Japan finds own shades of green
Japanese issuers’ supply of green bonds has rocketed in recent years. The country boasts a more diverse set of borrowers and a broader distribution of proceeds than many of its peers but further market development will present unique challenges, writes Morgan Davis
Borrowers from Japan were the 12th biggest suppliers of green bonds by volume last year, according to the Climate Bonds Initiative (CBI). The country has long made dealing with environmental issues a priority and that extends to its use of capital markets.
But what sets Japan apart from many others is the way its green bond market has developed, leading to an unusual proliferation of corporate issuance and a blossoming social bond market.
From humble origins — $316m of supply in 2014 — Japan’s green, social and sustainability bond supply has boomed. Last year saw a record $3.4bn of bonds sold, according to Dealogic data. That was up from $3.3bn in 2017 and $1.1bn the year before that.
Market participants are enthused about the prospects for further development of Japan’s socially responsible investment (SRI) issuer base.
“In 2018, Japan really came to the party,” says Jonathan Drew, managing director in the infrastructure and real estate group at HSBC. “There are plenty of reasons to be optimistic. What Japan has done in 2018 was get to a scale where there are plenty of good stories to tell… which will bode well for 2019.”
Japanese borrowers had printed $156.5m of SRI bonds between January 1 and March 1.
Much of the growth in the green market has been encouraged from on high. The government has been a vocal supporter of SRI financing. The Ministry of Environment’s establishment of green bond guidelines for the country in 2016 helped kickstart the market that year.
The country also established a subsidy scheme, similar to those in Singapore and Hong Kong, to help offset the extra costs of obtaining verification that an issuer’s bond is as green as it claims.
There has been other institutional support. The Tokyo Stock Exchange established a green and social bond platform at the start of 2018. Also last year the MoE began giving out green bond awards to issuers to provide further motivation.
“In Japan there’s a lot of encouragement from the Ministry of the Environment,” says Raj Malhotra, head of DCM for Asia Pacific at Société Générale. “There’s a push from the policymakers, and issuers have taken it upon themselves to tap this market and a new set of investors.”
But Sustainalytics’ lead analyst for Asia-Pacific research Masato Takebayashi is unsure that these government initiatives are what is really encouraging the market’s growth. “Of course government support to expand the green bond market is very important, but I don’t think the MoE’s subsidy was the key to expanding the Japanese green bond market,” he says.
Takebayashi believes Japanese issuers decide to sell green bonds regardless of government subsidies but that the financial incentives are a bonus. Instead, it is the general level of support for the market from the state that is the biggest factor. “Subsidies themselves are not a reason to expand the green bond market,” he says. “The recognition and commitment of the Japanese government for the green bond market is.”
In contrast to other countries, Japan’s green bond market development has taken an unusual path. Green bonds have tended in other countries to proliferate first from financial institutions, as banks have been able more easily to earmark streams of funding for green projects. Corporate borrowers have tended to follow later.
But in Japan corporate issuers have been quick to pick up the baton. And the result has been a variety of bonds sold from issuers in industries as diverse as shipping and paper. Property companies, in particular, have become leading green bond issuers.
“Japan is an interesting market,” says Malhotra. “It’s the market where we’ve seen the most diversification.”
Leasing company Hitachi Capital Corp became one of Japan’s newest green bond issuers when it sold a ¥10bn 2023 note in February to 11 investors. The company saw the transaction as a way to diversify its funding streams, as well as contribute to its company mission to be a “social values creating company,” a representative tells GlobalCapital.
“Hitachi Capital group positions eco- and energy-related business as one of its focused sectors… and has been promoting renewable energy business such as solar and wind power.”
The local investor base has helped drive the issuer diversification as it tends to be less demanding as to which industry sectors the green bonds come from compared to their European counterparts.
“Sector diversification will come in Europe, but it will take some time,” says Malhotra.
It also helps that many corporations in Japan naturally lend themselves to green issuance. Renewable energy and transportation companies, and real estate developers have all sold green bonds. Property has been a particularly important sector for the country, as a huge proportion of Japanese real estate was built during the post-Second World War boom, and is in need of refurbishment. There will also be increased building around the Olympics, which take place in Tokyo next year.
“Recently, the awareness of the importance of sustainability has been emerging in the real estate market,” says Hideki Kobayashi, head of the ESG (environment, social and governance) office at Japan Real Estate Investment Corp. While JRE Investment Corp’s green bond was sold domestically, the company attracted new investors.
The next steps for the industry will be about scaling up. “The theme is getting wider recognition from corporates,” says Drew. “We’re now seeing, globally, the weight of demand for green paper.”
For Japan’s corporate borrowers, as well as its financial institutions, growth in green bond issuance has come at the same time as the world has paid more attention to financing sustainability, thanks to the establishment of global Green Bond Principals, as well as the United Nation’s Sustainable Development Goals (SDGs).
At the same time, there has been increased emphasis on ESG investing standards. For many companies, green bonds are an easy way to help investors tick off the E in ESG. “It’s the simplicity of the green bond, as tackling broader ESG strategies is challenging for people,” says Sean Kidney, CEO of the Climate Bonds Initiative, who sees the boom in ESG investment practices tied to the acceptance of the SDGs.
JRE Investment Corp, a signatory to the Principles of Responsible Investment (PRI), the UN Environment Programme Finance Initiative and the UN Global Compact, is one such green borrower. The company’s green bond framework falls under its ESG efforts, something the company sees as a priority, leading it to create an ESG unit last April.
“In order to get ourselves in the investment universe overseas, you have to embrace ESG efforts,” says Kazuo Nezu, senior executive officer and general manager of the finance and accounting department at JRE Asset Management Co. “The driver for the growth of the market comes from two sides — one is from the issuer side and the other is the investor side.”
Kobayashi at JRE Investment Corp says people worldwide are more conscious about climate change risk. “That kind of awareness is booming on the investor side, and the ESG topic has played a great role in investor relations.”
“Sometimes investors ask us to promote sustainability and ESG matters,” says Kobayashi, adding that green bonds have made up a large portion of ESG discussions.
When an opportunity arose to refinance existing loans which had been used to purchase green-eligible assets, JRE Investment Corp used the chance to sell a green bond and make a “market statement”.
As has happened in other markets, the issuance of a green bond is the perfect marketing tool for a borrower. It is a public display showing that the issuer not only supports environmental reform but is doing something about it.
“Most of the issuers are issuing their green bonds not purely for financial reasons,” says Sustainalytics’ Takebayashi. He points to Tokyo’s green bond issuance as an example, explaining that the city’s issuance was more about encouraging environmental awareness than it was about raising the cash.
The governor of Tokyo, Yuriko Koike, says that being an environmentally friendly city is increasingly important as Tokyo prepares to host the summer Olympics in 2020.
Corporate borrowers want to send the same kind of message. “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 impact,” says Kazuyuki Aihara, head of ESG products, debt capital markets, at Nomura.
Using a green label for borrowing makes a statement not just at home, but internationally as well. Sustainability-linked bonds can tap an extra pool of investors, giving borrowers access to new pools of liquidity. “Foreign life insurers and other investors are showing interest in buying Japanese green bonds,” says Aihara.
These investors are helpful for the overall development of Japan’s green bond market, as they consider Japanese offerings against rival offerings from European borrowers. The feedback they provide will help develop reporting standards and other factors that will enhance the appeal of Japanese green bonds across the world.
International banks are also ready to take advantage of Japan’s developing market. For instance, French bank Société Générale established a debt capital markets team in Japan earlier this year. As the Japanese market has become key for SG’s Asian business, the bank decided to carve a niche for itself there. SG’s focus in Japan will be on debt capital market offerings in general, but the bank is also eager to share its specialty in sustainable bonds.
One client group for SG will be Japan’s mega banks, which are looking to sell green bonds in the international market, using deals not only to make a statement about their ESG credentials, but also a tool to access foreign funding.
Mitsubishi UFG, Sumitomo Mitsui Banking Corp and Mizuho Financial group have all sold green bonds in euros. The currency accounts for 45% of Japanese green bond sales, according to the CBI.
Those international ties work both ways, as Japan’s yen market becomes increasingly attractive for foreign issuers looking to sell green bonds. Fellow French bank Crédit Agricole, for instance, has issued 10 green Samurai bonds since 2013.
Aihara reckons that more foreign borrowers will look to the Samurai or Pro-Bond markets to sell their green paper in the future. “We’re seeing Asian sovereigns making efforts to attract the green bond investor base in the global markets,” he says. “Given the liquidity available in the Japanese market, we think those issuers will also tap the Japanese green bond market.”
Japan’s green bond market at a glance:
l Total green issuance as of 2018: $9.7bn
l 2018 issuance: $4.1bn
l One-third of proceeds have been allocated to green buildings
l 45% of issuance in euros
l 28% in dollars
l 26% in yen
l Japan is second only to China for Asia Pacific green issuance
Source: Climate Bonds Initiative
Japan has been promoting the use of bond proceeds to fund social projects. “We’ve seen a lot of issuances targeting social use of proceeds,” says HSBC’s Drew. “Globally, the social, sustainability component is only 10% of the market, where as in Japan it is significantly more.”
Part of the boom of Japan’s social use of proceeds can be attributed to the early issuers. The country’s development banks and agencies have been very active in sustainable investment, and have a broader use of proceeds than most corporate issuers.
The Japan International Cooperation Agency has been the most prolific social bond issuer, while the Development Bank of Japan has sold three sustainability-labeled notes.
“It just reflects a general, national approach and a focus on… the three legs of sustainable development: the economy, environment and social issues,” says Drew.
Compared to China, Asia’s leading green issuer, “Japan has, for a longer time, been focused on broader sustainability issues,” adds Drew.
But Takebayashi still sees a lot of room for growth in social bonds in Japan despite the problems inherent in defining the use of proceeds. A country with what is by global standards a wealthy population has a harder time finding direct uses for social bond proceeds compared to lower income countries.
“For a country like Japan, it’s difficult to identify the targeted population for which social projects can bring about an absolute social impact,” he says.
Nomura’s Aihara agrees that social bonds present a challenge. “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,” he says.
Leg up for loans
SRI issuance from Japan is not just focused on bonds, however. The nature of Japan’s capital market lends itself well to the development of green loans. The product provides a good way for banks to engage with clients in a mutually beneficial way. Market watchers expect that volumes will rise.
JRE Investment Corp says it is “constantly monitoring the opportunity” to do green loans.
“It’s quite new, and that means that there’s limited data at this point,” says HSBC’s Drew. “But from our conversations with clients I can say it’s a topic that is being given a lot of attention.”
The future of SRI financing in Japan presents many opportunities and the market has grown at a rate of knots to take advantage of them. But that does not mean issuers will pile in pell mell just to be seen to be doing the right thing.
“It’s still relatively new to a lot of issuers in Asia and Japan as well,” says Malhotra. “Adoption takes time. Issuers have to see what the benefits are of doing [green transactions]. They’re not going to do a green bond just for the sake of doing one.”