TOKYO REPORT: Japan Strives to Sustain ESG Investment amid Global Retreat

Tokyo, Dec. 22 (Jiji Press)–As the pursuit of sustainable economic growth becomes a pressing global challenge, ESG investment, an approach that incorporates nonfinancial elements such as environmental performance, social responsibility and corporate governance into investment decisions, has reached a critical juncture. Momentum behind ESG investment has faltered in recent years. The second administration of U.S. President Donald Trump adopted an adversarial stance toward the concept, while even in Europe, long regarded as the driving force behind ESG initiatives, policy support has shown signs of being rolled back. Yet the fundamental importance of ESG from a long-term investment perspective continues to grow. In Japan, key stakeholders including corporations and industry groups are pushing back against the global headwinds and working to make ESG investment a pillar of sustainable growth. Fund Outflows Global ESG investing gained real momentum after the United Nations launched the Principles for Responsible Investment framework in 2006, encouraging investors to factor environmental, social and corporate governance issues into their decisions. In Japan, interest in ESG investment accelerated following the introduction of the Stewardship Code in 2014 and the decision by the Government Pension Investment Fund to sign the PRI. In recent years, however, the growth of ESG-branded funds has stalled. According to Daisuke Motori, head of research at Morningstar Japan Inc., outflows from sustainable investment funds exceeded inflows by 125.8 billion yen between July and September 2025. This marked the 13th consecutive quarter of net outflows for ESG-related funds in Japan. “Funds labeled as ESG are facing severe situations in terms of relative performance (compared with other funds),” said Tamami Ota, head of ESG research at the Financial and Capital Market Research Department of Daiwa Institute of Research Ltd. Global Trend Since the inauguration of the second Trump administration, efforts to combat climate change and promote diversity, equity and inclusion, or DEI, have been scaled back in the United States. Concerned about political backlash, many companies have also wound down or quietly abandoned their ESG initiatives. Even Europe, long a global leader in ESG, is showing signs of fatigue. Governments there have begun relaxing certain environmental regulations in a bid to maintain industrial competitiveness. Russia’s invasion of Ukraine has intensified worries about energy security and has fueled calls for greater self-reliance in both security and economic policy. ESG regulations often mean “higher short-term costs for companies, due to capital investment and the development of internal systems,” said Junichi Sakaguchi, chief responsible investment officer at Sumitomo Mitsui DS Asset Management Co. Overly stringent rules push up costs and become a heavy burden, especially for small and midsize enterprises. At the same time, Sakaguchi recognizes a notable shift in Western policy. “In recent years, Europe and the United States have adopted a more transition-focused approach,” he said. “Rather than excluding electric power and steel companies because of their high carbon dioxide emissions, they are encouraging capital investment that helps these sectors reduce their emissions.” Commenting on this change, Ota said they “have returned to a considerably more realistic approach.” Despite the anti-ESG sentiment gaining ground overseas, the impact on Japan is expected to be limited. Instead, attention is increasingly turning to how individual Japanese companies will pursue their own ESG strategies. Planning and Execution Ability Sakaguchi noted that Japanese companies have now entered a “phase of viability” in their ESG efforts. In his view, it is no longer sufficient for companies to simply announce policies and targets; they must also clearly demonstrate whether they are carrying out their short-term plans and disclose concrete evidence of progress. This shift is taking place against the backdrop of Japan’s pledge to achieve carbon neutrality by 2050. In October 2020, then Prime Minister Yoshihide Suga declared that Japan would aim to reduce domestic greenhouse gas emissions to effectively zero by 2050. To contribute to the goal, companies are expected not only to publish their long-term reduction policies and numerical targets, but also to provide up-to-date information on the status of their ongoing initiatives. Additionally, it is becoming increasingly important for investors to establish clear sustainability criteria linked to the long-term enhancement of corporate value, to engage actively with companies on the basis of these criteria and reflect the outcomes of such dialogue in their voting behavior. Ota emphasized that companies need to “keep a constant eye on global trends and ESG-related government policies in every country and region where they operate.” Investors, she added, should regularly review and update their ESG assessments while continually deepening both their understanding of ESG practices and their knowledge of the companies in which they invest. Looking ahead, Ota said ESG investment encompasses an expanding range of themes, including biodiversity and changing work styles. “If guided only by a short-term view of things, corporate management decisions will not go well,” she said. “The broad ESG framework itself will continue to be needed.” Sakaguchi agreed, expressing the view that ESG investment will likely “continue as a base” for capital allocation. “It’s difficult to predict when the current retreat phase will reverse,” he said, “but if the United States shifts its policy, Europe will see its competitive disadvantages mitigated and may return to the same pace (as before).” Taken together, their comments indicate that, despite periods of backlash or adjustment, investment that incorporates ESG perspectives is expected to remain an enduring force in global markets. END [Copyright The Jiji Press, Ltd.]