Japan’s SME decarbonization calls for just transition finance

GENEVA (ILO News) - Representing a major share of economic activity and employment, small and medium-sized enterprises are central to a just transition. In Japan, SMEs employ almost 70% of the workforce and are deeply embedded in supply chains, including the automotive sector, whose transformation is key for global decarbonization efforts.

The shift to connected, autonomous, shared and electric vehicles requires businesses across automotive component manufacturing, raw materials and electronics supply chains not only to adopt new technologies, but also to adapt production models, build new skills, respond to changing market signals and manage impacts on workers. Around 1.6 million Japanese workers are likely to be directly affected.

SME decarbonization is therefore not only a technology challenge: it is also a technical capacity, workforce transition and finance challenge as SMEs often lack technical expertise and face high upfront costs and limited access to capital, all in a context of uncertainty about future demand.

Japan’s Green Transformation (GX) framework provides an important policy and public finance response, building upon the issuance of sovereign transition bonds and a gradual carbon pricing mechanism that introduces an emissions trading scheme and subsequently a carbon levy. The broader 150 trillion-yen public-private investment agenda includes multi-year subsidies for SMEs, aiming to reduce economic disruption and sustain industrial capacity during the transition.

However, preparing a transition plan for an SME is itself an investment, often foregone due to limited knowledge, unclear perceived benefits, financial constraints and lack of time. Besides subsidies, SMEs need comprehensive support: awareness of the benefits of decarbonization, clarity on available subsidies, green loans and support mechanisms, assistance with emissions measurement, data and reporting systems and clear demand signals from customers.

The social dimension also needs to be explicitly integrated. Existing support remains strongly focused on the technical and financial dimensions of decarbonization. Greater attention and funding are needed for retraining and reskilling programmes, as well as gender-sensitive transition measures, so that women can benefit from this shift and move from automation-vulnerable roles into higher-skill technical positions.

Financial institutions can be key enablers of SME decarbonization. Beyond green lending, they can support SMEs through “just-transition-plan-linked finance”: awareness-raising, connection to public support, subsidies and guarantees, tailored advice and financial products that incentivise inclusive workforce transition and decent work objectives.

Explore insights into what SME decarbonization looks like in Japan and learn first-hand what is needed to support a just transition for Japanese automotive parts SME.

Find out more about how banks, investors, insurance companies and development finance institutions can put a just transition strategy into action, learn from the pioneers at the ILO’s Just Transition Finance Hub and explore how institutional investors in Japan can address human and labour rights through investment practices.