Think tank urges Japan to ditch market neutrality to fight greenwashing

Japan’s central bank should establish a green collateral framework and revise its green investment directions, it said.

A think tank has urged the Bank of Japan (BOJ) to abandon its supposedly “market neutral” approach to shift financial flows from environmentally damaging activities.

In a briefing, UK-based Positive Money argued that “market neutrality” favors dominant sectors, many of which are high carbon.

“The Bank of Japan’s faith in markets to lead the green transition has caused an overdependence on voluntary initiatives, which won’t meet the speed or scale of action needed to effectively address the climate and nature crises,” said Joe Herbert, senior researcher at Positive Money.

It laid out a four-step plan for Japan’s central bank and chief financial regulator to redirect finance towards green projects such as renewable energy infrastructure.

This includes the BOJ revising its Climate Response Financial Operations to stop enabling greenwashing, particularly in enabling financial firms to decide what counts as a green investment.

Positive Money also recommended that the BOJ establish a green collateral framework, where it won’t accept “dirty assets” connected to fossil fuel expansion as collateral against loans to financial firms.

It also recommended that the BOJ set climate-resilient stewardship and portfolio strategies, and for the BOJ to shift into a “double materiality” approach.

In the latter, the BOJ is called to recognise the role of the financial system in shaping climate risks rather than only looking at the risks that climate change poses to the financial system, Positive Money said.

“The BOJ must move away from its ‘market neutral’ approach, which in reality implicitly favours environmentally-destructive sectors, and move towards a ‘double materiality’ approach, which properly factors in the financial sector’s contribution to environmental breakdown, and seeks to curb it,” Herbert said.

Positive Money said that the BOJ and the Financial Services Agency (FSA) underperformed against their counterparts in the ASEAN+3 when it came to integrating environmental considerations into their work.  Japan ranked sixth out of the 13 countries assessed, Positive Money said.

It also argued that the BOJ can integrate environmental measures into existing operational framework, as the environmental measures are already required as part of financial stability risk management.