Eri Watanabe is a senior Japan energy finance campaigner at Market Forces, a clean energy finance advocacy group working across Asia and Australia.

Japan’s two largest banks, MUFG and SMBC, recently followed the biggest U.S. and Canadian banks in withdrawing from the United Nations-led Net Zero Banking Alliance. These moves put global banking and investor climate initiatives under threat and place secure economies at risk. Japan’s major banks have a duty to hold firm on their net-zero commitments and accelerate efforts to minimize climate risk.

The NZBA is rallying its 130 member banks, which hold $49 trillion in assets, to stay the course.

Most of Asia’s banks, including those in Singapore and Malaysia, Japan’s Mizuho and Australia’s biggest four this year have held firm on their commitments to achieving net zero and retaining their NZBA membership.

It’s critical that Asia’s banks avoid short-term political and financial expediency, which risks undermining their longstanding commitments to climate goals and sustainability. The transition to a net-zero economy is supercharging, and banks need to recognize that there is no turning back.

To avoid losing more members, the NZBA is giving serious consideration to watering down its climate ambitions. Yet for many banks, including those jumping ship, the NZBA has enabled them to engage in greenwashing and window dressing by failing to hold coal, oil and gas companies as well as other high emitting customers to account.

MUFG joined NZBA in June 2021 as the first member bank from Japan, and led the alliance’s steering group. In MUFG’s 2024-2026 management plan, the bank pledges to “drive social and environmental progress,” including “achievement of a carbon neutral society.”

SMBC has long positioned itself as a green bank and in its 2023-2025 medium-term management plan highlighted its commitment to decarbonization and addressing global inequalities.

However, alongside these commitments, MUFG and SMBC have funded oil and gas developments, joining the “dirty dozen” top 12-ranked global financiers of fossil fuels, according to a Banking on Climate Chaos report.

The next litmus test for MUFG, SMBC and Mizuho will be whether they can effectively implement measures to support the genuine transition of high-emitting customers. Leading banks in Europe and Australia have demonstrated that financing companies with credible transition plans is core to managing climate and associated financial risks.

Last year around one in four investors and shareholders called on Japan’s megabanks to improve disclosure on their assessments of the climate transition plans of their customers.

Fortunately, the U.S.-led revolt against corporate environmental, social and governance (ESG) responsibilities has not yet imposed a significant impact on Asian economies. But the risk of a broader shock looms as MUFG, SMBC, Nomura and Norinchukin have jumped on the bandwagon, shunning climate science.

If Japan’s banks fail to adhere to their net-zero commitments and continue supporting companies expanding oil, gas and coal businesses, they jeopardize their bottom lines, their reputations and send damaging signals to the markets they wish to serve.
There is overwhelming evidence of immense economic risks associated with climate change. In 25 years, extreme heat, rain and flooding will cause $38 trillion in annual damages, according to the Potsdam Institute.

The warning bells must be ringing loud and clear for Japanese banks. A global network of 141 central banks and regulators recently estimated that under current climate targets and policies, the Japanese economy could lose about $9.2 trillion by 2050.

Conversely, if private and government leaders unite around the world to fully implement a transition to net-zero emissions by mid-century, by 2070 the global economy could win a $43 trillion windfall and 3.8% more economic growth, according to Deloitte research.

Fossil fuels are like a sinking ship. Renewable energy including wind and solar are already undercutting new coal and gas plants on production costs almost everywhere in the world. The economics of coal, oil and gas expansion don’t stack up and more investors are recognizing this cold hard truth.

In light of the mounting evidence and dire warnings, the financial sector must not shy away from its role as a catalyst for change and genuinely enable the transition to a net-zero economy. Despite withdrawing from the NZBA, MUFG, SMBC, Nomura and Norinchukin must reaffirm their net-zero commitments and translate these pledges into actionable policies and targets aligned with climate science and the Paris Agreement.

Another test for the Japanese megabanks is whether they will continue providing finance for one of the biggest and most polluting liquified natural gas projects ever planned, Papua LNG.

MUFG has acted as a financial advisor, yet the Papua New Guinea project faces severe financial, political and legal risks. So far, the Asian Development Bank, France’s biggest bank BNP Paribas, the Commonwealth Bank of Australia and 10 other lenders have confirmed they will not lend to Papua LNG.

Concerns extend beyond this project, especially as all three Japanese megabanks stand out among the top 10 global banks for their financing of LNG projects.

Proponents of LNG have long touted the gas as a cleaner fuel compared to coal. Yet exported LNG emits 33% more greenhouse gases than coal when taking into account transport and polluting methane emissions according to findings published in Energy, Science and Engineering.

Japan’s obsession with LNG threatens its energy security and economic viability due to a big surplus and decreasing demand. A push to resell excess LNG imports and construct LNG power plants across Asia risks locking developing nations into a costly fossil fuel-dependent future, undermining the shift to affordable renewable energy and worsening climate change impacts.

The onus is on Japan’s megabanks to determine their role in the transition to a sustainable economy. The banks’ future viability depends on their commitment to corporate responsibility and sustainable practices, which will dictate their long-term financial success in an evolving global economy and a warming planet.

This blog was originally published on Market Forces' website here.