Stockholm (NordSIP) – On Thursday, February 8th, the government of Japan, via the country’s central bank, launched its Climate Transition Bond with an inaugural transaction worth JPY800 billion (US$5.5 billion) in ten-year bonds. This transaction was first announced by Prime Minister Fumio Kishida at the 2023 PRI in Person Conference, which took place in Tokyo in the autumn of 2023.
Japan’s Green Transformation Programme
This is the first tranche of a planned JPY1.6 trillion (US$11 billion) Climate Transition Bond (CTB), with proceeds being used to fund Japan’s ambitious Green Transformation (GX) programme. It is understood that the Japanese sovereign is currently in the market pricing the remaining half of the funds planned to be issued under its Climate Transition Bond programme, through a five-year bond.
The GX Plan is the linchpin upon which Japan hopes to base JPY150 trillion (US$1 trillion) worth of public and private investments over the next 10 years in advanced, sustainable technologies. These investments are the means through which it hopes to support its national emissions reduction plan and implement its vision for carbon neutrality by 2050.
“Transition is the theme for the year: corporates, cities and countries need to do transition plans in line with global emission reduction targets; under the Paris Climate Agreement countries are working on ambitious new Nationally Determined Contributions (NDCs) – transition plans – to be tabled at next year’s COP,” Sean Kidney, CEO, Climate Bonds Initiative (CBI), said. “This bond shows clearly how governments, and others, can raise funds to invest in that transition. It marks a significant milestone in transition finance,” Kidney added.
Climate Transition Bond Details
The bond pays a 0.7% coupon, and the lowest-priced bid accepted at auction was at 99.62% discount, for a corresponding minimum yield of 0.74%, 15 basis points (bps) below the underlying 10-year (non-Climate Transition) Japanese sovereign bond according to figures shared by Reuters.
The security is certified under the Climate Bonds Standard, offering investors some independent assurance on the environmental objectives of the use of the proceeds and alignment with best practice global standards. 55.5% of the proceeds of the bond are allocated to support for research and development (R&D) initiatives aligning with Japan’s efforts to limit temperature increase to 1.5°C, in areas ranging from renewable energy to hydrogen utilisation in steelmaking; 44.5% are for subsidies for activities ranging from the manufacturing of electricity storage batteries to energy-efficiency measures in buildings.
The transition bond’s Use of Proceeds specifically exclude any allocation towards gas-fired power generation or operational activities involving ammonia co-firing in coal-fired plants. This was a seemingly important step for the fund to be endorsed by the CBI since the organisation blocked is said to have previously objected to the issuance of similarly labelled transition bonds by European issuers seeking to fund natural gas plants.
The bond’s independent verification report was prepared by Japan Credit Rating Agency (JCRA), a Climate Bonds Approved Verifier since 2019. “Since 2020, JCR has been contributing to the government’s efforts to develop Japan’s transition pathway toward net zero by 2050 and alignment to the Paris Agreement. JCRA hopes the government’s strong initiative will help various Japanese corporates which struggle to find a way to attain both carbon neutrality and business expansion in the coming decades,” Atsuko Kajiwara, Managing Executive Officer, Head of Sustainable Finance Evaluation Group at JCRA, said.
This is not the first Transition bond originating in Japan. In June 2023, Japan Airlines also issued a heavily oversubscribed JPY20 billion (US$142 million) in 10-year bonds.
A Critical Eye
The transition bond label has been criticised for being unnecessary and potentially facilitating greenwashing. The main issue seems to be with the fact that “transition” is too vague a term.
In 2020, Jacob Michaelsen, Head of Nordea’s Sustainable Finance Advisory warned that “I do not believe the market currently needs a new transition bond label”. According to Michaelsen, “’Transition Bonds’ carry more potential downside risk than we can hope to gain from them. (…) In the absence of clear and well-agreed-upon definitions for what constitutes a relevant transition (…) the risk of “greenwashing” goes up. (…) We are better off, as a market, to give sustainability-linked bonds our full attention instead of diverting it to a label that is not fully understood and which may call into question the validity of the overall labelled bond market.”
In a circular aimed at providing guidance for the issuance of transition bonds, the Securities and Exchange Board of India (SEBI), notes that these securities face “international hesitancy”. According to its reading of the Internation Capital Market’s Association (ICMA)’s Climate Transition Finance Handbook, ICMA “uts these bonds on a pedestal lower than the green or sustainability bonds. It refuses to recognize such an instrument as a standalone financing method and regards it as a ‘label’ given to sustainability-linked or green bonds.”
For his part, Ulf Erlandsson CEO of the Anthropocene Fixed Income Institute (AFII) argues that the Japanese government could do more by adding another security to its transition toolbox. “While it is encouraging to see Japan remove controversial ammonia-coal-cofiring from the capex use-of-proceeds (UoP) of this bond, it could achieve an even greater impact if it were to complement the issuance with a sustainability-linked bond (SLB). Japan has an excellent opportunity to take a global lead in sustainable finance by issuing an SLB focused on its ambitious 2030 carbon emissions reduction target. (…) For investors, the transaction would not only reduce their carbon footprint – the financial terms should also be attractive. The SLB gives investors an option to hedge against the issuer missing its emissions target and the ability to manage both coupon and impact risk in the US dollar benchmark curve.”
