Tokyo, already Asia’s leader in green finance, is emerging as a force to be reckoned with globally.
Japan’s green finance market has come of age. Green bond issuance by domestic firms has grown 76.4% on average every year since 2014, reaching a record US$9.82 billion in 2020, and the range of issuers and structures is rapidly diversifying. This momentum has received a further boost by the government’s growth strategy, in which green finance is a key pillar.
Cue the Tokyo Green Finance Initiative, a new strategic effort by the Tokyo Metropolitan Government (TMG) to develop an ecosystem for green finance that attracts global players, facilitates smooth business expansion in Tokyo, and enables easy access to information, including on TMG’s environmental policies and Tokyo-based companies with outstanding environmental technologies. The initiative expands on TMG’s existing green finance measures, such as the Tokyo Green Bonds, the Tokyo ESG Fund and the Sustainable Energy Fund.
Japanese investors embrace sustainability
The balance of ESG investments across Japan increased 300% on average annually from 2015 to 2018. The number of institutional investors signing the Principles for Responsible Investment grew seven-fold between 2010 and 2019. And the number of organizations committed to climate-related financial disclosure in accordance with the Task Force on Climate-Related Financial Disclosures stood at 428 as of June 25, 2021, the highest in the world.
As an example of the growing demand for Japanese green bonds, TMG, which has issued green bonds since 2017, saw the bid-to-cover ratio on its own bonds increase from four times in 2017 to eight times in 2020.
“There is a recognition among Japanese investors that finance is part of the solution to the world’s challenges and that’s for both institutional and individual investors,” says Stephen Fitzgerald, co-founder of specialist impact debt manager Affirmative Investment Management, which opened an office in Tokyo a few months ago. “Japanese investors have really embraced the intersection of finance and purpose.”
This sustainability-enlightened investor base was a key factor in the firm’s decision to expand in Tokyo. Furthermore, the process of setting up the office in Tokyo was a breeze. Initially, the company was planning for the process to take about half a year but it came down to only 2.5 months. “It was all extremely efficient,” says Fitzgerald. “Everyone we dealt with was responsive and encouraging. Plus, all communication was done in English, which was very helpful.”
“There has clearly been an acceleration in Japan’s market since last year with more and more issuers willing to sell green bonds,” says Alban de Faÿ, head of Amundi’s fixed income socially responsible and green bond investing. Amundi manages around US$5 billion of dedicated green bond funds and invests in more than $25 billion of green bonds across all of the company’s fixed income portfolios. “On the investor side, we are seeing more demand for green bonds, which is key to developing the market further.”
A rapidly evolving market
Affirmative Investment Management finds the dynamism in Japan’s green finance market attractive. “One of the things that we continue to see is innovation,” says Fitzgerald. “Initially when the market began, supranational agencies were the dominant issuers, but now corporates make up a little over 45% of the market.”
For example, Toyota issued its first dollar-denominated sustainability bond in 2021 with a total value of US$2.75 billion, clinching the title as the largest green bond issuance ever in the automotive sector.
Foreign governments are also participating in the Tokyo market, with Hungary issuing its first ever sovereign green bond in a samurai format in September 2020, selling Hungarian government bonds in yen to Japanese investors.
In addition, new mechanisms such as sustainability-linked bonds, which link bond prices to sustainability targets, and transition bonds, which allow companies with high carbon consumption to raise funds while reducing their environmental impact, have emerged, and are booming. One landmark deal in 2020 was for real estate company Hulic Co., which launched the first sustainability-linked bond in Japan.
“The different structures—be it green, social or sustainability-linked bonds—provide issuers the opportunity to explain their sustainability journey better,” says Amundi’s de Faÿ. “Meanwhile, for investors it allows for the use of dedicated and transparent finance instruments to fight climate change or social inequalities.”
Confident that Japan’s green finance market has a bright future, de Faÿ adds, “the Japanese market is well placed to play a big role in sustainable finance.”
Expanding Tokyo’s green finance ecosystem
Under the Tokyo Green Finance Initiative, the TMG will undertake a range of measures to accelerate Tokyo’s green finance momentum. The initiative focuses on three pillars: 1) develop Tokyo’s green finance market, 2) expand the number of players in green finance and support their business development, and 3) share information on Tokyo’s advanced environmental policies and companies with outstanding environmental technologies, as well as nurture human resources with ESG expertise.
Specifically, TMG will work to disclose ESG-related information on companies owned by the metropolitan government; introduce measures to reduce the burden related to external reviews, which are an additional cost when issuing green bonds; and stimulate green finance for Tokyo’s small to medium-sized companies, which account for 90% of the city’s firms, alongside regional financial institutions.
Time to Act
The Japanese government’s pledge to reduce greenhouse gas emissions to zero by 2050, announced last October, will bring about major changes in Japan’s industrial structure and social economy. Tokyo, too, is taking action under the slogan “Time to Act,” with the TMG now moving to halve the city’s carbon emissions by 2030 and reach zero by 2050. Alongside efforts such as these, the Tokyo Green Finance Initiative will solidify Tokyo’s frontrunner position in green finance and strengthen the city’s status as an international financial hub.
Revision of "Global Financial City: Tokyo" Vision (Draft)
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Tokyo Green Finance Initiative（TGFI）：Proposals for Developing Green Finance (Overview)
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Tokyo Green Finance Initiative（TGFI）：Proposals for Developing Green Finance
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