In June 2021, as introduced in this article (https://investmentjapan.jp/esg/3105/), the Expert Panel on Sustainable Finance, convened by the Japanese Financial Services Agency (FSA), made recommendations for the sustainable finance market in three main areas: promoting corporate disclosure, using capital market functions to provide investment opportunities, and climate risk management at financial institutions.

On the topic of capital market functions, the Panel stressed the importance of the sustainability-related bond market, recommending the development of a mechanism that certifies the eligibility of bonds for ESG labels, and enhanced provision of information and training for both investors and companies, specifically information on ESG bonds.

In view of these recommendations, in October 2021, Japan Exchange Group, Inc. (JPX) set up a Sustainable Finance Platform Development Working Group consisting of a varied range of related parties including issuers, institutional investors, and academics to consider the practicalities around these issues, among other things.  The Working Group met (virtually, due to Covid-19 restrictions) four times between then and January 21, 2022 and published its First Report on January 31.  An English translation can be found here: https://www.jpx.co.jp/english/corporate/news/news-releases/0090/20220225-01.html

After discussing the main barriers to development of the Japanese ESG bond market, the Working Group deliberated on two main topics: the creation and enhancement of an information platform; and ensuring eligibility for ESG bond labels.

Barriers to development

In its discussions on barriers to development of the Japanese ESG bond market, the Working Group focused on issues surrounding ease of access to necessary information for market players and ESG label eligibility for bonds and similar products.  Firstly, despite huge and rapid growth in the amount of capital allocated to ESG and the numbers of bonds using an ESG label, the kinds of non-financial and specialist information that ESG investors need to make investment decisions – and potential issuers need to discuss issuance – are fragmented across various different websites and platforms.  This is a consequence of the particular characteristics of Japan's market, whereby most activity is around publicly offered but non-listed bonds, meaning that information is not automatically gathered by the exchange and therefore cannot be provided to investors by the exchange.  Another issue regards the lack of a determined set of standards for third party reviewers to use when judging bond eligibility for ESG labels (it is noted, however, that opinions differ on the necessity for numerical standards or singular sets of metrics).  The debate on how to set targets and manage progress during "transition" is also picked out as an important aspect going forward.

Creation and enhancement of an information platform

The Working Group states that in order to make it easier for market players to access the information they need, it will be necessary to work towards the creation, operation, and enhancement of a platform that will become a "hub" for the Japanese ESG market.  This platform should be as integrated an information source as possible and utilize already existing sources.  Information should include fundamentals such as issuance amount and key dates, information on the issuer, links to post-issuance reporting, and information on third-party reviews.  The platform should also work to expand the pool of market participants by providing investors, issuers, finance experts, and others who have an interest with information and resources that cover at least the basics of knowledge on the topic.

This information should be gathered, the Working Group suggests, with the co-operation of related parties, using the incentive of improved convenience for all market players rather than any obligations.  Possible information flows could involve issuers sending to the platform information that they disclose at the time of offering, or lead underwriters sending public information that they maintain.

In line with these recommendations, JPX has now begun work on building the platform with a view to launch by the middle of 2022.  The platform will first cover publicly offered ESG bonds (including green bonds, transition bonds, social bonds, sustainability bonds, and sustainability-linked bonds), but going forward, discussions will continue on gradually expanding this coverage to, for example, privately placed ESG bonds and those issued overseas, ESG-linked loans and investment trusts, and other financial products.  The Working Group will also continue to meet post-launch to discuss whether the platform is meeting its objectives and also whether changes should be made to the operational set-up to maintain stable operations, for example the implementation of a cost-sharing structure.

Ensuring eligibility for ESG bond labels

The Working Group states that whether a bond can be called eligible for a "green", "transition", or similar label is a fundamentally important piece of information to have when issuing or investing in said bond, and therefore the information platform should include information on third party reviews to contribute to decision-making on issuance or investment.  This information could also improve the comparability of similar examples, leading to more reliable eligibility judgments.  

However, there was debate within the Working Group on the best approach to eligibility, with some suggesting that a framework for objective certification of bonds based on specific standards would increase transparency and confidence in the market, while others said that as the ESG bond market is still at an early stage, it would be better to build up a picture of the market as it develops before creating such a framework.  As such, the Report suggests that what is important at the moment is to gradually form a consensus through the whole market while experience of actual issuance and trading builds up.

In line with this, JPX and the Working Group will first aim to improve quality through market consensus by providing details on third party reviews along with the issuance information on the platform, while encouraging issuance of ESG bonds from many different organizations.  This will be combined with continued discussion on a framework for objective certification in consideration of global debate and market trends.

The Working Group hopes that as well as kick-starting JPX's work to create the information platform, the Report becomes a catalyst for deepening mutual dialogue among market players including issuers, investors, and review providers, so that ESG factors are appropriately taken into account at every stage of capital flow, leading to a more sustainable market and economic growth.