As a pretty close follower of sustainable finance and green bonds, I've been struck by the emergence in greater numbers this year of Japanese issuers tapping the market with green use-of-proceeds bonds. It's been a noteworthy development for a country whose issuers have been largely absent from this burgeoning market.
Away from Chinese issuers, which continue to dominate the market not just for Asian issuers but globally, green issuance by Asian SSA, financial and corporate borrowers has actually been more episodic than many of the market's proponents would like to believe. Even with the recent acceleration, Japanese issuers still need to do a lot more. Then again, Japan is hardly unique in that respect.
Before I continue, I should back up a little: Japanese investors have long been proponents of green, social and sustainable finance. In that respect, I've always considered the absence of Japanese issuers raising green finance in the public international and domestic bond markets to be a confounding contradiction vis-à-vis the prodigious appetite exhibited over many years by Japanese retail and institutional investors for environmental and social themed fixed-income exposure.
Much of that interest has come via retail-targeted Uridashis. Supranational issuers – the World Bank, IFC, ADB, AfDB, IDB and others have raised billions in this format. The pure retail buying that underpinned the market in the early days has long since expanded to institutions, predominantly life insurers. Japanese lifers today are avid buyers and have driven significant sole reverse-enquiry issuance or have acted as cornerstone buyers in club private placements. They like private placements because they can control timing to suit any number of internal agendas.
Long story short, Japanese investors have been instrumental in driving environmental and social bonds ever since labelled issuance came into being over 10 years ago. Which is why the lack of Japanese in the public green yen bond market has been so puzzling.
Activity is starting to ramp up, however. The country's green bond guidelines were established last year under the aegis of the environment ministry, working to pull together the country's Paris COP-21 commitments. Japan's Intended Nationally Determined Contributions (INDCs), incidentally, call for a 26% reduction in greenhouse gas (GHG) emissions by fiscal year 2030 compared to 2013 levels. That equates to around 1.042 billion tonnes of carbon dioxide (CO2) equivalent. The government certainly has its work cut out.
To complement the green bond guidelines and raise the profile in Japan of green finance generally, this past week saw the unveiling of the Green Finance Network Japan (GFNJ), a high-level taskforce with an impressive array of supporters: the OECD, multiple Japanese government ministries and Development Finance Institutions (JICA, JBIC and DBJ) as well think tanks and the private sector.
Financials initially backing the initiative include the Big Three mega commercial banks SMBC, MUFG, and Mizuho, as well as Citigroup and BNP Paribas. Other companies putting their name to the initiative include Softbank as well as insurance companies Axa, Nippon Life, Tokio Marine, and Amundi. The goal of the GFNJ is to create a platform to increase the green focus of all stakeholders through information-sharing, data-gathering and networking.
With green initiatives evolving, it's reasonable to expect Japanese primary issuance to increase. Deals data shows that this is already happening: Japanese issuance in the first 10 months of 2018 was close to US$3 billion-equivalent (including issuance in US dollars and euros). That is equivalent to almost 15% of total Asia (ex-Australia) issuance of close to US$20 billion. Issuance in yen was not far off 10% of the total.
Comparing that with issuance since inception of labelled issuance up until the end of 2017, Japanese green labelled issuance in yen has grown 10-fold as a proportion of overall Asian issuance across all currencies; up until the end of 2017, yen public green bonds accounted for no more than 0.85% of Asian issuance.
Issuance has come from a broad swathe of sectors, including airlines, banks, forestry, industrials, leasing, pulp and paper, real estate, retail, shipping, and transportation.
The evidence suggests that where issuers have green and conventional bond curves, the former can and often does trade through the latter. That tends to be a secondary phenomenon but issuers have also noted clear benefits in primary syndication.
When Japan International Cooperation Agency (JICA), the government agency, classified all of its domestic FILP (Fiscal Investment and Loan Program) agency bonds as social bonds back in 2016, funding officials noted an immediate broadening of their investor base, with the addition of funds with formal environmental, social and governance (ESG) mandates. Underwriters also note that they are able to print in bigger size when they have social or environmental themed issues, as a younger demographic emerges as a complement to their typical buyer base.
