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How Tokyo can lead the “Asian model” for transition finance

Transition finance, which provides funding for steps toward decarbonization in the real economy, is gaining attention. Tomohiro Ishikawa, Chief Regulatory Engagement Officer at Mitsubishi UFJ Financial Group (MUFG) and a leading expert in the field with deep knowledge of international trends, discusses the role that Tokyo as a financial hub should play in unlocking its potential.

Could you explain what transition finance is?

I think there are a few perspectives. Green finance refers to financing for businesses and services that immediately contribute to solving environmental issues such as climate change. However, transition finance is about supporting not only investment in green initiatives, but also businesses or projects that will become green in the future, and the efforts needed to make them green. The idea is not to deny green finance, but to complement it by supporting various transition initiatives that will lead to decarbonization across the economy. This is the first perspective.

Another point is that every company and sector is now developing strategies to tackle climate change and decarbonization looking toward 2050 and beyond. Transition finance provides financial support for these transition strategies. This is not really a new concept—just like there is acquisition finance for takeovers, there is transition finance for the transition strategies created by corporations. We as financial institutions engage closely with companies and respond to their funding needs, which is what we have always done.
So, transition finance should be seen as both a complementary role and as strategic support.

Is the reason transition finance is getting attention now because we’re about halfway to the 2050 carbon neutral goal?

We have been stressing the importance of transition finance for some time. At COP26 in Glasgow in 2021, UN Special Envoy on Climate Action Mark Carney (now the Canadian prime minister) declared that “finance will drive net zero, and private financial institutions will play their part." I was there and strongly felt that this is how new momentum is built.
Since then, we have deeply engaged with initiatives like the Glasgow Financial Alliance for Net Zero (GFANZ) and the Net-Zero Banking Alliance (NZBA), working alongside people like Mark.

Last year, there were political developments such as the EU parliament election and the U.S. presidential election, which affected environmental policy. The war in Ukraine also heightened discussions around energy security. We cannot prioritize net zero at the expense of everything else; it must be achieved while maintaining and developing industrial competitiveness, growing the economy, protecting jobs, as well as safeguarding communities and nature. There are multiple conditions that must be met in reality as we move toward decarbonization. I think the importance of advancing transition while addressing these various factors is now being recognized by many stakeholders both in Japan and internationally.

Can you share specific activities MUFG is undertaking in transition finance?

It’s important to look at both funding demand and supply.

On the demand side, it starts by carefully listening to our clients and understanding through dialogue where and how much funding is needed. To accurately grasp these needs, we have to understand global and local trends and have a global perspective ourselves. With this awareness, we publish the MUFG Transition White Paper every year together with our clients, in both Japanese and English, and we use this report in meetings with governments in various countries and exchange opinions. Through these initiatives, we dig deeper into understanding where the needs are, where the issues are, and how we can help solve them—and continue to communicate our findings globally.

On the supply side, in addition to traditional loans, we offer a range of products, such as blended finance that combines public and private funds for slightly riskier projects, and sustainability-linked loans that tie financing to specific goals. We are enhancing our product lineup to meet diverse funding needs. Since we are a bank that handles customer deposits and loans, we also strive to strengthen risk management and our organizational structure to ensure proper risk-return.

How do you promote and educate the public about transition finance?

For example, the MUFG Transition White Paper was produced with clients in so-called “hard to abate” industries as we shared their challenges. In Europe, there have been regulatory measures like those under the EU Taxonomy for Sustainable Activities, while in the U.S., the previous Biden administration introduced subsidies through the Inflation Reduction Act. In Japan, we have the Green Transformation (GX) strategy. The white paper
touches on what Japan is doing, how it differs from Europe and the U.S., and what challenges our clients are recognizing. The report aims both to communicate Japan’s unique approach to transition and raise attention to the challenges Japan currently faces.

We take these white papers into meetings with a wide variety of stakeholders globally, and through these discussions with both developed and emerging countries, we have been able to see that many countries face similar challenges. We have also engaged in global advocacy, asking, “Isn’t this a challenge everyone should tackle together?” Initially, there was skepticism that transition finance was somehow less important than green finance, or there were concerns about greenwashing, but over the past year or two, perceptions have changed dramatically. No one sees transition finance as unimportant now; it has become widely accepted.

What role should Tokyo play as a financial hub?

I believe the key role of major financial cities like London, New York, and Tokyo is to build communities and ecosystems. When people gather and networks form, information and money also gather, and markets for supply and demand are created.

London excels at rule-making that leads to global standards. This is exemplified by GFANZ and NZBA, and with the support of the UK government and central bank as well as HM Treasury, more than 700 major financial institutions have committed to net zero, creating a global momentum. London has successfully created an ecosystem where both information and finance for net zero are available.

I don’t think Japan or Tokyo needs to compete in exactly the same way. Transition finance in Asia isn’t necessarily the same as in Europe and the U.S. In Asia, energy demand will continue to grow for the foreseeable future. Green transformation will not happen overnight, and emissions from the energy sector are likely to continue for some time. Realistically, in Asia—especially in ASEAN—investment in fossil fuels will still be needed to support
industrialization, and that requires cutting-edge technology backed by finance. It’s not about Europe being right and Asia being wrong; the scope of transition finance required depends on each region’s circumstances.

Tokyo can create a market that channels funding appropriately into Asia’s unique needs. I believe what Tokyo needs to do is communicate to the world the importance of this “Asian model” of transition finance. The Asian region accounts for over half of the world’s population. If Asia’s problems are not solved, global problems will never be solved. Also, if Tokyo only talks about Japanese issues, it cannot lead the world. Tokyo and Japan need to
proactively elevate Asian solutions onto the global stage, and as a company—and personally—it’s something I’d like to help with.