What Japan’s GX-ETS Launch Could Mean for Corporate Earnings

As Japan prepares to roll out its first mandatory carbon market under the GX-ETS, investors face a new layer of financial and transition risk. The scheme will bring carbon costs directly onto company balance sheets, making it critical to understand how emissions exposure, pricing power and transition readiness could influence future earnings — and long-term portfolio resilience.  

Why carbon footprints matter for investors

The total carbon footprint of a portfolio has commonly been used to gauge both climate impact and transition risk, but they may require different approaches. Our analysis shows that when emissions are weighted by financial materiality, a clearer link emerges to financial outcomes.¹ While a tonne of CO2e has the same impact on the climate no matter how it is emitted, a materiality-weighted approach focuses on the scope of emissions that are financially material due to technology or market pressures, which differ by industry. Over the past decade, this approach showed stronger correlation with global equity-market outperformance than a non-weighted approach.² We observed the same pattern in Japan. 

Data for the period June 30, 2020, to May 30, 2025. Using the MSCI Global Equity Model for Long-Term Investors (GEMLT), the chart shows that the materiality-weighted approach had a stronger relationship with stock performance than using total emissions (non-weighted). Past performance, whether actual, back tested or simulated, is no indication or guarantee of future performance. Source: MSCI ESG Research

Implications of the GX-ETS 

From April 2026, the GX-ETS will price Scope 1 emissions for companies averaging in excess of 100,000 tCO2e over three years.³ For these large emitters, carbon costs could weigh on earnings. We analyzed earnings at risk from Scope 1 emissions above this threshold, treating it as a financially relevant carbon footprint under the scheme.  

Estimating earnings at risk under different carbon-price scenarios 

The impact of the GX-ETS will vary across sectors and depend on the carbon price. We estimate companies’ earnings sensitivity to carbon prices — earnings at risk — as the effect of a price increase of USD 1 per tCO2e. This measure reflects both emissions levels and the ability to pass costs on to customers.⁴ 

Using sector medians, we found that companies in the utilities, materials and energy sectors face the highest earnings at risk. Analysis of three carbon-price scenarios indicates that if the price rose to USD 70 per ton, in line with the EU-ETS,⁵ median earnings at risk for utilities and materials companies could surpass 10%.

Data as of September 2025. The analysis covers companies with average Scope 1 emissions exceeding 100,000 tCO2e over the past three years (2021-2023). Earnings at risk are calculated using the median value within each GICS sector, under three price scenarios: USD 1, USD 40 and USD 70 per tCO2e. Source: MSCI ESG Research

Earnings at risk in high emitting sectors

Industries with higher pass-through rates typically have stronger pricing power than those with medium or low pass-through, influenced by factors such as regulations and demand elasticity (e.g., customer price sensitivity, availability of substitutes). For example, electric utilities (a high pass-through industry) showed smaller earnings at risk than manufacturing industries like paper products (a medium pass-through industry) despite higher emissions.⁶

Data as of September 2025. The analysis covers companies with average Scope 1 emissions exceeding 100,000 tCO2e over the past three years (2021-2023). Sub-industries that had only one issuer were excluded from the analysis. Source: MSCI ESG Research

Combining emissions with pass-through rates shows that earnings at risk can vary even within high-emitting sectors. This means looking beyond emissions intensity to a company’s ability to absorb or transfer costs to customers. 

Data as of September 2025. The analysis covers companies with average Scope 1 emissions exceeding 100,000 tCO2e over the past three years (2021-2023) in the materials, utilities and energy sectors. Source: MSCI ESG Research

Green revenues and the path to emissions reduction

Can investors forecast companies’ future emissions and identify those best positioned to continue decarbonizing? We tested a range of transition indicators over three to five years using historical data and found that firms with credible transition plans were more likely to reduce future emissions.⁷

For Japanese companies, indicators such as those based on Science Based Targets initiative (SBTi) targets, target progress and green revenues showed statistically significant predictive power. A similar pattern was observed for the MSCI Kokusai IMI, with green revenues showing particularly strong significance within the MSCI Japan IMI.⁸ Green revenues may indicate when low-carbon technologies extend beyond product development to production processes (such as the development and the use of renewable energy by utilities or energy companies). 

Data from 2018 to 2023. A two-sided t-test with unequal variances is calculated to see if the mean of emission change in the top tertile is different from the mean in the bottom tertile. Negative values indicate faster reduction in the top tertile. Tertiles are constructed by sector, except for the greenhouse-gas mitigation score where only global tertiles could be created due to the distribution of the score. For non-numerical variable like SBTi and Paris-aligned indicators, the bottom bucket contains issuers with no target or that are not aligned; the top bucket contains issuers with an SBTi-approved target or are flagged as 'committed,' 'aligned' or 'aligning.' Azure shading indicates results in the expected direction, raspberry shading indicates result in the unexpected direction. Dagger (†) indicates variables for which correlation and not forward-looking test was applied. Source: MSCI ESG Research 

Positioning for Japan’s carbon-priced future

The launch of Japan’s GX-ETS signals a fundamental shift in how carbon risk is priced and managed across industries. As carbon costs become an explicit line item, investors will need to evaluate which companies can maintain margins and competitiveness under rising carbon prices. 

Our analysis highlights that combining earnings-at-risk modeling using pass-through dynamics and transition indicators such as SBTi targets and green revenues can provide a more forward-looking picture of corporate resilience. Firms with credible transition plans and the ability to pass costs to customers may not only mitigate downside risk but also capture opportunities as capital shifts toward lower-carbon business models. 

For investors, integrating these insights into portfolio construction, engagement and risk management may be key to navigating — and benefiting from — Japan’s accelerating energy transition.

The authors would like to thank Harinakshi Raina and Zoltán Nagy for their contributions to this blog post.