Japan seeks to stabilise ESG investing as global momentum stalls

As momentum behind environmental, social and governance (ESG) investing has slowed globally, Japan is making a deliberate effort to stabilise the idea as a pillar of long-term economic growth rather than abandon it.

According to The Japan Times, the global push for ESG, which gained traction after the United Nations launched the Principles for Responsible Investment in 2006, has encountered renewed headwinds. The second administration of U.S. President Donald Trump has adopted an adversarial stance toward parts of the ESG agenda, and European policy support has softened as some governments prioritise industrial competitiveness and energy security in the wake of geopolitical shocks such as Russia’s invasion of Ukraine. The result, industry officials say, has been a retreat in some ESG-labelled funds and a reorientation in public and private policy toward “transition”-focused approaches that favour emissions reductions over outright exclusion of high-emitting sectors.

Market data cited by The Japan Times illustrates the strain: Morningstar Japan reported that outflows from sustainable investment funds exceeded inflows by ¥125.8 billion between July and September 2025, the 13th consecutive quarter of net outflows for ESG-related funds in Japan. “Funds labeled as ESG are facing severe situations in terms of relative performance (compared with other funds),” Tamami Ota, head of ESG research at the Financial and Capital Market Research Department of Daiwa Institute of Research, told The Japan Times.

Yet other signals point to a more mixed picture. According to a Morgan Stanley report, sustainable funds outperformed traditional peers in the first half of 2025, posting a median return of 12.5% against 9.2% for traditional funds, while assets under management in sustainable funds rose to $3.92 trillion as of June 30, 2025. Those figures suggest investor interest and performance can diverge between branded ESG products and broader, engagement-led strategies.

Japan’s largest public investor has been among those doubling down. The Government Pension Investment Fund increased its holdings tracking ESG indexes to roughly ¥18.2 trillion as of March 2025, representing about 14.7% of its equity investments, up from ¥17.8 trillion the previous year, according to reporting by Bloomberg and national coverage. The move underlines Japan’s institutional commitment to sustainable investment even as some global managers scale back green strategies.

Industry voices in Japan argue that ESG must now prove its practical value rather than rely on rhetoric. “It is no longer sufficient for companies to simply announce policies and targets; they must also clearly demonstrate whether they are carrying out their short-term plans and disclose concrete evidence of progress,” Junichi Sakaguchi, chief responsible investment officer at Sumitomo Mitsui DS Asset Management, told The Japan Times. He added that ESG regulations can mean “higher short-term costs for companies, due to capital investment and the development of internal systems,” and warned that overly stringent rules can be burdensome for small and midsize enterprises.

Both Sakaguchi and Ota described a policy shift in the West toward facilitating decarbonisation of heavy industries rather than immediately excluding them. “In recent years, Europe and the United States have adopted a more transition-focused approach,” Sakaguchi said to The Japan Times; Ota characterised this as a “considerably more realistic approach.” That reframing aligns with calls from investors for clearer sustainability criteria tied to long-term enhancements in corporate value, and for active stewardship, engagement and voting grounded in measurable outcomes.

Japan’s domestic policy commitments provide a backdrop for these debates. The country pledged carbon neutrality by 2050 under a target announced in October 2020, and corporate disclosure of both long-term targets and up-to-date progress has become an expectation for investors. The Japan Times reports that attention is shifting to company-level execution: investors are being urged to “regularly review and update their ESG assessments while continually deepening both their understanding of ESG practices and their knowledge of the companies in which they invest,” Ota told The Japan Times.

The substantive expansion of ESG themes, beyond climate to biodiversity, changing workstyles and other social considerations, was highlighted as a reason the framework remains relevant. “If guided only by a short-term view of things, corporate management decisions will not go well,” Ota said to The Japan Times. Sakaguchi echoed that sentiment, predicting ESG will “continue as a base” for capital allocation even as the sector navigates a retreat phase; he cautioned that timing for any reversal remains uncertain, and that shifts in U.S. policy could materially affect Europe’s pace and the global landscape.

Taken together, the evidence paints a nuanced picture: headline flows into some ESG-labelled products have weakened, yet institutional commitments, pockets of strong performance and an evolving, transition-minded regulatory stance suggest ESG-informed investing is adapting rather than collapsing. In Japan, where public pension preferences and calls for rigorous disclosure are converging, the focus has moved from branding to verification, measuring whether corporate promises translate into measurable action.