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Japan’s largest bank considers bowing to climate resolution pressure

13 April 2021 Bernadette Lee

Japan's largest bank Mitsubishi UFJ Financial Group (MUFG) is said to be considering ending loan financing for new coal-fired power plants and reducing its outstanding loans for such projects after a climate resolution was filed by several environmental groups on 26 March.

MUFG's latest move was reported by local newspapers Asahi Shimbun and Nihon Keizai Shimbun on 12 April, but no formal statement from MUFG was issued. MUFG did not respond to a request for comment from IHS Markit.

Welcoming MUFG's latest move, environmental groups Kiko Network, Market Forces, Rainforest Action Network (RAN), and Japan, said in a 12 April joint statement that revisions to MUFG policies would be "a clear improvement" on its existing lending and underwriting policy, if formalized.

But the groups are demanding stronger action from MUFG, in particular, they pointed to the lack of clarity on the exact scope of the policy and the need to scrutinize the definition of "new" plants, as it may not apply to new coal-fired plants in the pipeline where negotiations are currently underway or have yet to reach financial close.

"If this is the case and normal debt reductions in outstanding loans are considered, the commitment to reduce outstanding loans to coal-fired power by 30-50% by 2030 means [that] the new policy will still allow new financing of coal after the policy takes effect. Therefore, such a policy cannot be considered to be aligned with the Paris Agreement," the joint statement said.

Second Japanese bank to receive a climate resolution

MUFG became the second financial institution in the country to receive a climate resolution last month, demanding it adopt a plan to align its financing and investments with the goals of the Paris Agreement.

The shareholder proposal on climate change, submitted by Kiko Network along with three individual co-filers, seeks an amendment to MUFG's articles of incorporation.

"Under Japanese corporate law, the sole legal pathway for a shareholder proposal on climate change is via an amendment to a company's articles of incorporation [as had happened to] Mizuho Financial Group last year," said ClientEarth, an environmental law charity.

The resolution on MUFG will be discussed initially at board meetings and subsequently shareholder approval will be sought at its annual general meeting in June, a spokeswoman for Kiko Network told IHS Markit. A majority shareholder vote would be needed for approval to be granted, she added.

But even after the resolution is passed and approved, ultimately, the bank decides whether or not it will amend the articles of incorporation to reflect the tightening of its lending policies, the Kiko Network spokeswoman said.

It is often difficult for banks to change the articles of incorporation, and in most cases, over two-thirds of shareholder votes would be needed to pass a resolution, the spokeswoman said.

"MUFG will surely consider shareholders' resolutions, but how deeply they want to reflect these resolutions in their policies is up to them. Climate resolutions [can put banks under pressure] and have some influence in steering banks toward decarbonization, but unfortunately resolutions cannot stop banks from lending to coal power plants unless they change their strategies. We hope MUFG would stop supporting coal power plants," she added.

A similar shareholder proposal on climate change was submitted to Mizuho Financial Group in June 2020, and received nearly 34% shareholder support, but the resolution was rejected in the end, the Kiko Network spokeswoman said.

The environmental groups that submitted the shareholder proposal remain in discussions with Mizuho and hope to garner more shareholder support this year, the spokeswoman added.

Legal impact of shareholder proposals

The legal impact of such shareholder proposals is the same as the "special resolutions" on climate change filed and passed at UK-listed companies including Barclays, BP, Royal Dutch Shell, Rio Tinto, and Anglo American, which take binding effect as part of the companies' constitutions, according to ClientEarth.

Changing articles of association or incorporation have wider implications on the legal responsibility of the company, said Christine Chow, the global head of IHS Markit's strategic governance advisory in London.

"This proposal will accelerate [MUFG] efforts in the decarbonization of its portfolio holdings, from incentives for customers to accelerating their own transition plan to more stringent standards for project financing," she said. "Shareholder proposals such as this accelerate the decarbonization momentum at financing companies."

But banks need to first distinguish between the different types of financing products they offer in their environmental, social, and governance plans, given the wide-ranging nature of such products, from general purpose loans to revolving credit facilities that focus on company entities rather than specific projects such as in project financing, Chow said.

The co-filers filed the shareholder proposal due to the absence of a policy by MUFG to minimize its exposure to climate-related risks, said a 29 March joint statement from Kiko Network, Market Forces, Rainforest Action Network (RAN), and Japan.

The environmental groups evaluated the state of MUFG's loans and underwriting as well as its financing and investment policies for a carbon-free future based on information it disclosed in the "MUFG Report 2020: Integrated Report," the "MUFG Sustainability Report 2020," and the "MUFG Environmental and Social Policy Framework."

MUFG a leading financier of fossil fuels, deforestation: activists

While MUFG has put in place sustainability policies and committed to ceasing project financing of coal-fired operations by 2040, it continues to be one of the leading financiers of the fossil fuel sector and deforestation-linked activities around the world, Kiko Network said in a separate statement 29 March.

"It is investing and underwriting operations that are accelerating climate change on a global scale," it added.

MUFG's financing activities demonstrate that the bank has not only fallen short of aligning with the Paris Agreement goals, but it has also created significant financial and reputational risk for the company, given the Japanese government's carbon neutrality goal by 2050, the joint statement said.

MUFG was the third-largest global lender to the coal industry in the last two years, the sixth-largest fossil fuel financier in the last five years, and the seventh-largest banker for the palm oil industry in the last four years, according to Kiko Network.

"MUFG's failure to pivot from fossil fuel financing should be a major concern to shareholders, especially since its global competitors' transitions are gathering pace," said Megu Fukuzawa, energy finance campaigner at Market Forces. "Pledging only for the reduction of coal power project finance is far from enough, given that all coal power stations must be shut by 2040 worldwide at the latest. MUFG should show how it plans to engage with its clients in order to get there."

Kiko Network said MUFG's current policies will not help the firm achieve net-zero emissions by 2050, which is critical for achieving the 1.5 degrees Celsius goal.

"If MUFG truly intends to reach net zero, it must cease all financing to fossil fuels and deforestation without exception," it added.

The Paris Agreement aims to strengthen global efforts in dealing with the threats of climate change by limiting global temperature rise to well below 2 degrees Celsius above pre-industrial levels, and preferably to 1.5 degrees Celsius, while ensuring financing flows are consistent with a pathway towards that goal.

Strong support from global institutional investors

Investors often look for evidence and plans that demonstrate alignment with the Paris Agreement, according to Chow.

"The case here is not that MUFG has failed Paris-alignment; it is more to do with [the fact that] the bank [has] yet to convince investors that it has a credible plan to align with Paris. The whole conversation is quickly shifting to net-zero commitment, so banks should be aware of the need to accelerate their efforts and progress," she said.

The Net Zero Asset Managers Initiative points to likely support for the shareholder proposal submitted to MUFG from global institutional investors, Chow said.

The Net Zero Asset Managers Initiative is an international group of asset managers committed to supporting the goal of net-zero GHG emissions by 2050. It now has 73 signatures representing $32 trillion in assets under management.


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