Decarbonization and changes in the industry

I have recently published a few articles together with my company.

From principle to practice: Making stakeholder capitalism work,” McKinsey & Company, April 2021

Charting a path from the shuchu kiyaku to ESG for Japanese companies,” McKinsey & Company, March 2021

Was interesting to see how Japanese companies are different vs some of the global entities/companies.

Few things I have found out:

a) interestingly, Japan as a country — is relatively cheaper to decarbonize towards 2030 vs Europe. This is because, Japan is not ahead in renewables, electric vehicle penetration, etc.

b) however, towards 2050 — Japan is much more expensive to decarbonize vs Europe. This is because there’s a number of areas especially in the power sector that it will take more cost to decarbonize — (i.e., less renewable potential due to land restriction & ammnoa/hydrogen related power generation required in Japan)

I also looked thru the differences in terms of each axis of the ESG — how it’s different in Japan vs Europe.

As above, Japan was lagging a bit on S and G — relatively better in the E aspect.

Here are some quotes from the article I wrote in Charting a path from the shuchu kiyaku to ESG for Japanese companies. (McKinsey & Company, 2021)

On our ESG scorecard, Japanese companies’ overall performance lags behind that of companies in North America and Europe. Large players outperform smaller players, which trail in all three aspects of ESG. One reason is that large players generally have greater global exposure, making them naturally more attuned to changes in international norms and more inclined to adapt their brand messaging and business activities accordingly. From a sectoral perspective, consumer-goods companies in Japan tend to do better than companies in the extractive industries, manufacturing, or technology. As customers globally increasingly expect large corporations to help solve collective problems like climate change and inequality, businesses that do not make ESG a priority can find themselves tackling disruptive consumer responses such as boycotts.”

For the S factor,

“While Japanese companies score high on employee health and safety, business leaders can focus more on well-being, talent acquisition and retention, and performance management”.

For the G factor,

“Business leaders in Japan would be wise to preempt investor and government expectations on corporate governance. Investors require an increasing amount of transparency, disclosure, and accountability across a range of issues, including diversity, board composition, and board governance. According to the data company Activist Insight, the number of governance-related demands made by activist investors surged from 27 to 1,400 between 2009 and 2019. Articulating a credible ESG value position has become an imperative for Japanese companies that routinely undervalue their ESG propositions.”

This was a very interesting exercise to pursue — looking at the history, it was very intriging — quoted from the same article:

“Four hundred years before the acronym ESG was coined in 2004 to frame expectations around a company’s environmental, social, and corporate governance impact, a Japanese document from the Tokugawa period encouraged corporations to think beyond profits. Commercial activity, the shuchu kiyaku (code of ethics) states, should not only be carried out for the sole benefit of a business but also for the benefit of society” —

Was interesting to seek how the Japanese history and ESG links together — and which aspects are lower higher vs global standards.

These starting points are helpful for me to think of the leadership journey ahead — few points I will further discover:

a) what are the changes in the manufacturing/industry side Japan will need to pursue going forward for decarbonization?

b) what’s the total cost to decarbonize the economy, and what are the difficulities and soft elements required to decarbonize

c) what’s the risks foreseen and how would the country “finance” the decarbonization

Look forward further deep-diving to this journey.

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Yuito Yamada

Yuito Yamada

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