AlwaysFree: Investors Wary Of Greenwashing In Japan’s $140 Billion Bond Plan

• Government aims to sell “GX” bonds to fund low-carbon plans
• Ambiguity around name of new debt is seen deterring investors

According to Bloomberg article published on November 18, 2022, the Japanese government faces a challenge in one of its landmark climate-change initiatives, a new type of sovereign debt to raise funds for the country’s decarbonization efforts. The problem is, investors remain unclear over what the money will be used for. 

Japanese Prime Minister Fumio Kishida proposed in May establishing a “green transformation economic transition bond,” widely referred to in Japan as a “GX bond,” in an effort to raise as much as 20 trillion yen ($143 billion). But the ambiguous name and a lack of details over what the proceeds would be used for are sparking concerns among investors increasingly wary of greenwashing.   

“What investors are not interested in is very loosely defined initiatives with no clear aims and no way to accurately track the impact of these investments,” said Patrick Ghali, a managing partner and co-founder of UK-based Sussex Partners, an investment advisory firm. “‘Green transformation’ to me is very broad and could include anything from protection of biospheres to decarbonization.” 

The government aims to complete plans for the new bonds by the end of the year. Japan’s trade ministry did not immediately respond to a Bloomberg request for comment.

With demand for green debt surging, issuers are increasingly looking to avoid narrow definitions that will limit how they use the funds. At the same time, investors are applying more rigorous scrutiny to financial products that exaggerate their environmental benefits. Failure to address the issue could discourage investors and make it difficult for Japan to raise the money needed to meet its climate goals.  

The name “green transformation economic transition bond” leaves investors uncertain what category the debt will fall under according to International Capital Market Association guidelines. Japan has yet to decide on how the proceeds will be used, but the government has identified areas where public and private investment should be made. That includes things like renewable energy, as well as technologies that fall under the objectives of a transition bond, such as hydrogen and ammonia that can be co-fired in thermal power plants.

The fact that the new debt straddles characteristics of both green and transition bonds could confuse and drive investors away, according to Itaru Asano, a senior ESG analyst at SMBC Nikko Securities Inc. 

“While it is a tentative name, having both ‘green’ and ‘transition’ in the name of the product may make investors wary of greenwashing,” he said. 

Japan and the US are the only Group of Seven countries not to have issued green bonds which comply with ICMA guidelines. No country has ever issued a sovereign transition bond, according to Bloomberg data. 

The government, which started discussing the details of the new debt in July, left open the possibility of using the funds for a wide range of projects, including nuclear power. A traditional instrument like a green bond would have stricter limits on the use of proceeds. 

The new bond is part of an ongoing effort to cut the country’s emissions by 46% from 2013 levels by 2030, and go carbon neutral by 2050. The resource-scant nation is heavily reliant on fossil-fuel imports. A panel at the trade ministry calculated that Japan will need 150 trillion yen ($1.1 trillion) in corporate and government investment over the next decade to achieve its 2050 climate goals.

Japan should simplify the name of the bond to make it easier to understand its intent, said Tsuyoshi Yamaguchi, a former environment minister of Japan. During his time as the head of the ministry, Yamaguchi called for the creation of a new sovereign bond to raise funds for investing in innovation that would help with decarbonization. 

“Japan will need to attract more and more capital from overseas to achieve decarbonization,” he added. 

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