Greening the Economy Can Grow the Economy – Nomura Connects

Report on Japan’s Green Transition and Alignment with Sustainable Development Goals

Executive Summary

This report outlines the critical need for private sector engagement to achieve Japan’s ¥150 trillion Green Transition (GX) target. Achieving this goal is fundamental to the nation’s progress on multiple Sustainable Development Goals (SDGs), particularly SDG 13 (Climate Action), SDG 7 (Affordable and Clean Energy), SDG 8 (Decent Work and Economic Growth), SDG 9 (Industry, Innovation, and Infrastructure), and SDG 17 (Partnerships for the Goals). Analysis from industry leaders indicates that while the government has initiated funding, a substantial investment gap must be filled by private capital. Success hinges on reframing GX investments as drivers of economic growth, overcoming commercialization challenges in hard-to-abate sectors, and implementing supportive financial and policy frameworks.

The Imperative for Private Sector Investment in Achieving SDG 13

The Japanese government’s GX initiative aims to foster a low-carbon economy while ensuring stable energy and economic growth, directly addressing SDG 13 and SDG 8. However, a significant funding disparity threatens this objective.

• Government Target: A ¥150 trillion investment is required for the national green transition.
• Public Funding: The government has committed an initial ¥20 trillion through GX economy transition bonds.
• Investment Gap: The remaining ¥130 trillion must be urgently sourced from the private sector.
• Economic Rationale: According to Tomohisa Murakami of Nomura Securities, private companies and market participants must be convinced that GX investments will drive Japan’s economic growth to accelerate capital flow. The capital markets, especially the bond market, are identified as essential financing channels.

Industry Case Study: The Steel Sector’s Contribution to SDG 9 and SDG 12

The steel industry represents a critical sector for decarbonization, with its efforts directly impacting SDG 9 (Industry, Innovation, and Infrastructure) and SDG 12 (Responsible Consumption and Production). Hiroyuki Tezuka of JFE Steel Corporation detailed the company’s innovation and the associated challenges.

1. Research & Development Initiatives: JFE Steel is pursuing multiple decarbonization pathways, including the use of hydrogen instead of coal for iron production and the installation of innovative electric arc furnaces.
2. Contribution to SDG 7: The company is developing ultra-high performance electrical steel sheets that enhance the efficiency of Electric Vehicles (EVs) and reduce transmission loss in power grids, contributing to clean energy infrastructure.

Key Challenges to Commercial Viability

• Profitability and Sustainability: Mr. Tezuka emphasized that for any green technology to be sustainable, it must generate profit and requires predictable cash flow for a minimum of 20 years to justify commercial-scale investment.
• The Green Premium: A major concern is that low-carbon production methods, such as using hydrogen to create green steel, are expensive but do not change the steel’s intrinsic value. This puts green products at a market disadvantage.
• Societal Cost-Sharing: As society is the ultimate beneficiary of reduced CO2 emissions, it is argued that mechanisms must be established for society as a whole to share the associated costs, moving beyond what a single company can achieve.

Financial Mechanisms and Partnerships for the Goals (SDG 17)

Mobilizing the necessary capital requires innovative financial models and robust public-private partnerships, a core tenet of SDG 17. Yutaka Naito of BlackRock highlighted the importance of blended finance and aligning investment schemes with GX objectives.

• Blended Finance Models: Public-private partnerships are essential to de-risk investments and attract private capital. The Financing Asia’s Transition Partnership (FAST-P) in Singapore was cited as a successful model, where catalytic public funds absorb first-loss risk to mobilize larger pools of commercial capital.
• Aligning Retail Investment: A proposal from the Japan Asset Management Forum suggests aligning the NISA tax exemption scheme with GX. By creating a designated GX index for NISA investments, individual savings could be channeled towards significant decarbonization projects.

Policy Recommendations and Framework for a Sustainable Future

Achieving the GX target and related SDGs requires a comprehensive national strategy that transforms markets and investment mindsets.

1. Expand Green Markets: The government must scale up pilot programs that support green products. This includes expanding the prioritization of green steel in public procurement and increasing subsidies for consumers purchasing products like Clean Energy Vehicles made with green materials.
2. Establish a National Framework: A national policy is needed to support long-term GX investment. This framework should help define appropriate returns and ensure stable cash flows to reduce investment risk for private companies.
3. Shift Investment Mindset: A fundamental contradiction exists between the market’s pressure for short-term shareholder returns and the long-term nature of GX investments. Public sector leadership is required to champion the strategic importance of long-term sustainable investment.
4. Promote Global Leadership: By taking the lead in green technology, business models, and investment mechanisms, Japan can export this framework globally, fully realizing the connection between the green transition and national economic growth, in line with SDG 8.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article discusses Japan’s green transition (GX), focusing on the financial and industrial strategies required to achieve a low-carbon economy. This connects to several Sustainable Development Goals (SDGs) that address climate change, economic growth, industrial innovation, and partnerships.

• SDG 7: Affordable and Clean Energy

  The article’s focus on a “shift to a low-carbon economy with a stable energy supply” and the development of technologies like “ultra-high performance electrical steel sheets” that “reduce transmission loss in power grids” directly relates to improving energy efficiency and promoting cleaner energy systems.

• SDG 8: Decent Work and Economic Growth

  A central theme is the need to achieve the green transition “while maintaining economic growth.” The article repeatedly emphasizes that “GX investments will drive Japan’s economic growth,” linking environmental sustainability directly to economic prosperity and development.

• SDG 9: Industry, Innovation, and Infrastructure

  The article heavily features the challenges and innovations within the steel industry, a key industrial sector. It details investments in “R&D and some small-scale pilot projects to reduce CO2 emissions,” such as using “hydrogen instead of coal” and installing “innovative electric arc furnaces.” This highlights the goal of upgrading industries with sustainable and clean technologies.

• SDG 12: Responsible Consumption and Production

  The discussion on creating markets for “green materials and products,” specifically “green steel,” aligns with this goal. The article mentions policy measures like “public procurement of goods… that prioritizes the use of green steel” and subsidies for “Clean Energy Vehicles using green steel,” which are designed to promote sustainable production and consumption patterns.

• SDG 13: Climate Action

  This is the most prominent SDG addressed. The entire article revolves around Japan’s efforts to “achieve Carbon Neutrality” and “reduce CO2 emissions.” The government’s 150 trillion yen target for the GX is a direct national strategy to combat climate change.

• SDG 17: Partnerships for the Goals

  The article underscores the critical need for collaboration. It calls for “public–private partnerships” (blended finance) to mobilize the necessary capital, citing the government’s 20 trillion yen investment as a catalyst for a much larger private sector contribution. The mention of Singapore’s FAST-P initiative also serves as an example of partnership models to achieve common goals.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the issues discussed, several specific SDG targets can be identified:

1. Target 7.3: Double the global rate of improvement in energy efficiency.

   This target is connected to the development of “ultra-high performance electrical steel sheets” which are designed to “reduce transmission loss in power grids,” directly contributing to increased energy efficiency.

2. Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading and innovation.

   The article’s argument that “GX investments will drive Japan’s economic growth” through technological innovation in sectors like the steel industry directly aligns with this target of decoupling economic growth from environmental degradation through technological advancement.

3. Target 9.4: Upgrade infrastructure and retrofit industries to make them sustainable… with greater adoption of clean and environmentally sound technologies.

   JFE Steel Corporation’s efforts to reduce CO2 emissions by investing in “hydrogen instead of coal to produce iron and installing innovative electric arc furnaces” are a direct example of retrofitting a major industry with cleaner technologies to make it sustainable.

4. Target 12.7: Promote public procurement practices that are sustainable.

   The article explicitly mentions a policy measure that supports this target: “the guidelines for public procurement of goods published in this year by Ministry of Environment now include a list that prioritizes the use of green steel.”

5. Target 13.2: Integrate climate change measures into national policies, strategies and planning.

   The Japanese government’s announcement of a “150 trillion yen ($1 trillion) target” to achieve a green transition is a clear example of integrating climate action into national economic and industrial policy.

6. Target 17.17: Encourage and promote effective public, public-private and civil society partnerships.

   The article’s core message is the need for the private sector to fund the majority of the 150 trillion yen transition, which is a massive public-private partnership. The discussion of “blended finance” and the FAST-P initiative in Singapore are cited as models for such partnerships.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

The article mentions or implies several quantitative and qualitative indicators for measuring progress:

• Total investment in the green transition:

  The article provides a clear financial indicator: the “150 trillion yen ($1 trillion) target.” Progress can be measured by tracking the amount of public (“20 trillion yen in upfront investment”) and private capital mobilized towards this goal.

• CO2 emissions reduction in industry:

  While not providing specific numbers, the article implies that a key indicator is the reduction of CO2 emissions from industrial processes, such as steel manufacturing. The success of pilot projects using hydrogen or electric arc furnaces would be measured by their impact on emissions.

• Adoption of green products and materials:

  Progress can be measured by the market adoption of green products. The article suggests tracking the use of green steel in “public construction projects, consumer appliances, and vehicles” and the uptake of subsidies for “Clean Energy Vehicles using green steel.”

• Development of sustainable financial mechanisms:

  The creation of new financial products, such as a “GX index” for Japan’s NISA tax exemption scheme, would be an indicator of progress in channeling individual investments towards decarbonization projects.

• Implementation of sustainable public policies:

  The existence and scope of policies like the “guidelines for public procurement of goods that prioritizes the use of green steel” serve as a direct indicator of government action and commitment.

4. Table of SDGs, Targets, and Indicators

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