During a pivotal period of global economic transition towards sustainable development, the financial system is encountering unprecedented opportunities and challenges. As climate change issues deepen and ESG investment concepts gain popularity, sustainable finance has progressively evolved into a core agenda of global financial reform. However, practical problems such as regional development imbalances and persistently high costs of green technology continue to test the wisdom and execution capabilities of financial institutions.
Against this backdrop, a dialogue was held with Masayuki Takanashi, Chief Sustainability Officer of Sumitomo Mitsui Financial Group, to explore the strategic significance of sustainability issues for financial institutions, the differences in practices across global markets, and the current challenges and future evolution of this field.
When asked about the primary drivers behind the Group's strong commitment to sustainability, Mr. Takanashi explained that the Group frequently uses the concept of "social value creation" internally. While similar to "sustainability," the term "sustainability" inherently focuses on maintaining the status quo, whereas "creating social value" carries a stronger connotation of actively generating and increasing value. The Group formally adopted this terminology three years ago and integrated it into its mid-term management plan, which is renewed every three years. The Group's strategy rests on three pillars: continuing to generate profit, strengthening the fundamental corporate platform, and making a significant contribution to social value.
Mr. Takanashi outlined three main reasons for this commitment. First, numerous social challenges hinder economic growth, and as a major financial institution, the Group's success is deeply tied to the health of the economy. Second, stakeholder evaluation criteria are evolving, including from investors, customers, employees, and prospective talent, particularly younger generations who are highly attentive to how companies address social issues. Third, focusing on sustainability creates business opportunities, as developing new services to solve societal problems also generates revenue.
Regarding the financial returns from incorporating environmental and social considerations into decision-making, Mr. Takanashi stated that the Group conducts Environmental and Social due diligence as part of its credit approval processes, considering it essential primarily for risk mitigation. This helps minimize potential losses, for example, by ensuring projects secure necessary permits, thus protecting investments. A current priority is decarbonization, involving managing both transition and physical risks, which is vital for protecting the portfolio and enhancing long-term financial performance.
On the phenomenon of some regions witnessing setbacks, such as delays to net-zero targets, Mr. Takanashi views this not as an abandonment of environmental commitments but as a pragmatic adjustment to changing external conditions. He believes financial institutions should set realistic goals based on their specific circumstances, and differences between regions are expected. Adjusting strategy based on a changing landscape should be seen as a necessary recalibration.
When discussing the gap between Europe and Asia in sustainable finance, Mr. Takanashi acknowledged Europe's historical leadership but noted a shifting dynamic. He pointed to the EU's recent regulatory recalibration, which seeks a clearer balance between decarbonization goals and financial returns, suggesting the gap is narrowing significantly. A key example of convergence is the concept of transition finance, actively promoted by the Japanese government, which has gained substantial traction. While definitions may vary, the term is widely adopted, and greater standardization is expected, indicating a closing gap in perspective and approach.
Looking at future trends, Mr. Takanashi identified the most critical funding gap as existing where projects lack financial viability. The core issue is the cost of decarbonization; if costs are not reduced, projects remain unprofitable. The real challenge is to drive down costs through innovation and shift market mindsets to value long-term benefits. While blended finance can be effective in specific cases, it cannot transform fundamentally unviable projects. Technological innovation is crucial for reducing costs and attracting finance. Despite headwinds in some areas, such as higher interest rates affecting project viability, the overarching strategic direction towards sustainable transition remains firm, as evidenced by initiatives like Japan's GX-ETS launch proceeding as planned.