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Helping big polluters transform into greener enterprises is one of the biggest challenges facing Japanese banks, and simply cutting off funding for “brown” companies could jeopardize those transition efforts, said the head of the country’s banking group.

“Discussions often lead to a rather dualistic thinking of lending money to green companies and not to brown ones,” Makoto Takashima, chairman of the Japanese Bankers Association, said in an interview. “We need to provide financial support to transition.”

Takashima’s push to back firms making this pivot underscores the delicate balancing act facing global lenders as they shift from financing fossil fuel industries to greener companies and projects. Green bonds and loans from the global banking sector exceeded the value of fossil financing for the first time this year, an unprecedented reversal since the clinching of the Paris Agreement in 2015.

That shift is playing out more slowly in some Asian countries such as India, Japan and Indonesia, whose economies and energy supplies are still linked to coal, among the dirtiest of fuel sources. Some 70% of Japan’s electricity is generated by fossil fuels.

Takashima, who is also chief executive officer of Sumitomo Mitsui Banking Corp. — a unit of Japan’s second-largest lender — said there are some banks in Europe and elsewhere that have stopped funding companies deemed large emitters. These moves could choke off investment necessary to achieve carbon neutrality, he said.

“Without necessary investment, there will be stranded assets and nobody can do anything about them,” said Takashima, who took over Thursday as head of the banking group until March 31.

The Bank of Japan this month expressed similar caution over ESG policy. The central bank discussed the need for its new climate change program to be flexible because there’s still no broad agreement on what projects will be considered environmentally friendly.

Prime Minister Yoshihide Suga has set a goal for Japan to reach net-zero emissions by 2050. The costs involved in making the transition will be about $3.2 trillion (¥356 trillion), according to Shunsuke Oshida, head of credit research at Manulife Investment Management.

Engagement, rather than outright divestment, is the main approach by lenders and regulators in Japan. Earlier this year, the Japanese government published guidelines on transition finance, emphasizing the need to support decarbonization efforts in “hard-to-abate sectors,” such as energy.

Japan’s three biggest banks, including Sumitomo Mitsui, have long been criticized by environmental groups and others for financing coal-fired power generating projects in Asia’s emerging markets.

Responding to growing investor demand for sustainable lending, the banks are now adopting stricter environmental policies and ramping up targets for green finance. In May, Sumitomo Mitsui said it won’t finance new coal-fired power projects and has pledged about $180 billion in green finance over 10 years.

Kimiko Hirata, international director at environmental group Kiko Network, said Japanese banks are heading in the right direction but “there is still a big gap in having their overall business operations in line with fighting the climate crisis or meeting the Paris Agreement.”

Her group is among those who made shareholder proposals to Japan’s largest lender Mitsubishi UFJ Financial Group Inc. this week, demanding it include an annual disclosure of environmental goals in its articles of incorporation.

Hirata said while divestment isn’t the only viable approach, and prodding large emitters to make a green transition could be an option, Japanese banks don’t have specific enough targets to justify such moves.

“Transition (finance) and engagement without clear measures and goals run big risks of just prolonging the status quo,” she said.

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