Japan’s SRI bond market: strength in numbers

Outsiders often see Japan’s debt market as a staid place, where the maturity of investors and issuers leaves little room for innovation. The development of the green bond market puts the lie to that idea.

  • By Matthew Thomas
  • 28 Mar 2019
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Japan 2019

The country has led the way in the development of green bonds and other forms of financing that will attract socially responsible investment (SRI). Bankers have worked hard to structure novel deals, issuers are rushing to beat the competition and the government has given the development of the market a crucial push by offering subsidies for some of the extra costs of green bond issuance.

What’s next for Japan’s green bond market? Does the rise of other forms of SRI financing such as social bonds represent a new opportunity or a risk of fragmentation? How much flexibility do Japanese issuers have when it comes to the use of proceeds? GlobalCapital sat down with a group of leading market participants to find out.

Participants in the roundtable were:

Kazuyuki Aihara, head of ESG products, debt capital markets, Nomura

Masato Kanedome, technical assessor, DNV GL

Go Nikaido, assistant manager, finance, ANA Holdings

Tadashi Shibakawa, director, environment and economy division, Ministry of Environment (MoE)

Satoko Tanaka, director, capital markets division, Japan International Cooperation Agency (JICA)

Akiyo Miyakawa, director, division of financing, Development Bank of Japan (DBJ)

Yoshiyuki Arima, director, fund management division, Japan Student Services Organisation (JASSO)

Naoki Sato, director, bond section, budget division, bureau of finance, Tokyo Metropolitan Government (TMG)

Matthew Thomas, Asia bureau chief, GlobalCapital




GlobalCapital: It would help to start this discussion by going first to the issuers on the panel. What has been your experience of issuing bonds that fit the socially responsible investment (SRI) profile? Is there anything holding you back from further issuance?

Go Nikaido, ANA: Last October, we made our debut in the green bond market. The purpose of the issuance was to help us fund a new training centre for our air transportation business, which we are constructing as a green building. Ahead of the Tokyo 2020 Olympic and Paralympic Games, flight slots at Haneda and Narita airports are being expanded and in light of that, we have increased our own investments based on our mid-term corporate strategy. Investing in people and safety is one crucial part of that, so building the green centre was an important step. 

At the early stage of considering green bonds, we studied the possibility of funding for fuel efficient aircraft. As a result, [we found that] aircraft investment seems to be challenging [to finance through green bonds].

Satoko Tanaka, JICA: Among various types of assistance JICA offers are development assistant loans to developing countries. We finance about 10% of the loan operation by bond issuance. Our annual bond issuance budget is ¥80bn, although the actual issuance has been closer to ¥60bn in the recent years. That bond market portion is a natural fit for social bonds. We issued our first social bond in 2016, and have continued to tap the market since then. This is now a regular funding market for us.

Akiyo Miyakawa, DBJ: In the case of DBJ, around ¥200bn ($1.8bn) of our bond issuance is guaranteed by the Japanese government. Around ¥150bn is issued without a guarantee and of that roughly $500m to $1bn is allocated for SRI bonds. Please note that this is just an approximate size, not a rigid budgetary constraint. 

In terms of assets funded by green bonds, the very first green bond we issued was used to finance green buildings. DBJ has its own unique green bond certification system, so it was tied to that. Subsequently, we increased the category of the use of proceeds in this segment, including the DBJ Environmentally Rated Loan Programme, loans that fit the global real estate sustainability benchmark (GRESB), and financing for renewable energy and clean transportation projects.

Naoki Sato, TMG: Green bonds represent a very important part of our funding. The biggest merit of issuing green bonds is that they limit the use of proceeds to environmental projects, so in addition to investors who already see the terms of the bond as attractive, we get additional investors who are attracted by the use of proceeds. That enables us to maximise demand. We think that oversubscription will bring a positive sentiment towards the next transactions, leading to even stronger demand. Creating such positive momentum will help the green bond market mature.

The use of proceeds needs to be determined by each issuer, taking into account their individual circumstances and depending on market conditions. We think that single product bond programmes will attract strong demand from investors who sympathise with a specific theme, but with multi-product funding programmes the issuer will be able to increase the number of eligible projects and achieve a larger issue size. 

Yoshiyuki Arima, JASSO: The social bonds we issued were for type-two scholarships, which are interest bearing loans for promising students. We have issued these bonds on a quarterly basis, raising a total of ¥120bn ($1.08bn) a year for the last four years. In the past, we had issued a total of ¥180bn but we had some budgetary limitations, including funding costs and expenses, so in the last fiscal year we issued ¥120bn.

In that sense, there is some room for more issuance. However, budgetary limitations are one major factor for us as an institution responsible for implementing policies.

GlobalCapital: Is the green bond market reaching a tipping point in Japan? What sort of growth are you expecting in the coming fiscal year?

Japan 2019Kazuyuki Aihara, Nomura: In Japan, the issuance of green bonds has increased rather substantially. One thing that is unique about Japan is that it is corporate issuers, including real estate investment trusts, rather than financial institutions that are really proactive when it comes to issuing green bonds. 

A range of issuers including DBJ, JICA and others have been important issuers of SRI bonds, but also we are now seeing more and more issuers flocking to this market.

Tadashi Shibakawa, MoE: The green bond market last year grew by about 2.4 times in total volume terms, and the number of deals tripled. In 2017, we introduced the Green Bond Guidelines and we also created the Pilot Project for Green Bond Issuance. In 2018, we started the Financial Support Programme for Green Bond Issuance to subsidise the external cost of green bonds, such as the cost of the external review and consultation on establishing a framework for the green bond issuance.

The efforts made by supporters of green bond issuance, and the increased awareness by issuers, may have contributed to the market development. We intend to make the market self-sustaining. 

For further development, we expect diversification of the use of proceeds and types of green bonds. This is an important way to increase the size of issuance in this market. Green financing needs to move beyond being seen as just one asset class to representing many different asset classes.

GlobalCapital: How strict is the definition of ‘green’? How strict should it be? It would be interesting to go back and consider Nikaido-san’s earlier point about green financing for aircraft — could this ever be considered green?

Masato Kanedome, DNV GL: That would be very difficult at the moment. Given best practices limited to the aviation business segment, it could be defined as greener activity. But according to best practices in the wider corporate landscape, and considering the Paris Agreement, it would be difficult. These industry-specific and more general considerations need to be balanced. 

The continued use of fossil fuel makes it very difficult for aviation to be financed by green bonds, but sometime in the future we will have a clear definition or taxonomy on the use of proceeds. 

There are no clear standards at this time on the fuel efficiency of aviation. The European Commission’s sustainable finance expert group is coming up with a green taxonomy this year, so we will all be keeping a close eye on that — it will be influential across the world.

Nikaido, ANA: The difficulty is that we are a user of aircraft, not a manufacturer. We voice our opinions to the manufacturers, urging them to come up with better, more efficient aircrafts. It is true that fossil fuels are not environmentally friendly, so biofuel development for jets is something we would like to see. 

Aihara, Nomura: As Kanedome-san mentioned, there is an EU taxonomy being developed. That makes it likely that global standards will move towards a stricter regime. That is my understanding. We’re seeing heightened awareness and interest in the environment, and that is extending to markets. Investors’ thinking about the environment are probably moving towards the darker green side. [‘Dark green’ investors are those most committed to environmental impact.]

Japan 2019

Shibakawa, MoE: For the MoE, it is important that individual green bonds keep a high quality of ‘greenness’ to sustain the reputation of the market. In the future, people will become harsher and stricter about green standards. 

Miyakawa, DBJ: When we issued our first green bond in 2014, the use of proceeds was only financing tied to DBJ’s green building certification. As we could disclose the names of all three projects the funds were allocated to, the transparency was very high and investors seemed comfortable with that. In 2015, we started to add our DBJ Environmental Rated Loan Programmes (ERLP) as a use of proceeds of our bond. 

In ERLP, we rate our clients based on their commitment to the environment. The rating criteria consist of four parts: general environmental management, environmental business activities, environmental performance and sustainability. We ask borrowers more than 100 questions to rate them. These questions include ones about how environmental issues are managed, what eco-friendly products they have on the market, what the real estate environmental performance of the customer is, and so on. 

As it is difficult to report how much CO2 reduction a company has achieved thorough funding from an ERLP loan, some strict investors requested we remove ERLP loans from the use of proceeds or change its scheme to be able to collect certain figures related to CO2 emission from the borrowers. The number of investors who push for these measurable CO2 reductions is increasing, and each year investors are pushing for more transparency to measure the impact. 

Of course, we are trying our best to increase the transparency of our reporting, but unfortunately we can’t disclose all the numbers investors want at this point. We have disclosed CO2 reductions for renewable energy finance, and will continue to make efforts to respond to investors’ requirements in the future. 

GlobalCapital: There is still no pricing advantage for most green bond issuers, which is why the subsidy from the Ministry of Environment has been so effective. But in the long-term, what is the pitch for issuers without some sort of pricing advantage?

Japan 2019Sato, TMG: We think that a pricing advantage is necessary as long as additional efforts, such as obtaining second party opinions and maintaining reporting, are required. However, in the current situation, where the green bond market is just starting to mature and expand further, it is more important to widen the investor base by showing a pricing level in line with investors’ targets than it is to excessively pursue tighter pricing. We believe this approach will generate social benefits and give the market momentum.

Aihara, Nomura: We are seeing an increase in corporations that are considering SRI bonds. There are a few reasons for this. First, they want to be clear with the market — not just bond investors, but also their customers — that they are making an effort to have a positive environmental and social impact.

Second, increasing appetite from investors is making SRI bond marketing run smoothly. This may lead to a pricing advantage in the long-term, but it is not the only factor.

GlobalCapital: How much has the green and SRI investor base developed in Japan? Is it catching up with the overseas market?

Aihara, Nomura: In Europe, there are funds dedicated to green bonds and SRI bonds. Most market participants are aware of the existence of those funds. But in Japan, they have not reached such a recognisable size.

Asset owners, such as life insurers, have continued efforts to invest in these areas, expanding their SRI investment. The regional investors such as shinkin banks or credit institutions are small in size, but those investors have also started to show interest in green bonds. These regional investors are also interested in social bonds, such as those issued by JASSO and JICA.

We need to expand the market. One way to encourage the development of more of those investors in the domestic market is to create an index for green bonds and SRI bonds.

Sato, TMG: There are investors that have bought our bonds because they are green and we think the number of SRI-dedicated investors in Japan will increase. But in order to enlarge the demand in the future, we think further development and maturing of the domestic green bond market in Japan is essential, which is one of our reasons for issuing green bonds. 

Kanedome, DNV GL: As we discuss with issuers and brokerage firms the benefits of green bonds, the diversification of the investor base is a key one, so we need to make sure that this investor base continues to grow. But we also need to consider a wider definition of green financing tools and instruments. What about green loans? They do not really exist in Japan at the moment, but overseas the market has options like that available. Companies want to see more diversification of the tools and instruments. It is not just green bonds or even green loans, but social financing too. We do need to work hard to establish green bonds in their own right, but it is also important the development of the market is not too limited.

GlobalCapital: Are foreign investors — and perhaps foreign issuers — going to be a crucial part of developing this market?

Aihara, Nomura: Foreign life insurers and other investors are showing interest in buying Japanese green bonds. They have actually already begun investing in some of these deals. I imagine that there is still room for them to allocate more capital to the Japanese market. I’m wondering how they view Japanese green bonds as opposed to European green bonds. What do they think of reporting standards in Japan? These are key questions we would like to ask investors.

We also expect more foreign issuers to sell green bonds in Samurai or Pro-Bond format. We’re seeing Asian sovereigns making efforts to attract global green bond investors. Given the liquidity available there, we think those issuers will also tap the Japanese green bond market.

Shibakawa, MoE: As of today, foreign issuers and investors are not yet investing nor issuing much in the Japanese green bond market. But we expect that they may play an important role in increasing the demand for green bonds and diversifying the investor base.

Sato, TMG: Most of the green bonds issued in the domestic market are yen-denominated and not large in size, as such we think that participation of foreign investors is limited.

Japan 2019

GlobalCapital: The SRI market is, of course, more than just green bonds. How far have social bonds and other forms of financing developed in Japan? 

Arima, JASSO: We have offered our type-two scholarships since 1984. We had previously explained these scholarships to investors, showing they have social characteristics. But the idea to clearly define our financing as social bonds actually came from those investors. 

We conducted an internal review that lasted around a year and in September 2018, we obtained an opinion that we could issue social bonds. The maturity of the subsequent deal was two years, so it was a very short tenor and the yield was 0%. We have issued bonds with a 0% yield for our last 11 issuances and we continue to see the fruits of labelling our bonds as ‘social’. 

The second opinion that we obtained includes an assessment of JASSO’s environment, social and governance (ESG) performance as the issuer. The challenge for us obtaining a second party opinion was that we’re not just offering type-two scholarships. In other words, we need each department to report their own social impact, since it is only by combining all of our departments into a whole that we can get an opinion from a second-party certifying our deals as social bonds. But one thing that has made this slightly easier is the fact that we have already compiled detailed reports for the Ministry of Education, so we didn’t face substantial issues for reporting.

Tanaka, JICA: We started issuing social bonds in September 2016, which made JICA the first Japanese social bond issuer. Even before ICMA published the Social Bond Guidelines (now Principles) in 2016, we had received support from investors who valued the socially contributive nature of JICA’s projects, and when the principles were first announced, we realised our bond framework fit the principles. 

Japan 2019More recently, in addition to receiving support for the ‘social’ aspect of our bonds, we are beginning to see growing support from investors who are committed to making a contribution to the UN’s Sustainable Development Goals (SDGs), which were adopted at the 2015 UN Summit. Many financial institutions, both Japanese or overseas, are looking for financial products that can make a positive impact towards achieving the SDGs, and they see JICA as an agent that promotes the socioeconomic development of the developing world and consider our bonds as a viable means to make their contribution to the SDGs.

Miyakawa, DBJ: We have been looking at the possibility of social bonds since last year. But when you look at JASSO and JICA, they have been doing reporting for a while and their social contribution was clear before anyone started talking about ‘social bonds’. 

According to the Social Bond Principles, the use of proceeds shall be a project for the ‘target population’. In Europe, most of the social bonds issued so far seemed to go to financing projects such as affordable housing or hospitals for low-income households, or employment generation for SMEs. 

Since these projects are listed in the principles as samples of the use of proceeds, they are easily accepted by the investors. Unfortunately we don’t have a large enough amount of such projects in our assets, so if we decide to issue social bonds, we need to consider what we could allocate as ‘social projects’.

GlobalCapital: This comes back to the question of definitions. Isn’t development a social factor almost as much as it is an economic one? You could certainly argue to investors that by helping create economic development you’re also laying the groundwork for long-term social progress. 

Aihara, Nomura: In the green bond market, a CO2 reduction can be quantified. But for social bonds, how we quantify the impact is something that everybody is struggling with. 

There is a need for more quantitative reporting on social impact. That is now a central piece of the discussion, but different investors focus on different factors. We have been struggling to pave the way for social bonds.

Japan 2019

GlobalCapital: Is there a risk of fragmentation? Does the development of alternative SRI bond markets reduce the liquidity that would otherwise go into green bonds?

Shibakawa, MoE: These markets are stimulating each other. I don’t think the fragmentation prevents the development of the green bond market.

Kanedome, DNV GL: Fragmentation may be a factor and unavoidable at this time, but for both investors and issuers, green awareness still needs to be enhanced. We need to understand that Japanese green and social markets are still in the initial stage of development, where the most crucial thing is growing the market. Once the market has reached a mature level, with enough size, the market focus will shift to stricter definitions of what is really green and what is really social. 

GlobalCapital: The Ministry of Environment has taken a few steps to develop the green bond market in Japan, including introducing Green Bond Guidelines and offering a subsidy for issuers. How much is the development of Japan’s green bond market down to these measures?

Aihara, Nomura: The Ministry of Environment has played a very important role. Treasury departments at issuers focus on the cost of issuance before any other factor, so the subsidy provided by the MoE went a long way towards encouraging these issuers to come to the market. 

Most green bond issuers have applied for subsidies, which shows how important the policy has been. But it is not just the subsidy. Last year, the MoE began giving awards to issuers. That has increased the motivation on the part of issuers, even though it doesn’t change the economics.

Shibakawa, MoE: We intend to make the market self-sustaining in several years’ time, providing the subsidy and non-financial support. That should be a step forward.

In 2018, about 70% of issuers used our subsidies and as Aihara-san said, we have also introduced green bond awards to give issuers a non-financial incentive. We have commissioned researchers to make extensive studies on pricing. 

We have a fiscal budget of ¥500m for subsidies and the registration system of Green Bond Issuance Supporters in the next financial year, which starts on April 1.

We are seeing diversification among the issuers and in the purpose and type of bonds. In addition, a lot of research and study is being done. How do we price green bonds? How does the risk-return of a product weigh against the environmental risk-return? We have commissioned external bodies to make extensive studies on pricing.

Sato, TMG: Issuance of green bonds is increasing in the domestic market and we think that the implementation of the green bond guidelines has contributed to it. Setting up The Green Bond Issuance Promotion Platform is particularly important in terms of information transparency. 

Japan 2019The subsidy project for obtaining a second party opinion is relatively new and too early to evaluate. 

GlobalCapital: Did ANA get a subsidy?

Nikaido, ANA: Yes, we did. I should express my gratitude to the MoE. It was a big part of the motivation for us to issue and the MoE’s Green Bond Guidelines also helped us figure out how to structure the deal. They have detailed steps, including a checklist that issuers need to go through. We used it extensively and receiving a stamp of approval from the ministry was a definite benefit to us.

Kanedome, DNV GL: One thing we noticed — there were some issuers who did not apply for the Ministry of Environment subsidy [but did issue green bonds]. We need to learn a lesson from them as to why they did it without a subsidy. There may be some useful tips regarding how to grow up a sustainable green and social market in the future.   





  • By Matthew Thomas
  • 28 Mar 2019

Global Green Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 6,623.09 48 6.22%
2 Credit Agricole CIB 5,915.31 35 5.55%
3 BNP Paribas 5,736.07 36 5.38%
4 Bank of America Merrill Lynch 5,487.29 34 5.15%
5 Citi 5,339.73 31 5.01%