The Bank of Japan is launching a new climate change scheme that is expected to boost the underdeveloped green lending market and take one more step towards the country's goal of becoming carbon-neutral by 2050.
Under the scheme, the central bank will offer lenders in Japan long-term loans at zero interest for on-lending through green and sustainability-linked loans and bonds. The new scheme will be launched later this year and last until fiscal 2030.
Although Japanese banks are already flush with liquidity, the BoJ’s commitment to combat climate change is expected to accelerate efforts from both borrowers and lenders to achieve Japan’s carbon neutrality goals.
“Borrowers are asking if they can raise funds at lower rates when the scheme launches as interest rates have not been particularly lower for sustainable finance so far, while lenders are looking to strengthen their sustainability finance efforts by employing this back finance [BoJ’s new scheme],” said Tomoko Hirabayashi, deputy general manager of syndicated finance at Mizuho Bank.
The move should help lift Japan’s green and environmental, social and governance loan market, but might not be sufficient on its own. Japan's infamous wafer-thin pricing on conventional loans leaves very little scope for incentivising borrowers to opt for green and ESG loans.
“Zero interest rates will not directly be applied to individual deals, so the market impact on interest rates is still unknown,” said Takayuki Hirayama, head of business promotion at Sumitomo Mitsui Banking Corp’s wholesale banking sustainable business promotion department.
Moreover, vast liquidity amid a negative interest rate environment that has prevailed in the country since 2016 poses hurdles for green and ESG loans.
“In Japan, investments that fall under the category of green investment have traditionally been conducted as ordinary investments. There may not be enough incentives for being labelled as green to cover the costs of having various business divisions involved. Blue-chip companies can easily raise funds without having green labels, which is particularly the case in the syndicated loan market,” said Kei Kuritani, joint general manager of distribution at SMBC.
Japan’s green and ESG loan volumes reached US$2.68bn in the first half of 2021, according to Refinitiv LPC data, 18% lower than the record US$2.94bn raised during the same period last year. It is also a drop in the ocean compared with global volumes of US$312.96bn in the first six months of 2021.
“I think that the BoJ introducing a support system will send a positive message to the market, which is still in its infancy,” said Koji Tanaka, head of syndication at MUFG’s solution products division.
He said that conditions in Japan are nowhere close to Europe, where funding costs are rising for companies that do not incorporate ESG factors in their financings.
“Borrowers often ask if there are any advantages in choosing green financing, but there will be disadvantages in not doing it in the future,” Mizuho’s Hirabayashi said.
More initiatives
Details of BoJ’s climate change scheme are yet to be determined, but follow in the footsteps of other initiatives Japanese regulators have announced this year.
In May, the Ministry of Economy, Trade and Industry announced guidelines on climate transition finance, which are in line with the International Capital Market Association’s climate transition finance handbook published last December.
Meti plans to roll out interest rate subsidies for ¥1trn (US$9.2bn) of transition financings and subsidise borrowing costs for transition projects by up to 20bp over the next three years – covering a significant portion of funding costs.
In July, NYK Line's ¥20bn transition bond was selected as the first deal to receive subsidies for assessment costs. The five and seven-year transition bond carries coupons of 0.26% and 0.38%, respectively.
Meanwhile, the Tokyo Stock Exchange’s prime market will require blue-chip companies to disclose ESG factors from next April.
Equity investors are increasingly demanding disclosures on ESG initiatives and companies not contributing to ESG factors will be divestment targets in future, according to bankers.
“How companies disclose their medium-term management plans and financial results are clearly quite different from this quarter. Sustainability strategies and goals are being incorporated in their presentations and such dialogue is increasing,” said Munehiro Goda, senior vice president of sustainable business promotion at SMBC.