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Japan’s sustainable bond market blossoms

By Morgan Davis
16 Apr 2021

Japan’s sustainable bond market, already one of the world’s largest, has grown over the past year — given a boost from social funding needs brought about by Covid-19. Morgan Davis reports.

Japan’s ESG bond market got a boost in March, when Toyota Motor Corp sold its first dollar sustainability bond. The $2.75bn triple-tranche deal, sold under Toyota’s “woven planet bond” framework, was the latest first for Japan’s sustainable bond market, and bankers in the country expect to see more. 

Toyota is not new to environmental fundraising in the capital markets, as it has sold green dollar bonds before. But the company’s sustainability-labelled transaction, which combines green and social uses of proceeds, may indicate a turning point for sustainable borrowing, bankers say. The market has been dominated by financial and state-linked issuers, but corporations are increasingly selling green and sustainable notes domestically and internationally.

“Many corporate issuers are interested in selling ESG-themed bonds in the international market, given the increasing demand from global ESG investors, but they needed a trigger,” said Akiko Tsubouchi, managing director for Japan debt capital markets at Bank of America.

Kaoru Adachi, director, rates and currencies structuring, at Citi, agrees that the Toyota trade will influence other corporations to dip into the market. “Businesses cannot turn away from the ESG space these days,” he said, explaining that issuance looks set to grow both internationally and domestically. “To achieve a net-zero [carbon emissions] society, we need more industrial sectors to make an effort.”

JapanToyota’s transaction follows what was another record setting year for environmental, social and governance (ESG) related bond issuance in 2020 in Japan. The country’s borrowers publicly sold 58 green bonds worth more than $8.6bn, in addition to nearly $5.6bn of sustainability bonds and $8.2bn social bonds. The $22.4bn raised topped the $12.7bn borrowed in 2019, according to Dealogic. This year is on track for even more issuance — about $9.6bn of GSS bonds were sold in the first quarter, more than double what was raised in the first quarter of 2020.

But even those numbers show only a portion of the ESG market in Japan. Private placements are also on the rise, spurred by investors seeking bonds form specific issuers, said Adachi.

Japanese investors have sought out Covid-19 related bonds as well, said Adachi. Most borrowers ultimately decided not to sell explicit Covid-labelled bonds of the like seen in China and other global markets, but instead have mentioned Covid related projects in the announcement or press release. This often allows the notes to qualify as social or sustainable bonds.

Additionally, Japan saw its first sustainability-linked bond (SLB) sale last year, when real estate company Hulic Co sold a ¥10bn ($91m) decade bond. SLB transactions, which do not count in Dealogic’s GSS tallies, do not tie the use of proceeds to green projects. Instead, they link the price of the bonds to the borrower’s ability to meet a designated sustainability target — for instance, transitioning buildings to green energy use.

Bankers say SLBs offer Japanese borrowers significant potential, as they give companies more flexibility in their use of proceeds, while still furthering their ESG objectives. Bankers at Mizuho say they have several issuers looking at potential SLB sales.

“All the major Japanese companies have a sustainability strategy. Green assets are not easy to accumulate, so the sustainability-linked bond option is very attractive,” said Tomonori Yoshida, head of debt capital markets for Japan at Crédit Agricole. He noted that a number of companies that do not traditionally sell green bonds, such as industrials or cement companies, are interested in the concept of transitioning to greener practices. SLBs meet this need, as do transition bonds, which are tied to a use of proceeds but are not explicitly “green”.

“We expect a lot of inaugural transactions from Japanese issuers this year,” said Yoshida.

SLBs are also supported by Japanese investors who are keen to put money into green-related projects. “More investors are also announcing their ambitious targets to increase green holdings in their investment portfolios,” said Adachi. “From their perspective, it is getting more important to have a way to show that they are contributing to the transition space via investments.”

SLBs meet that goal as they are tied to specific company targets, and investors can pinpoint how the companies they invest in are working toward net-zero emissions.

Bankers at Mizuho are optimistic that the domestic ESG market could reach ¥3tr in 2021. “There is no reason to decline. The entire movement of ESG is going forward,” said Manon Inomata, a junior vice-president in the capital markets promotion team at Mizuho.

Japanese companies are expected to get an additional push to consider ESG bond issuance, thanks to the country’s government. When Japanese prime minister Yoshihide Suga and US president Joe Biden met on April 16, carbon emissions were on the agenda. Suga has committed to make Japan carbon neutral by 2050.GC

By Morgan Davis
16 Apr 2021