Japan looks to tap new investor base in SRI market
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Japan looks to tap new investor base in SRI market


Green bonds have become one of the hottest topics in finance, taking their place alongside project finance and China’s Belt and Road as the necessary buzzwords on every investor’s lips. But green financing is more than just a passing fad for Japan’s strongest issuers. In a market defined by a famously rigid investor base, they are attempting to build a market that can be sustainable in every sense of the word. GlobalCapital sat down with some of Japan’s leading issuers, analysts, bankers and policy bankers to discuss where green and social financing is heading.

Participants in the roundtable were:

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

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

Masaya  Okuyama, director for environmental finance, Ministry of the Environment (MoE)

Naoki  Sato, director, bond section, budget division, Bureau of Finance, Tokyo Metropolitan Government (TMG)

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

Masato  Takebayashi, senior analyst, research products, Sustainalytics

Kenji  Yokoyama, group chief financial officer, Nomura Research Institute (NRI)

Matthew Thomas, moderator, GlobalCapital

: How do the offshore and onshore markets compare in terms of opportunities for SRI issuance? Where are you concentrating your efforts?

Satoko Tanaka, JICA: The biggest difference we see between the offshore and onshore SRI markets is the investor base. In the onshore market, as the number of SRI investors is still limited, we are making efforts to have dialogues with investors to let them know about our social bonds when we meet them on the road or by attending seminars on SRI. As for the offshore market, because the concept of SRI, or, in a more recent term, ESG, is widely accepted, our focus is to let them know about JICA, our work for the United Nations’ Sustainable Development Goals (SDGs), and our mission so that we can tap into the ESG focused investor base.

Naoki Sato, TMG: We understand the market is currently much bigger offshore than onshore, but TMG has concentrated its efforts on developing the domestic market. We raised ¥10bn from institutional investors with our Tokyo Green Bonds, and also sold an Australian dollar-denominated bond worth around the same amount; that was bought by individual investors. TMG wants to make the most of domestic funds for the promotion of Japan’s environmental measures, while at the same time invigorating green bond opportunities for other issuers. We were the first Japanese local government to issue green bonds, but we won’t be the last.

Akiyo Miyakawa, DBJ: Since 2014, we have issued one green bond and three sustainability bond deals — all of them in the offshore market. Recently we have seen some demand from domestic investors for DBJ to make its debut in the onshore sustainability bond market. We understand that this is a sign of the growing ESG investor base here, but since our priority is to diversify our investor base, and considering the limitation of the size of the eligible asset, we cannot immediately respond to the expectations from domestic investors at this point.

Sustainability bonds allow us a good way to diversify our investor base when we go offshore but, in the onshore market, there is still not a distinct set of green bond investors. That doesn’t mean we have ruled out a domestic deal. It is certainly something we’re considering. But the offshore market is more compelling at the moment.

Kenji Yokoyama, NRI: We take the opposite stance. We prefer to remain in the onshore market. Two years ago, we made our first SRI issue. We wanted to help create the market in Japan, so along with Nomura we put the work in to do a deal. It was a natural fit for us.

We have always been a green company, but we wanted to help lay the groundwork for the development of this market so we conducted intensive investor relations activity. That ensured we had conversations with investors across the market and those meetings gave me confidence that the green bond market will increase dramatically. 

The issuer base is already growing quickly, including with a deal from TMG. But there is still so much more room for more issuers to join this market. Corporations should make efforts to show the outside world they care about ESG.

As they start to do that in greater numbers, the growth of this market is inevitable.

Masaya Okuyama, MoE: There is clearly a difference between the onshore market and the offshore market. The offshore market had a head start, has expanded impressively, and is still growing year after year. Why has the onshore market in Japan not improved enough? This is something we have to reflect on ourselves.

Masato Takebayashi, Sustainalytics: ESG bonds in Japan are still at an early stage, so investors look at these bonds and still wonder how best to evaluate them. This is similar to all markets at an early stage of development: the first step is that investors put the work in to understand the product and what its advantages are. After they have made that commitment, they are much more likely to become a regular participant in the market. We’re still waiting for Japanese investors to show that commitment on a wide scale.

Kazuyuki Aihara, Nomura: Green bonds require a certain level of commitment from the issuer base, for instance in adhering to Green Bond Principles. ESG investors are certainly growing, but they have not grown to the point that they can drive pricing of the deal.

This is one difference to the offshore markets. Offshore, we are starting to see some indication that ESG demand can impact pricing, although mainly in the secondary market. Onshore, that is still a long way off. In many ways, though, the choice of market is not important. The key factor is taking action. Issuers need to make a commitment to this market.

Sato, TMG: We are not aware of any statistics showing how many Japanese investors have quantitative targets for investments in ESG. However, for the Tokyo Green Bonds that TMG issued in 2017, the demand from institutional investors reached more than four times the issue size. We believe that SRI and ESG investor base has been expanding steadily. In that sense, TMG has contributed to the long-term development of the market in Japan.

: The fundamental question driving any funding decision is one of incentives, whether these incentives come from cheap funding costs, diversification or anything else. But when you look only at the funding cost, green bonds do not seem to offer cheaper pricing than conventional deals, at least not in the primary market. What are the incentives for selling green bonds? Is it mainly PR value at this point?

Aihara, Nomura: Their motivation is, in part, the PR benefits. But that is surely not the only motivation. The background is that investor interest is increasing significantly. Issuers would naturally want to respond to this demand.

Takebayashi, Sustainalytics: That’s a difficult question. Japanese issuers are certainly aware of the PR value of issuing bonds, but that is not the only factor. A lot of companies are becoming more conscious of their environmental impact. As an extension of that they ask: ‘what more can we do?’

Green bonds are a natural next step for environmentally-conscious companies.

Green bonds need to have some relevance to the core ESG activities that issuers are doing. They cannot be seen as a completely separate product. They flow from a company’s wider approach to ESG.

Yokoyama, NRI: You’re right that the incentives aren’t exactly clear. We turned to the green bond market because our capital expenditure needs and the nature of the product matched. We invested in a green office building since no investments in our core business were necessary [at the time of issuance]. Frankly, it is a bit of a challenge to always have green bonds linked to a specific green project.

Miyakawa, DBJ: By its nature, DBJ has been committed to ESG for a long time. We were the first financial institution in the world to create and introduce an environmentally-rated loan programme, and we became the first Japanese issuer of green bonds in 2014. Since then we have issued several sustainability bonds, with the primary objective of diversifying our investor base.

Issuing such bonds helps us to have dialogue with the investors who are not interested in our government guaranteed bonds. The investor base is clearly growing offshore, so we’re very happy with what we’ve seen in the overseas market. It has definitely hit the targets we set out to achieve when we first started to issue sustainability bonds.

Okuyama, MoE: When we started trying to popularize green bonds in Japan, we had a lot of conversations with market participants and tried to find out exactly what issuers needed to know before they would consider issuing green bonds. The aim was to remove any obstacles to green bonds.

In March last year, we published our Green Bond Guidelines, which are in line with the global Green Bond Principles. These guidelines ensured that issuers could quickly understand green bonds, including the use of proceeds, the external review and the objectives. The idea was to encourage the rise of green bonds in the domestic market, since issuance is still quite sporadic onshore.

Why is issuance still not increasing? I think one of the reason is because there are additional costs associated with green bonds. The MoE will support the entities seeking the issuance of green bond by providing subsidy to mitigate the extra cost.

: Would you consider offering subsidies to reduce the additional costs of selling a green bond?

Okuyama, MoE: We’re trying to mitigate the costs in an indirect manner.  We will create a platform that publishes the information related to green bonds, and we will support and champion issuers that present a model case for the market. The MoE will support the entities seeking the issuance of green bonds by providing a subsidy to mitigate the extra cost.

: Are subsidies needed to give the domestic green bond market an early boost?

Takebayashi, Sustainalytics: The cost related to issuance is an important burden for those corporations considering green bonds, so subsidies would certainly help in that regard. But they are not the only solution. Regulators could help reduce the administrative costs of green bonds by improving the ease of registering these bonds, for example.

There are some issues that are not economic. Green bonds require a lot of co-ordination between different departments. More and more companies are creating CSR or SRI departments now, and they would naturally get involved in the decision to sell a green bond. But ultimately the decision will come from the treasury team, and the treasury team will often in turn be responding to the capital expenditure needs of another department. The need for co-ordination between these different groups is leading to serious bottlenecks at a lot of companies.

Aihara, Nomura: I agree. The benefits of a subsidy would be large, but issuers have welcomed the support the Ministry of Environment has shown already. The bigger problem seems to be creating an internal consensus when it comes to green bonds. This is an area where banks like Nomura can play a bigger role.

There are some other incentives that are worth mentioning, however. The withholding tax could be exempted for green bonds. That would be a major change.

The risk-weighting of green bonds could also be reduced, encouraging banks to more readily invest in these deals. Direct subsidies are only one tool the government could use to encourage the development of green bonds. There is so much more that can be done.

Tanaka, JICA: Yes, it is correct that we are yet to enjoy a clear price benefit by issuing social bonds. It is also unclear whether we have the liquidity benefit since our bonds are already illiquid given their small size.

That said, through issuing social bonds, we have been able to reach out to SRI investors who agree with our mission and support our work that aims to directly contribute to the UN Sustainable Development Goals, and as a result, have been able to expand our relationships. We believe this has been the biggest benefit for us so far.

Additionally, we feel that being the first and only social bond issuer in Japan helps us promote our public relations through increased media coverage related to ESG investment, leading to a positive image of our organization itself.

: There’s a lot of talk about standardizing green bonds, but it’s not clear this is actually a worthy goal. One could imagine vastly different standards in different jurisdictions, offering flexibility to issuers and increasing the chance that one market becomes the real green bond hub. Should regulators in the green bond market also be willing to set their own standards — potentially giving them an advantage over other financial hubs? Or is standardization necessary?

Takebayashi, Sustainalytics: Green bond standardization is something that we are watching with great interest. In the principles-based approach, the general guidelines are set and issuers only need to follow the principles. This is sometimes hard to determine. The other option is a more restrictive approach, where issuers essentially have a checklist they have to meet.

Japan has so far taken the principles approach, following the lead of other markets. This means there is some room for innovation among the issuer base, but it opens up the question of how investors should evaluate environmental impact.

Which aspect of green bonds should be evaluated? What sort of details should investors pay attention to? It may be the case that a more standardized set of rules would help.

I’m curious to hear the view of the other panellists on this. Which approach should be adopted in Japan?

Aihara, Nomura: This is, indeed, a very difficult question. Japanese issuers are paying attention to the Ministry of Environment’s Green Bond Guidelines, but they still need some further details. What are the eligible projects? What projects are not allowed? The guidelines are not clear on this point. There are some transitional projects, like clean coal projects for instance, that should be officially recognized in these guidelines.

Miyakawa, DBJ: The more detailed, list-based approach would be easier for issuers, because they would have that reassurance they were complying exactly with the rules. But in my personal view, the principles-based approach is preferable to help expand the market. It leaves a lot up to issuers, which gives them the flexibility to structure deals in a way that suits their specific situation. It also allows issuers to adapt as the demands of investors adapt, something we should be considering at a time when the ESG investor is small but growing quickly.

Yokoyama, NRI: We have given consultancy services to many issuers and we have found that most of them seem to prefer the principles-based approach. It’s that same point that others have made: the flexibility is a major boost. A checklist approach would probably limit green bonds to the financing of new, green-certified projects, but a principles-based approach opens the door for green bonds to also be used to refinance deals.

Okuyama, MoE: It is respected that different markets approach differently, but we prefer the principles approach. It should be discussed among markets participants what could be considered as green. It is important that the understanding of investors is deepened.

Sato, TMG: The largest challenge in issuing Tokyo Green Bonds was to obtain a second party opinion from a SRI rating agency. While TMG is restricted under the Local Government Finance Act regarding the use of proceeds from the bonds issued, TMG has carefully selected projects that are highly eligible for a use of proceeds of a green bond and spent an adequate amount of time providing explanations to our second party opinion provider.

We would give the following tips to potential issuers. First, you need to clarify with investors the significance of your bond. Second, carefully select the type of deal, whether it is a green bond, a social bond or any other type of ESG bond. Third, obtain a second party opinion from an SRI rating agency, as necessary, in order to obtain better creditworthiness in the market. We are certainly helping to grow this market. We hope more issuers join us.    

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