carbon pricing would be helpful, they are somewhat unclear about how they should make use of such systems.

Moderate shares of companies said they rely on renewable energy credit systems, such as green power certificates (13%), FIT nonfossil certificates with tracking (14%), and J-credits (6%).

Expert Commentary and Case Study

Businesses are nearing a turning point in their approach to decarbonization. Under carbon pricing, companies are expected to shift from a defensive posture of conventional pollution control to a model of environmental and low-carbon management that generates new value using carbon as an asset.

There were three key features in the response of South Korean businesses after the Korea Emissions Trading Scheme was introduced in 2015 as Northeast Asia’s first nationwide cap-and-trade program.

The first was a change in the perception of carbon-pricing costs. Initially, companies had viewed emissions limits as a liability and compliance measures as additional costs. But companies that succeeded in reducing emissions soon realized that selling surplus allowances on the carbon market enabled them to generate income, reduce debt, and even turn a profit.

The second was top-down support for bottom-up initiatives. The introduction of emissions trading schemes made emissions reduction a key item on corporate agendas, deepening management’s interest and understanding of carbon pricing. Dedicated units were formed, developing proactive proposals for decarbonization. With support from top management, these initiatives translated into highly effective measures for controlling carbon emissions and navigating the carbon market.

And the third was internalization of carbon pricing. This entailed the quantifying of business risks and opportunities of climate change and identification of the economic costs and benefits of reducing GHG emissions, leading to a positive impact on innovation and management.

Carbon pricing does not necessarily generate additionalities or lead in itself to the creation of new renewable energy sources. But as Fujitsu General’s efforts to achieve 100% renewable energy shows, carbon pricing can be a useful tool in achieving carbon neutrality by supplementing in-house power generation systems and power purchase agreements.

Looking Ahead

The Foundation’s questionnaire survey was conducted only a year after Japan announced its 2050 carbon neutral target, when many companies were still in the midst of formulating a vision and roadmap toward this goal. A follow-up survey will be needed when a clearer picture emerges of how Japan and Japanese companies are navigating their way toward carbon neutrality in the context of international trends. The choice companies make to approach this issue either as a business opportunity or as part of their social contributions has great significance from a CSR perspective, and their activities in the years ahead with the anticipated development of carbon markets bear close watching.