Whether in the form of regulatory frameworks like the EU Taxonomy or investment incentives like the Inflation Reduction Act, Net Zero Industry Act or Japan's Green Transformation (GX) strategy, governments have a responsibility to ensure sufficient capital is directed towards the transition to a net zero economy.

So too do banks and other financial institutions have a key role to play in financing the energy transition. Financial institutions have an important gatekeeping role in capital allocation and steering the real economy's emissions profile through their lending and investment decisions. Transition finance provides a pragmatic framework for responsibly exercising this function.

We believe transition finance is the most prudent approach to mitigate the climate risk on our own balance sheet. We also view it as our responsibility to support the management of the risks associated with the energy transition as best we can, from today until 2050 and beyond.

The Japanese government, in cooperation with the private sector, aims to provide a cumulative $1trn in transition finance over the next 10 years – known as the GX strategy – as part of its net zero commitments. To support this, MUFG is engaging with clients on transition strategies for the whole economy. This is particularly relevant for hard-to-abate sectors, like energy and heavy industry. If banks divest from these sectors, who will help them to decarbonise?

Japan's GX strategy

The energy sector represents 50% of emissions in Japan, which is why MUFG is supporting JERA, Japan's largest power company, as the company leads the way towards a low-carbon society. JERA plans to expand its renewable energy capacity, establish grid-scale battery storage and build thermal power plants.

Specifically, JERA is exploring offshore wind projects in Hokkaido, Aomori and Akita, and is involved in the Gunfleet Sands offshore wind farm project in the UK and Formosa 1-3 in Taiwan. It is also investing in renewable companies abroad, including ReNew Power Ltd. in India and Aboitiz Power Corporation in the Philippines.

We refer to this continuous dialogue we have with our clients as transition planning. Ever since the Glasgow Alliance for Net Zero (Gfanz) published its first Transition Planning Guide in November 2022, many financial institutions have engaged in an intense process of supporting transition planning with a view better to formulate transition strategies for individual institutions.

Some criticise the imbalance of attention paid to each of the components that make up ESG and the greater focus that is often given to the E. However, the carbon-intensive energy and industrial sectors require a fundamental transformation to achieve the goals outlined in the Paris Agreement. Without a fundamental reform of the global energy system, we will not be able to decarbonise those sectors that fuel our economies today, and we will fail to stay below 1.5°C of global warming.

Energy and industrial sectors

This is particularly the case for many countries across Asia. The energy and industrial sectors account for around half of total emissions in the Asian economy, and so the decarbonisation of these sectors must be a first-order priority. This will require investment in infrastructures like carbon capture, carbon storage and hydrogen; wind farms and solar investment alone will not suffice. If Asia does not realise net zero, then neither will the rest of the world. Banks like MUFG, with a broad geographical footprint in local markets, are well-placed to support the energy transition that is necessary to tackle climate change.

It also requires a deep understanding of available technologies and dialogue between policymakers, society and the private sector about whether current assumptions, methodologies and technologies will enable us to get to net zero in a feasible manner – that banks can finance.

The success of the financial sector's net zero strategy ultimately depends on governments, corporations and financial institutions making well-informed decisions about the most effective and impactful way to deploy capital to enable the net zero transition. The public and private sectors must work together to deliver transition finance to where the emissions are.

Ultimately, having a plan, despite imperfections, is better than having no plan at all.

This article was authored by Anne-Karien von Fumetti, Head of Regulatory Policy EMEA, European Regulatory Affairs Office, MUFG. It was published in Capital Monitor.