Developed roots

Asian Development Bank Special Report 2019
9 min read
Steve Garton

Japan has led the world in financing for social causes, but Asia’s biggest capital market has been slow to embrace green finance. That attitude is changing as issuers and investors respond to the government’s ambitious energy policy.

When the World Bank set out to raise money for an ambitious international immunisation programme in 2008, the Japanese capital market was the obvious choice. The combination of a Triple A rating and a worthy cause was an instant hit with retail investors, kicking off a funding programme that went on to raise over US$2bn for the International Finance Facility for Immunisation in a variety of currencies.

Since then, Japan has developed into a major market for social finance, where investors tie funding to a specific cause or theme. The Asian Development Bank turned to Japan to sell ‘water bonds’ in 2010, as did Latin American development bank CAF on several occasions. More recent thematic deals have included ‘gender bonds’, with a NZ$130m (¥10bn) ADB deal placed entirely with Dai-ichi Life Insurance in November 2017. Corporations have also tapped into this growing investment pool: Starbucks’ ¥85bn Sustainability bonds in 2017 were also the US coffee giant’s first bond sale outside of North America.

While the social theme has expanded rapidly, green finance has been surprisingly slow to catch on.

Japan is home to the world’s second-biggest biggest bond market, but ranks only 10th for total Green bond issuance, according to the Climate Bonds Initiative. Green bond sales in 2018 reached US$4.1bn, against US$34.2bn for the US and US$31.0bn for China, the two biggest markets.

Chaoni Huang, executive director for green and sustainable solutions for Asia Pacific at Natixis, notes that ESG – environmental, social and governance – strategies are already popular among Japanese investors, but most have so far focused on the social and governance elements.

“Japanese investors started looking at ESG much earlier, and so far it has been an investor-driven approach,” she said. “Action around the environment has been less urgent for Japan than for China because the problems are less visible.”

There are signs that the “E” of ESG is getting more attention, as both issuers and investors see the benefits from green finance.

The Government Pension Investment Fund, the world’s biggest pension fund with around ¥151trn (US$1.4trn) under management, signed up to the UN Principles for Responsible Investment in 2015 and has embedded ESG into its investment strategy since 2017.

In September, GPIF said it would allocate ¥1.2trn (US$10bn) of passive investments to two equity indices that give a higher weighting to carbon-efficient companies and those that report their carbon footprint, in an effort to encourage corporate disclosure and safeguard its long-term returns.

Sachie Ii, head of the sustainable finance office at Mizuho Securities, sees the trend spreading from the equity to the bond market.

“Japan has been behind as a country in the development of issuing Green bonds but this has accelerated since the second half of 2017. At first Green bonds were issued mainly by government agencies and the financial sector, but in 2018 we saw bonds issued by J-REITs, leasing companies and other operating companies,” she said.

“Many investors are already thinking about it and are ready to invest, and issuers began studying Green bonds much more last year.”

Policy goals

Japan’s energy policy is driving momentum. The government’s commitments under the 2016 Paris agreement include a 26% reduction in greenhouse gas emissions from 2013 to 2030, which will require enormous investments in energy efficiency and renewable power.

To help mobilise funding, the Ministry of the Environment published Green bond guidelines in 2017 and followed up that initiative in 2018 with a subsidy programme to help companies pay for certification and verification costs.

Aya Nagata, deputy director for environmental finance at Japan’s Ministry of the Environment, believes Green bonds can be an effective way of encouraging private sector investment to support global Sustainable Development Goals (SDGs) and limit global temperature increases to less than 2 degrees Celsius from pre-industrial levels.

The subsidies, she says, have been successful in overcoming a “bottleneck” that had limited the issuance of Green bonds, while a dedicated information channel – the Green Bond Issuance Promotion Platform – helps to motivate issuers and investors.

“In 2018, the Japanese Green Bond market grew by 2.5 times in total volume and triple in number of issuances from the record of 2017. This expansion was more than double our expectations both in volume or numbers,” said Nagata.

The subsidy scheme provides up to ¥50m per issue to cover the additional costs of an external review. To qualify to apply for the subsidy, at least half of the proceeds must be used for projects in Japan. The bonds can be issued in any currency as a public offering or private placement.


The first Japanese company to take advantage of the subsidy was Ricoh Leasing, which sold ¥10bn of five-year bonds in September 2018. Mitsubishi UFJ Morgan Stanley, Mizuho, Daiwa and Nomura were the joint leads on the transaction. Among regional investors taking about 30% of the five-year offering, a few participated for the first time.

Hitachi Zosen, Tokyo Century, ANA, Daio Paper and Fuyo General Lease all followed quickly with straight bonds of their own.

Japan also hosted the world’s first offering of Green convertible bonds last September, when timber company Sumitomo Forestry raised ¥10bn to refinance a New Zealand project, via sole bookrunner Daiwa.

Tokyo Tatemono, a commercial property developer, sold ¥50bn 40-year non-call 10 subordinated Green bonds in March, in Japan’s first public offering of Green hybrid bonds. Mizuho, Daiwa Securities and SMBC Nikko were lead managers, and 26 investors – including the Development Bank of Japan – announced they had bought the bonds.

Next steps

Looking ahead, there is much excitement about Japan Railway Construction, Transport and Technology Agency (JRTT), which said in February it had obtained a certification from the CBI for its Sustainability bond framework. The state-owned rail builder is the first Japanese issuer to obtain a CBI certification, part of a strategic move to use only sustainable financing for its ongoing operations, and plans to issue ¥117bn in fiscal 2019.

Yasunobu Katsuki, senior primary analyst at Mizuho Securities, described the move as “epoch-making in our market”, predicting that JRTT’s approach would stimulate Japanese issuers.

“We can forecast that we will see more issuers and investors coming to this market in the next fiscal year,” said Katsuki, who also expects a more diverse variety of instruments such as securitisation to arrive in the 2019 fiscal year.

JRTT also plans to borrow ¥55.3bn via a syndicated Sustainability loan, adding to the nascent development of a Green loan market following the publication of global Green loan principles in March 2018.

Though progress is clear, observers and policymakers agree that more needs to be done to meet Japan’s ambitious climate goals, and ministers are likely to look for ways to showcase their progress when Japan hosts the G20 Summit in Osaka at the end of June.

The CBI suggests Japan’s government agencies could do more to attract private capital and promote green finance, naming Japan Finance Organization for Municipalities, Japan Bank for International Cooperation, Japan Housing Finance Agency and Japan Finance Corporation among potential issuers.

“The Green bond market remains relatively small. Both public and private sector action is required to scale up issuance and investments to meet the country’s environmental targets,” said the CBI in a March report. “Public sector entities are pivotal in the development of the Green bond market.”

Aside from JRTT, only the Development Bank of Japan and the Tokyo Metropolitan Government have so far issued Green bonds.

Nagata at the Ministry of the Environment expects the Green bond market to develop as the range of issuers, use of proceeds and maturities broadens. She said the government aimed to establish Green bonds as a self-sustaining market where issuers and investors participate actively – without subsidies.

“The important point is motivating the investors and issuers to mobilise funds towards green finance” to address global warming and meet the SDGs.

“Market participants are starting to realise the importance of achieving these goals.”

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Developed roots