The challenges of standardising green bonds in Japan
Katsuyuki Tainaka, Suguru Miyata and Shinya Mizumoto of Mori Hamada & Matsumoto examine why green bonds have become widely known and accepted in the Japanese debt capital markets
History of green bonds in Japan
The dawn of green bonds in Japan was the issuance in October 2014 of euro-denominated green bonds by Development Bank of Japan (DBJ). The net proceeds of the issuance were used to finance new and existing loans managed by DBJ in connection with a real estate development holding the DBJ Green Building Certification.
Since then, DBJ has monitored and accounted for the net proceeds in order to ensure their proper allocation to those loans, and has made relevant information public on its website. While DBJ has never unequivocally declared that the bonds were issued to be compliant with the green bond principles established and published by the International Capital Markets Association (ICMA GBP) initially in January 2014, it is apparent that DBJ’s framework and arrangements were informed by the ICMA GBP.
DBJ’s continuous issuance of sustainability bonds in place of green bonds since 2015, and a number of subsequent cases of green bond issuances by Japanese financial and non-financial institutions thereafter, indicate the expansion of green bonds in Japan almost concurrently with Europe.
The Green Bond Guidelines published by the Ministry of the Environment
Notwithstanding the several-year history of green bonds and more than 150 cases of issuances by the end of 2020, no regulation has been introduced in Japan, or, so far as aware, in any other jurisdictions specifically governing the issuance and offering of green bonds and the regulatory position is based rather on informal guidance. In Japan, the Green Bond Guidelines (the GBG), published initially in 2017 by the Ministry of the Environment of Japan (the MOE), have been the main source of regulatory guidance for Japanese companies planning to issue green bonds in the Japanese domestic market. The GBG are available at the website of the MOE`s Green Finance Portal.
Initial publication of the GBG in 2017
After a six-month-long discussion by the Green Bond Review Committee established within the MOE, including discussions with European and US financial market participants, and completion of the public consultation process, the GBG were first published in March 2017.
The GBG were drafted based on the recognition that, while green bond issuances and investments in the international markets had increased significantly since the introduction of the ICMA GBP, there was room for further development in the Japanese green bond market. The basic approaches of the GBG are as follows.
Due consideration should be given to ensuring consistency with the globally-accepted ICMA GBP. In order to attract international investors to green bonds issued by Japanese companies, the GBG have been designed to align with the ICMA GBP so as to reduce the investment costs of international investors already familiar with the principles.
The GBG should reflect Japan’s developing market, where green bond issuances and investments are not yet active compared to international markets, and the MOE should consider incorporating means of lowering the costs and administrative burden of the guidelines. The GBG have been designed considering the twin goals of standardising the financing process for green bond issuances and facilitating the establishment of the Japanese market. Accordingly, the GBG allow companies to declare the environmental benefits of the bonds they issue even if the bonds do not possess all elements described as ‘requirements’ of green bonds under the guidelines. The MOE has confirmed that even such ‘trial’ issuances are effective. The MOE’s position is based on the expectation that such issuers will accumulate the knowledge for green bond issuances pursuant to a more robust standard in the future.
To ensure the integrity of domestic and international green bond investments, the GBG should prevent ‘green wash’ bonds (i.e. bonds labelled as ‘green’ despite having exaggerated or no environmental benefits, or whose proceeds have not been appropriately allocated to green projects) from being issued and invested in. The GBG are based on the principle that the best way to prevent the spread of ‘green wash’ bonds is market discipline based on mechanisms for investor assessment based on the adequate disclosure of information pertaining to green bond issuances.
Since the first publication of the GBG, the number of green bond issuances by Japanese companies has rapidly increased year on year.
First revision of the GBG in 2020
The first edition of the GBG clearly stated that the guidelines will be revised in response to changes in the maturity of the Japanese market, international trends and other conditions. Taking into consideration the development of the Japanese green bond market since 2017, the MOE revised the GBG in March 2020. This revision was also affected by the update of the ICMA GBP in June 2018 and the publication of the Green Project Mapping and the Guidance Handbook in June 2019.
“the number of green bond issuances by Japanese companies has rapidly increased year on year”
Prior to the publication of the revised GBG, an eight-month-long discussion by the Green Bond Review Committee was held and a further public consultation process conducted. Furthermore, the committee also sought opinions from relevant international institutions such as the ICMA GBP New Market Task Force and the Climate Bonds Initiative, which were reflected in the revised GBG.
Through this revision process, the MOE closely examined the recent ICMA GBP as well as international trends in green bond issuances and sought to maintain consistency with those standards. In addition, it is worth mentioning here that the revised GBG introduced a concept of sustainability bonds and confirmed that the guidelines also apply to sustainability bonds which have the nature of ‘green’.
The GBG have become established as key guidelines in the Japanese capital market, and it is expected that the guidelines, along with the ICMA GBP, will be continuously relied on by Japanese issuers until legislation for the regulation is introduced in Japan.
Overview of the GBG
Under the GBG, green bonds are defined as bonds issued by companies, local governments or other organisations for the purpose of raising funds for domestic and international ‘green projects’. Specifically, green bonds have the following features: proceeds are allocated exclusively to ‘green projects’, the allocation is tracked and managed in a reliable manner, and transparency is ensured by ongoing reporting after the bonds are issued.
As noted above, the GBG are not legally binding but are designated to align with the ICMA GBP, introducing the four core components of green bonds: (i) use of proceeds, (ii) a process for project evaluation and selection, (iii) the management of proceeds, and (iv) reporting.
In addition, as seen in the ICMA GBP, the basic concept of external review is also referenced in the GBG. All expected elements of green bonds and their issuers, as well as possible measures to ensure that the bonds have such elements, are described in the GBG as a requirement, a recommendation or a consideration. The MOE considers that bonds satisfying all the requirements of these four core components are expected to be internationally recognised and accepted as green bonds, while the recommendations are elements which green bonds are expected to have and the considerations illustrate possible approaches and interpretations of the guidelines.
Use of proceeds
The GBG articulate that the use of proceeds of green bonds should be allocated to ‘green projects’, which have clear environmental benefits, and that the issuers should provide an assessment of those benefits. While the ICMA GBP carefully list eligible ‘green project’ categories, the GBG set forth in an annex an exhaustive list of ten categories and sub-categories of possible uses of proceeds with a disclaimer that issuers should nevertheless pay close attention to developments in acceptable uses of proceeds in international practice.
The GBG also make it clear that, in cases where ‘green projects’ have incidental negative effects on the environment along with the intended benefits, issuers should disclose any such negative effects as well as measures to combat them, to investors and market participants for their proper evaluation. Examples of negative effects are provided in another annex to the GBG.
Project evaluation and selection process
Under the GBG, each issuer of green bonds is required to provide investors, prior to their making an investment, with information on (a) environmental sustainability objectives that the issuer intends to achieve through the issuance of the green bonds and (b) the criteria and process for determining the suitability for such objectives of the green projects to which the proceeds of the green bonds are to be allocated.
Notably, the GBG provide examples of the above ‘objectives’, ‘criteria’ and ‘process’ for issuers to easily incorporate into their own disclosure. For instance, as to criteria, the GBG suggest that, if climate change mitigation or adaptation is the main environmental objective, the proceeds may be used for green projects that will reduce greenhouse gas emissions such as renewable energy projects.
Management of proceeds
Issuers of green bonds are also required to track and manage the entire green bond proceeds in an appropriate manner to ensure their proper allocation to ‘green projects’ and such tracking and management should be governed by the issuer’s internal processes. The GBG also provide that such proceed tracking and management measures should be disclosed to investors in advance. For possible issuer reference, a few examples of such measures are illustrated in the GBG.
Issuers of green bonds are expected to publicly disclose up-to-date information on the actual status of the allocation of the bond proceeds. They should renew such disclosure at least annually until the completion of allocation and must also disclose on a timely basis any material changes in the stated allocation plan. Such information may be disclosed on the issuers’ official websites.
Disclosure should include, among other things, an outline of each green project to which the proceeds have been allocated, the expected environmental benefits of each project, and information regarding unallocated proceeds. When disclosing information on the expected environmental benefits, it is recommended that issuers use appropriate metrics, while ensuring consistency with the ‘environmental sustainability objectives’, the ‘criteria’, the ‘process’ and the nature of the green projects. The GBG cite the ‘Handbook – Harmonized Framework for Impact Reporting’ and ‘Guidance Handbook June 2019’ published by the ICMA.
Similar to the ICMA GBP, the GBG recommend that issuers of green bonds request an external review in the event that an objective assessment of the alignment of their approach with the four core components is required and that the results of such review should be disclosed.
“the use of proceeds of green bonds should be allocated to ‘green projects’, which have clear environmental benefits”
In practice, the green bond framework of each proposed green bond issuance is reviewed by an external review provider prior to issuance. In Japan, not only global green bond rating companies such as Vigeo Eiris and Sustainalytics, but also Japanese domestic rating companies such as JCR and R&I offer such external review services.
In June 2021, the ICMA GBP 2021 edition was released, highlighting two key ‘recommendations’ on the bond framework and external reviews designed to increase transparency alongside the four core components. This will be considered at the time of the next revision of the GBG.
Rapid increase in green bond issuances with financial support from the government
To encourage Japanese companies as well as Japanese real estate investment trusts (J-REITs) to issue green bonds, in 2018, the MOE launched the Green Bond Issuance Promotion Platform, a website transmitting information about green bonds such as models of issuance, data of recent cases by domestic issuers, and relevant policies of the Japanese government.
The MOE has also provided subsidies for fees to be paid by potential issuers of green bonds to third-party experts who provide support in the form of external reviews and consultation on the establishment of a green bond framework. Since the commencement of this financial assistance programme in 2018, around 120 cases of green bond issuances by Japanese financial institutions, non-financial institutions and J-REITs in total have been granted the subsidies.
With support from the government’s establishment of the GBG as well as the financial assistance programme, green bonds have become widely known and accepted in the Japanese debt capital markets, and the number of green bond issuances by Japanese entities continues to rapidly increase.
Mori Hamada & Matsumoto
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Katsuyuki Tainaka is a partner at Mori Hamada & Matsumoto, with deep expertise in capital markets and in debt offerings in particular.
Katsuyuki has recently been advising on environmental, social and governance (ESG) matters as a leading partner of the firm’s ESG/SDGs practice group. He has been recognised as an IFLR – Asia Future Leader 2021, and as a ‘Rising Star’ by IFLR1000’s 30th edition, for his capital markets work.
Katsuyuki is a graduate of the University of Tokyo and holds a LLM from University of Pennsylvania Law School. He is admitted to the bar in Japan and New York.
Mori Hamada & Matsumoto
T: +81 3 6266 8732
Suguru Miyata is a partner of Mori Hamada & Matsumoto. He has large experience in equity deals such as IPOs, issuances of zero coupon convertible bonds in euro-markets, private placements of stocks, preferred stocks and warrants.
Suguru has experience in working with the Securities Exchange and Surveillance Commission of Japan and in enforcement actions and litigations there under the securities law. He has also been advising on ESG disclosure in Japanese disclosure documents, in particular for Japanese listed companies.
Suguru holds a law degree and a JD from the University of Tokyo, and a LLM from New York University School of Law. He is admitted to the bar in Japan and New York.
Mori Hamada & Matsumoto
T: +81 3 5223 7752
Shinya Mizumoto is an associate of Mori Hamada & Matsumoto. He works primarily in capital markets, with a particular emphasis on debt offerings.
Shinya graduated with a bachelor’s degree from Waseda University and a JD from the University of Tokyo. He was admitted to practice in Japan in 2017.