Japan’s $148 billion transition green bond plan will be a tough sell to investors

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A chemical plant in Kawasaki, Japan. The government plans to launch the green transition obligations to accelerate efforts to decarbonize polluting industries.
Credit: Carl Court/Getty Images News via Getty Images

Japan will likely offer higher yields and greater disclosure of the use of funds to attract investors to its “green transition” sovereign bonds as it accelerates carbon neutrality efforts.

Investors will need higher yields to compensate for the low secondary liquidity of transition bonds due to low issuance. Global transition green bond issuance totaled $4.4 billion in 2021, up 33% year-on-year, although it represented less than 1% of the $522.7 billion green bonds issued the same year, according to Climate Bonds Initiative.

Voluntary disclosure of the use of proceeds, which is not part of the recommended guidelines for such bonds in Japan, could also be useful as it will improve the transparency of decarbonization projects financed by this relatively new class of debt instruments, analysts said.

Prime Minister Fumio Kishida proposed in May to raise about ¥20 trillion in Sovereign Transition Green Bonds over the next 10 years for decarbonization initiatives that do not meet green finance requirements. It’s unclear when the first batch of bonds will be released, though several government departments and experts are working on launch details.

The government needs to resolve many issues before the bonds are issued, said Mana Nakazora, head of environmental, social and governance strategy at BNP Paribas in Japan. “The question is, how do they motivate investors? »

Green transition bonds are often used in high-polluting sectors such as oil and gas, steel, aviation and shipping, or “brown” projects that aim to reduce environmental impact or emissions. This debt instrument has yet to become mainstream in sustainable finance due to a lack of widely accepted criteria for eligible transition projects and concerns about greenwashing, where issuers claim they are more environmentally friendly. the environment than this is the case.

Raising the interest bar

Transition bonds are rare in Japan: only three Japanese companies issued such bonds for a total of 140 billion yen in the fiscal year ended March 31, according to the Ministry of Commerce. In contrast, about 1.86 trillion yen of green bonds were issued during the same period, according to data from the Ministry of the Environment.

The proposed transition bonds are the latest effort by the Japanese government to drive the country towards carbon neutrality by 2050. The country aims to reduce coal power to 19% in its energy mix by March 2031, from 32 % in March 2020, while it plans to double renewable energy sources to 36% or more during the same period.

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The government will likely offer a higher coupon than regular government bonds, analysts said. The yield on 10-year Japanese government bonds stood at 0.233% as of June 21.

With over 20 trillion yen needed for energy transition efforts, the premium on these instruments must be high enough to attract investors, said Takero Doi, a professor at Keio University’s faculty of economics and a member of a committee government on fiscal policy.

Mizuho Financial Group Inc., one of Japan’s three megabanks, is reportedly considering buying the new transitional sovereign debt, a spokesperson told S&P Global Market Intelligence. “As an institutional investor, however, we would be looking for a higher coupon.”

More disclosure needed

The government will have to disclose more details on the use of proceeds from the green transition bonds, analysts said.

If the bonds meet the guidelines recommended by the International Capital Market Association that Japan has adopted, the use of the money will remain unclear and the progress of the decarbonization plan will be vague, said Yoshihiro Fujii, executive director of the Environmental Research Institute. Finance. Transition bonds may seem easy enough to issue, but that doesn’t mean investors are lining up to invest, Fujii added.

If the government does not clarify the use of the bonds, investors may not be willing to accept or invest in the instruments, said Takero Doi, an economics professor at Keio University and a member of a government committee on fiscal policy.

Some investors, especially foreign ones, could take a wait-and-see approach on these bonds, an Environment Ministry official told Market Intelligence on condition of anonymity. Foreign investors tend to prefer investing in green projects aligned with the international green taxonomy, the official said.

Japan’s financial guidelines state that it is ultimately up to the market to assess how appropriate fundraiser responses to green transition financing are and whether they are eligible for investment and financing.

The planned transitional sovereign bond could replace some of the regular government bonds planned to help cap the country’s budget deficit, BNP Paribas’ Nakazora said.

Japan’s sovereign bond issuance is expected to reach ¥1,026 trillion in 2022 highest of all time swelling of ¥177.5 trillion 10 years ago, according to data from the Ministry of Finance.

Last year’s outstanding issue of ¥990.3 trillion brought the ratio of outstanding issues to GDP to more than 250% tallest in the world the data showed.

As of June 20, US$1 was equivalent to ¥135.03.

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