Japan’s railway network is the envy of nearly every country on the planet. Servicing most metro and urban areas, the innovative rail system is a case study in operational efficiency and punctuality – with any delays limited to mere seconds.
Backed by significant investment over a number of decades, the cutting-edge network is headlined by Japan’s world-renowned Shinkansen bullet trains, which are highly energy efficient thanks to an aerodynamic design and regenerative braking systems able to convert kinetic energy into electricity.
Moreover, the country’s largest railway companies are accelerating efforts to source electricity for railways from renewable sources, which is further reducing the carbon footprint of this extensive system. Encouragingly, emissions from Japan’s transportation sector are at about 70% of prior peak levels and have declined annually since 2001.
However, with the sector still accounting for about 17% of the country’s overall emissions, making further sustainability strides forward will be essential as Japan seeks to become carbon neutral by 2050.
While rail already garners strong cultural support in Japan, promoting additional use of the network instead of cars and aviation will further boost these efforts. To highlight the contrast, per-passenger emissions by travelling on the Shinkansen between Tokyo and Osaka are just 8% of flying between the two cities – while per-passenger emissions are far higher still via car.
At Nordea Asset Management, we believe engaging with companies on environmental, social and governance (ESG) activities is a powerful way to protect shareholder value, enhance long-term returns and foster positive change. Even though the Japanese rail network is already one of the most advanced in the world in terms of sustainability, we continue to have a close dialogue with the country’s leading providers to ensure all ESG efforts are progressing full steam ahead.
JR Central
Central Japan Railway (JR Central), which primarily operates in the region of Chubu, boasts the flagship Tokaido Shinkansen – which connects the major population hubs of Tokyo and Osaka. JR Central’s network also encompasses conventional rail lines, bus services and real estate development projects.
JR Central has high Scope 2 gas emissions, which is why engaging with the company is essential. There are a number of measures train operators can undertake to improve energy efficiency and reduce emissions, including the use of renewable or cleaner energy sources to power trains.
During our meeting with JR Central, we discussed its decarbonisation strategy – particularly as it has no stated ambition to reach net zero. Corporate governance practices were also on the agenda, as we felt the company could improve its disclosures.
Management outlined a number of promising longer-term initiatives – such as a focus on rolling out more energy-efficient trains, the development of hydrogen and the offsetting of passenger emissions. The company acknowledged it was still working on emissions reduction targets and the timeline for measuring Scope 3.
Further decisions will be conducted with JR Central management in an effort to strengthen its sustainability governance and target-setting. In particular, we will encourage the company to adopt science-based targets. Board diversity is also an area we identified for improvement in the future.
JR East
East Japan Railway (JR East) serves approximately 14 million daily passengers in the regions of Kanto and Tohoku. In addition to a rail network, JR East develops offices, hotels and shopping centres adjacent to its lines.
Unlike JR Central, JR East has publicly stated a net-zero goal for its Scope 1 and 2 emissions and proactively sent a commitment letter to the Science Based Targets initiative (SBTi) for validation of its targets – the first railway company in Japan to do so.
During our engagement, management outlined the plan to achieve net zero and the obstacles it will need to overcome to meet this target. It has also set an interim target of reducing emissions by 50% by 2030 for Scope 1 and 2, relative to 2014 levels.
The largest source of emissions comes from JR East’s thermal power stations, consisting of four mid-sized gas generators. JR East plans to convert these generators to hydrogen, with the first three converting by 2050 and the remaining emissions offset with carbon credits. The company is investing ¥130bn over the next five years on environmental projects, such as the expansion of its renewable energy capacity, which it expects to reach 700,000 kw by 2031.
Our discussions with JR East included Scope 3, where decarbonising its supply chain remains challenging. It also noted operational difficulties in working with partners to develop new technologies, such as hydrogen-powered trains.
We remain encouraged by the proactivity of JR East in terms of setting strong targets and believe it is well-positioned to accelerate decarbonisation, due to its ownership of hydroelectric plants that supply 40% of its power. However, developing new technologies increases its responsibility to reduce emissions and we will continue to maintain close dialogue with the company to ensure its sustainability initiatives remain on track.
Jamie Hayes is a director at Nordea Asset Management. The views expressed above should not be taken as investment advice.