When Tokyo had a rare snowfall on February 5, many staff from Japan’s Ministry of Finance worked from home due to the suspension of public transport. However, this did not derail the Japanese government from making history that month when it issued the first sovereign climate transition bonds.
The bonds are part of Japan’s plans “for promoting transition to a decarbonised, growth-oriented economic structure”, known as the GX strategy. The country aims to reduce emissions by 46 per cent from 2013 levels by 2030, and to become carbon neutral by 2050.
A official from the Ministry of Economy, Trade and Industry, who asked not to be named, says climate transition bonds, known as GX bonds, were preferred to green bonds because new technologies, which GX bonds support, are necessary to meet the targets. The METI official explains: “Transition finance, which covers not only established technologies but also efforts that are still under development, is crucial in realising the whole-of-economy decarbonisation.”
In 2021, Japan formulated its “basic guidelines on transition finance” and created technology roadmaps for eight industries covering more than 80 per cent of the country’s emissions. As a result, cumulative issuance of transition finance in Japan exceeded ¥1.6tn ($10.3bn) by the end of 2023, according to the official, although this is still less than green finance.
“We believe that by the government taking the lead and issuing transition bonds, we can further stimulate transition finance issuance domestically,” adds the METI official.
Forging a new path
The framework for the GX bonds was released in November 2023 after six months of development. The METI official says: “The greatest challenge was that this was a first on all fronts. It is the first sovereign transition bond, so there were no exact precedents on how to formulate the framework and conduct messaging.”
In preparation for the issuance, the government held meetings with investors inside and outside Japan, together with staff from the Ministry of Finance, METI, sustainable finance second-party opinion providers, alongside GX bonds marketing supporters and a group of seven investment banks.
The latter consisted of SMBC Nikko, Daiwa, Nomura, Mizuho and Mitsubishi UFJ Morgan Stanley from Japan, BNP Paribas from Europe and US bank Citi. A Ministry of Finance official, also speaking anonymously, says the banks were chosen for their deep knowledge of environmental, social and governance principles.
Roadshows were held in Europe and the US, and the government also held three online seminars for Japanese institutional investors.
During the first auction on February 14, 10-year GX bonds raised ¥799.5bn, with a nominal coupon of 0.7 per cent per year. Subsequently, an auction on February 27 raised ¥799.8bn from five-year GX bonds with a nominal coupon of 0.3 per cent a year. The Ministry of Finance official says there are no plans to issue transition bonds in other maturities in the near future as diversification could lead to less liquidity for each tenor.
Climate Bonds Initiative chief executive Sean Kidney says in a statement that the GX bonds marks a significant milestone in transition finance. The CBI, which works to mobilise capital for climate action, certified the issue and says in a memo that the bonds were unique in earmarking more than half (55 per cent) of the proceeds to research and development.
The METI official says: “We received positive comments, especially from foreign investors regarding the CBI certification, and believe it was one of the key factors in the success of the first issuance,” and adds that innovative technologies require R&D that may take time to bloom and so investment must be conducted at an early stage.
The remaining proceeds support decarbonisation projects, which are selected using multiple criteria including the difficulty of obtaining private sector financing, the METI official says.
Measuring progress
Impact reporting will be conducted annually within two years of the issuance and may include an overview of the main projects being funded combined with progress updates on R&D. The METI official says: “We are currently discussing the details of how to conduct reporting and will be consulting with experts from various fields, as well as looking to past cases of green sovereign bond reporting, to ensure a credible and transparent reporting mechanism.”
The Japanese government has estimated that the public and private sectors will need to invest ¥150tn to achieve the GX strategy targets.
The METI official says ¥20tn will be covered by the issuance of GX bonds, and hopes ¥130tn will come from private financing, spurred by government investments, adding: “In addition, the [government’s] GX Promotion Organisation will begin operations from summer 2024. The organisation will conduct financial support, such as debt guarantees as a form of blended finance, to facilitate private investment in GX fields where otherwise they cannot commit.”
