Testing the Japanese Equity Market Alignment with the 2°C Climate Goal

Policy Report
2 degree testing TOPIX

This report compares the energy and technology exposure of the Tokyo Stock Price Index (TOPIX) stock market index with the 2°C roadmap of the International Energy Agency (IEA). The analysis is
based on a translation of this climate scenario into “2°C benchmarks” for investment portfolios, focusing on a 5-year window: 2016-2021. Such a 2°C benchmark for the TOPIX represents the
relative amount of energy/technology which TOPIX companies should produce/use to achieve the 2°C target under the IEA 2°C scenario. If the TOPIX index, based on its current composition, follows
this production and capacity benchmark, it would then be “2°C-aligned”.

The main results for the TOPIX analysis are the following (also see the figure on the next page):
Power: The TOPIX overweights nuclear, gas and coal capacity relative to its 2°C benchmark, while underweighting renewables capacity. The planned electric capacity of TOPIX companies is thus
misaligned with the power capacity in the 2°C scenario.
Automobiles: The TOPIX underweights low-carbon technologies (hybrid, electric) and overweights high-carbon technologies (internal combustion engine (ICE) e.g. petrol / diesel car production)
relative to the 2°C reference. The TOPIX is thus misaligned with the 2°C pathway for automobiles.
Fossil fuels: The TOPIX overweights oil and gas production relative to the 2°C scenario. It does not contain any coal production. The exposure is thus misaligned with the 2°C pathway for oil and gas
production but is more climate-friendly than the 2°C scenario for coal production. Since the above three sectors are among the most climate change concerned sectors (they typically
account for most of the TOPIX carbon footprint), their misalignment with the average production and capacity required by the 2°C scenario means that the TOPIX index, as a whole, seems to be
incompatible with a 2°C climate goal.

As a consequence, financial institutions that invest in the Japanese economy through Japanese listed companies are not aligned with such goals, and contribute to orienting the global climate towards hazardous trends, leading to the overshooting of the 2°C threshold. These results call for more informed investment strategies towards decarbonization and for better policy signals oriented at investors, so that the financial sector contributes effectively to the fight against climate change.