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Japan’s SRI issuers catching up after investors show the way

Japan’s borrowers have been slow to board the SRI train. However, this is beginning to change, thanks to committed issuers such as the Tokyo Metropolitan Government, the Development Bank of Japan and the Japan International Cooperation Agency.

Japan, noted the Principles for Responsible Investment (PRI) in April, is “currently the fastest growing market for responsible investment, having previously lagged other markets”. 

The figures speak for themselves: according to the most recent survey from the Japan Sustainable Investment Forum (JSIF), which was published in April, the sustainable investment balance of Japanese institutional investors in 2016 reached ¥56.25tr ($51bn), 2.1 times more than the previous year’s total. The total including individual investors is ¥57.05tr. 

Some of this increase, JSIF acknowledges, reflects more efficient reporting among institutional investors. But JSIF reports that it has also been driven by “the significant change in the sustainable… and ESG investment situation over the past year and the advancement of related initiatives.”

Bankers say there is nothing new about Japanese demand for exposure to socially responsible investment (SRI) opportunities. Vince Purton, managing director at Daiwa Capital Markets Europe Ltd in London, says these date back at least a decade. He points out that as early as 2008, Daiwa led the inaugural Japan-driven issue for the International Finance Facility for Immunisation (IFFIm). This “vaccine bond” was a R1.7bn ($223m) two year Uridashi issue. Proceeds were used by the GAVI Alliance for health and immunisation programmes throughout the developing world.

Revitalising Japan

According to JSIF, much of the growth in the ESG capital market has been driven by a series of initiatives introduced under prime minister Shinzo Abe’s administration’s Japan Revitalisation Strategy, many of which have been focused on the G element (governance) in ESG. These included the issuance of Japan’s Principles for Responsible Institutional Investors (the Stewardship Code) in February 2014 and the Corporate Governance Code in June 2015. 

Another initiative aimed at strengthening governance was the publication in August 2014 of the so-called Ito Review by the Ministry of Economy, Trade and Industry (METI), which made a series of recommendations “to increase corporate value and generate ongoing growth via investor dialogue and capital procurement”. 

“Key messages,” this added, “are the need for a shift to capital efficiency-focused management, optimisation of the investment chain, and promotion of two-way dialogue between companies and investors.”

More specific to environmentally-sound issuance in the capital market was the publication in March 2017 by the Ministry of the Environment of its Green Bond Guidelines. At the time of their release, the Ministry announced that these would “lead to both the establishment of credibility of the green characteristics of green bonds and the alleviation of costs and administrative burdens for issuers, thereby spurring green bond issuances and investments in Japan.”

Another recent phenomenon reflecting heightened ESG awareness in Japan has been the very public commitment shown by a growing number of institutional investors to putting their weight behind socially responsible investments (SRI).

The Government Pension Fund, which has some $1.3tr of assets under management, signed up to the PRI in May 2016, and in November 2016 its CIO, Hiromuchi Mizuno, was elected to the PRI board. A more recent signatory to the PRI is Nippon Life, which announced in March 2017 that it had put its name to the principles. Although Nippon Life has been investing in ESG bonds and financing renewable energy projects for some time, it has now established a target allocation of ¥200bn into ESG bonds between 2017 and 2020. It has also indicated that it will adopt a more formal ESG screening procedure in the investment process and use its influence as a bondholder to promote enhanced governance standards by conducting “dialogues with investee companies about ESG issues”. 

A decisive response from issuers

Public as well as private sector borrowers have also been responding decisively to the challenges presented by climate change. Tokyo Metropolitan Government (TMG), for example, has been vocal in its support of the green capital market in Japan. “I would like to start a movement to make more effective use of Japan’s money,” said Tokyo’s governor, Yuriko Koike, in a speech delivered at the Asahi World Forum last October. 

TMG has been true to its word. Having already pioneered the issuance of its so-called “Tokyo Environment Supporter Bonds” in the Australian dollar market, TMG has now drawn up plans to issue some ¥20bn of “Tokyo Green Bonds” between October and December of this year. 

Perhaps more important for the longer-term development of Japan’s green capital market, TMG says that by launching the first green bonds by a local government in Japan, it will establish a benchmark that other municipal borrowers may follow. 

Japan International Cooperation Agency (JICA), meanwhile, was the first Japanese borrower to issue yen bonds in accordance with the Social Bond Principles (SBP). JCIA’s two-tranche offering of 10 and 30 year social bonds raised ¥35bn in September 2016. Sony Life announced that it had bought ¥4.4bn of the issue, while Dai-Ichi Life took ¥2.3bn.

In the international ESG market, among Japanese borrowers the way has been led by Development Bank of Japan (DBJ), which over the past 40 years has provided more than ¥3tr in loans and investment for environmental protection projects. In the capital market, DBJ launched Japan’s inaugural green bond in 2014 and its first sustainability bond in 2015. Last October, it issued its first dollar denominated SRI bond. 

The strength of Japanese investor demand for ESG exposure has not been lost on international issuers, many of which have increasingly been targeting green, sustainable and social bond issuance at the Japanese institutional market. 

In March 2014, EIB issued a small ¥5bn climate awareness bond (CAB) which it described at the time as the first-ever green bond in Samurai format. CAF, the South American development bank, has also raised ESG transaction funding in yen, launching a water bond in the Samurai market alongside a Uridashi in 2016.

Among other borrowers targeting the socially-conscious Japanese investor base with innovative ESG issues, Banco del Estado de Chile (Banco-Estado) broke new ground in June 2016 with the issuance of a ¥10bn, 10 year fixed rate ‘Women Bond’. This was BancoEstado’s third yen issue but its first SRI bond in any market, and the first 10 year offering ever from a Chilean institution in the Japanese market. Two months later, BancoEstado reopened the bond for an additional ¥15bn. 

This year, meanwhile, Electricité de France (EDF) took the yen ESG market into new territory when it launched the first benchmark-sized public green Samurai. Led by MUFG, Mizuho and SMBC Nikko, this issue raised ¥137bn (about €1.1bn) in four tranches of 10, 12, 15 and 20 years. A notable feature of this transaction was that the ¥3.1bn 20 year part was the longest tranche ever issued in the Samurai space, although it was demand for the green ¥107.9bn 10 year tranche that drove the overall success of the issue. 

Among other French borrowers, BPCE has also acted as a pioneer in the ESG segment of the Samurai market. In June, it issued an inaugural ¥58.1bn (€470m) social impact Samurai, a four-tranche transaction via Daiwa, Mitsubishi UFJ, Mizuho, Natixis and SMBC Nikko.

March saw another notable first for the market when US coffee house Starbucks launched the first global yen-denominated corporate sustainability bond in the Japanese market.

Japan was an appropriate market for the issuer, given that it now has more than 1,200 outlets located throughout the country.

International borrowers have also identified the yen market as a deep source of liquidity for renewable project financings. In April, for example, Canadian Solar announced the completion of a ¥5.4bn ($47m) dual-tenor bond via Goldman Sachs, the proceeds of which were used for the financing of the company’s solar power plant in the Gunma Prefecture in central Japan.

Private placement potential

There is also strong demand in the market for ESG private placements targeted at Japan. “When our team was in Tokyo in April we were asked a number of questions about the evolution of our social bond programme,” says Rodrigo Robledo, head of capital markets at the Madrid headquarters of Instituto de Crédito Oficial, a notable pioneer in the European social bond market. “There is clear interest from Japanese investors in private placements of social bonds.”

This interest has already been successfully leveraged by borrowers such as the International Finance Corporation. In July, it launched its first institutionally targeted social bond in private placement format with a $100m transaction bought by Nippon Life. Another borrower that has accessed the Japanese investor base via a private placement of SRI debt is Eurofima, which in March issued a $100m 10 year environmentally friendly railway bond sole-led by Daiwa. 

Japanese equity investors are also increasingly adopting ESG criteria into their asset allocation. The biggest of them all, the Government Pension Fund (GPIF), recently announced that it had selected the new FTSE Blossom Japan Index as a core benchmark for its ESG strategy, alongside the MSCI Japan ESG Select Leaders and the MSCI Japan Empowering Women Index. That is an especially relevant benchmark in Japan, given the government’s focus on promoting greater participation in the workforce.

GPIF has 3% of its equities in stocks with strong ESG credentials, a share which it intends to increase to 10%. This would suggest inflows into environmentally sound equities of $29bn.