More carbon-intensive companies in Japan will likely turn to transition bonds for emissions-reduction projects that do not meet green definitions amid growing investor appetite and Tokyo’s push for net-zero finance.
The annual issuance of transition bonds in Japan could reach ￥1 trillion "in several years" after a slow start this year, according to Ryosuke Tamura, head of environment, social and governance finance & product innovation team at Mitsubishi UFJ Morgan Stanley Securities Co. So far, there was only one issuance in Japan, with which shipping company Nippon Yusen Kabushiki Kaisha, also known as NYK, raised ￥20 billion in July to build offshore wind farms, green terminals, and ammonia-fueled and hydrogen fuel cell vessels.
"Transition bonds could grow significantly as issuers are considering them seriously," said Tamura, whose team was the lead manager of NYK’s maiden transition bond.
The Japanese government has been trying to allay investor concerns over the assessment of claims and disclosures by transition bond issuers amid an absence of taxonomy. The Ministry of Economy, Trade and Industry issued in May disclosure guidelines on transition finance based on the International Capital Markets Association framework published in December 2020. The government also plans to cover most of the cost of external reviews for issuers to incentivize more issuance.
Transition bonds are seen as an alternative funding route for heavy polluting industries, such as steelmakers and chemicals producers, to kick start their path to emissions reduction without access to the green bond market. This new debt instrument is vital for Japan, which seeks to reduce coal power in its energy mix to 20% by March 2031 from over 30% as of March 2020 as part of the nation’s goal to be carbon neutral by 2050, analysts said.
"There is no such country as Japan where transition bonds can fit well. Japan has many heavy industry businesses," said Mana Nakazora, chief ESG strategist at BNP Paribas in Japan.
In Asia, Japan is the third largest greenhouse gas producer, following China and India, which plan to achieve carbon neutrality by 2060 and 2070, respectively.
S&P Global Ratings estimated in March that global transition finance, including bonds and loans, could contribute up to $1 trillion annually, or 30% of the estimated $3 trillion per year required to meet net-zero emissions over the next 30 years. The ratings agency did not specify how much the issuance of transition bonds will account for the estimated amount.
Growing demand
While investors are still concerned about potentially false marketing claims by transition bond issuers, or so-called "brownwashing" risk, investor appetite has been growing gradually.
NYK’s transition bond drew strong demand from investors, according to Tamura. The two tranches of the bond — a five-year debt at a 0.26% coupon rate and a seven-year note with 0.38% coupon — attracted orders 10.5 times larger than the issuance amount, Tamura added.
"We’ll be aggressively considering an investment in transition bonds because they are in line with our zero-carbon policy," said Taisuke Sugino, general manager of the fixed-income department at Dai-Ichi Life Insurance Co. The life insurer was one of the subscribers to the NYK transition bond.
"We'll assess if [issuers] can achieve a zero-carbon target and we won't make light of a return from our investment even though this is related to ESG," Sugino said. The insurer seeks a similar coupon rate on transition bonds to a yield on regular corporate bonds, the general manager added.
As of Dec. 17, US$1 was equivalent to ￥113.59.