Japan’s Capital Market is Exposed to Nature-Related Risks: Research

Japan’s capital market and companies face moderate to high dependency on nature, especially the energy sector and the food, beverage and tobacco sector.

The data released by the Asia Investor Group on Climate Change (AIGCC) shows that public equities in Japan are particularly exposed to nature-related risks, with 18%, or US$938 billion, of the local stock market’s capitalisation comprising companies in sectors with a higher direct dependence on nature.

For example, the energy sector in Japan comprises 5.5%, or US$284 billion, of Tokyo Stock Exchange’s (TSE) total market capitalisation. Energy companies, especially in the integrated oil and gas industry, are highly dependent on ground and surface water. Given Japan’s robust trade activity in energy imports, Japan is also exposed to nature risks and opportunities in other markets.

Overall, 20%, or US$6.72 trillion, of Asia Pacific’s Gross Value Added (GVA) is in economic sectors are highly directly dependent on nature. This includes reliance on fertile soils, clean water, pollination, and climate stability, all of which are in serious decline in many parts of the region. Comparatively, Japan’s GVA with higher dependency on nature is at 12%, or US$603 billion.

For example, the Food, Beverage, and Tobacco sector in Japan makes a high relative contribution to its GVA (2.9%), compared to APAC (2%) and global figures (1.9%). Companies in this sector are highly reliant on surface and groundwater as a direct input for the production process. A loss of these ecosystem services would lead to a critical disruption of production processes.

The differences between Japan and APAC can be attributed to Japan’s lower exposure to the agricultural sector, compared to APAC. Japan’s economy is relatively less reliant on the agricultural sector, with the sector accounting for 0.9%, or US$44 billion, of the economy’s GVA,

In APAC, the agricultural sector contributes to 5.3%, or US$1.78 trillion of the region’s GVA. However, Japan’s sectors have a higher percentage of moderate dependency (38%) on nature compared to APAC overall (33%).

Japan’s Progress in Managing Nature-Related Risks

The Japanese government and corporates and investors in Japan have started to address nature degradation and mitigate nature-related risks. Japanese companies make up the largest cohort of early adopters of the Taskforce on Nature-related Financial Disclosures (TNFD), accounting for 25% of early adopters globally.

Japan has also established a TNFD consultation group, co-convened by Keidanren Committee on Nature Conservation (KCNC), Norinchukin Bank, and MS&AD Insurance Group, to bring together private sector organisations to discuss nature-related business and finance issues and the future adoption of the TNFD framework.

AIGCC Director of Investor Practice, Monica Bae said: “Japan’s economy, like others across Asia-Pacific, is deeply reliant upon healthy ecosystems. Nature loss translates to financial risk, and it’s a threat we can’t afford to ignore. New analysis in the Japan edition of our Nature at a Tipping Point report offers a critical first step for Japanese investors to assess how ecosystem decline can impact their portfolios.

 “Transitioning to a nature-positive future unlocks vast opportunities for investors. By proactively integrating nature-related risks into their investment strategies, Japanese investors can position themselves to thrive in a sustainable and resilient future. AIGCC commends the early actions that Japanese policymakers, investors and companies have taken thus far. And we actively support them in their journey by advocating for policies that promote nature-positive practices and encouraging investment in nature-based solutions.”