Expectations for, and Challenges and Solutions to Transition Finance (PR)

2023年01月31日 09時50分

Transition finance drives decarbonization of hard-to-abate sectors, or sectors for which reducing greenhouse gas emissions is difficult. The United Nations Framework Convention on Climate Change (COP 27) held in November 2022 saw high expectations for the role transition finance will play as a new financing approach that will pave the way for steady transition to a decarbonized society.

The Organization of Global Financial City Tokyo (FinCity.Tokyo, Chairman: Hiroshi Nakaso, former Deputy Governor of the Bank of Japan) will host “FinCity Global Forum—Transition Finance, Challenges and opportunities for Tokyo” in February 2023. The forum will provide information and make recommendations on financial support for decarbonization, involving an all-Japan team that includes Financial Services Agency, Ministry of Economy, Trade and Industry, and Ministry of the Environment, as well as financial industry groups, financial institutions, and private sector companies.

This special report, a three-part series planned in connection with the FinCity Global Forum, looks at the current situations of transition finance and introduces initiatives of FinCity.Tokyo.

＜Third installment of a three-part series＞

We should lose no time combating global climate change, and transition finance, which uses the power of finance to help promote gradual reductions of GHG emissions, has a major role to play in the effort. Tokyo is a home to many financial institutions that are pioneering in transition finance. There are expectations that Tokyo, an international financial center, will lead Asia’s long journey to creating a decarbonized society. Here, we look at transition finance-related measures being taken by the Organization of Global Financial City Tokyo (FCT/FinCity.Tokyo; Chairman: Hiroshi Nakaso) and its member companies and organizations, as well as associated problems.

◆Japanese Financial Institutions Joining Forces

In Japan, cases of transition finance have been increasing in recent years.

In one case, Sumitomo Mitsui Trust Bank and Mizuho Bank formed a syndicate for transition loans to major shipping company Kawasaki Kisen Kaisha in March 2021. Kawasaki Kisen used the loans worth about 5.9 billion yen to purchase a next-generation car carrier using liquefied natural gas (LNG) as fuel. In September 2021, Kawasaki Kisen procured about 110 billion yen of transition-linked loans. Among the lenders were Mizuho Bank, the main arranger of the loans, the Japanese government-backed Development Bank of Japan (DBJ) and Sumitomo Mitsui Trust Bank, both co-arrangers, Norinchukin Bank, Shinkin Central Bank and Bank of Yokohama.
Also in September 2021, Sumitomo Mitsui Trust Bank and the DBJ served as arrangers for loans to support funding of Mitsui O.S.K. Lines’ purchase of Japan’s first LNG-powered ferry. The funding scheme was selected as the first of "climate transition finance model projects,” a Ministry of Economy, Trade and Industry initiative for supporting firms’ emissions cuts.

Lenders of the loans to Mitsui O.S.K. Lines also included co-arranger Sumitomo Mitsui Banking as well as 10 regional banks--Yamaguchi Bank, Higo Bank, Oita Bank, Kitakyushu Bank, Bank of Yokohama, San-in Godo Bank, Hiroshima Bank, Iyo Bank, Ehime Bank and Bank of Kyoto. For the transition loans to Kawasaki Kisen and Mitsui O.S.K. Lines, Japan Credit Rating Agency certified that the loan frameworks of both cases meet the principles of “transition,” which aims to reduce GHG emissions. Including these, cases of transition finance involving cooperation between megabanks and regional banks are increasing steadily in Japan.

Financial institutions are steadily building necessary systems as sustainability-related fields, including transition finance, are expanding.

At Sumitomo Mitsui Trust, specialized teams such as the “technology-based finance team,” which has specialists like those with Ph.D. in science, and the “ESG solutions planning promotion division,” which comprises members with advanced knowledge, are teaming up with other in-house divisions for the promotion of transition finance. By resolving problems facing clients, “we are improving the skills of our employees and of our proposals,” an official of the trust bank says. In October 2022, Nomura Securities established the sustainable finance division, into which the company’s functions such as advising clients on nonfinancial information disclosure as well as sustainable finance including emissions trading, have been concentrated. The division now has roughly 30 staff employees. By deepening collaboration with Nomura Greentech, which has accumulated experience and built up track records in sustainability-related fields, and with sustainable finance-linked teams abroad including Europe, “we will beef up our international competitiveness,” a Nomura Securities official says. The DBJ launched the transition promotion office in April 2022, “aiming to facilitate cross-regional, cross-industry efforts across our bank.” Norinchukin Bank has named two executives as “co-chief sustainability officers” (CO-CSuOs), who are responsible for supervising and promoting the bank’s sustainability-related measures, with one of them deployed in London and the other in Japan. By establishing a system enabling cooperation on a global scale, Norinchukin Bank is putting effort into sustainable finance.

Reducing GHG emissions is a global challenge, therefore requiring cross-border cooperation among and joint actions by national governments, and private-sector companies and financial institutions. According to a report dated Jan. 18, 2023, from SMBC Nikko Securities, sustainability bonds worth a total of 830 billion dollars were issued around the world in 2022. Of the total, China accounted for 14% to rank top, followed by international organizations, with a share of 12%, France, with 11%, Germany, with 10%, and the United States, with 6%. Japan shared the sixth spot with South Korea, with 5% each. Four European countries--France, Germany, the Netherlands and Italy--together accounted for about 30% of the total issue amount. The issue amount of transition bonds was only 1% of that of sustainability bonds, an indication that there is a great possibility of the transition bond market expanding from now. A Nomura Securities official says that the market for transition-related securities “will likely grow because the need for them is high from both issuers and investors.”

Decarbonizations is an issue for not only Japan but other parts of the world. As Japanese companies are increasingly active around the world, it is necessary for supply chains as whole to promote decarbonization. Interest in transition finance, a tool for securing funds for measures for decarbonization, is high. “Inquiries about transition finance are increasing,” a Nomura Securities official says.

Companies in Asia, in particular, are said to be lagging behind others in taking measures against climate change. As many Japanese companies are doing business in Asia, Japan, which has accumulated experience in the field of transition finance, has a major role to play in the region. It is necessary to accelerate the implementation of anti-global warming measures “from Tokyo” in Asia, on top of supplying the region with Japan’s sophisticated environmental technologies.

Discussions on decarbonization sometimes tend to become polarized, dividing industries and companies into two group--those with high environmental impacts and others with zero emissions. In reality, however, many sectors, such as the steelmaking, electricity and shipping industries, which emit large amounts of GHG, cannot achieve decarbonization quickly. In October 2020, then Japanese Prime Minister Yoshihide Suga announced a goal for Japan to realize carbon neutrality by 2050. A green growth strategy the Japanese government forged based on the carbon neutrality goal highlights the importance of transition finance, which provides funding needed for each stage of the decarbonization efforts in order to steadily create a low-carbon society. In the strategy, the government expresses its resolve to lead international discussions on transition finance at such forums as the Group of Seven major industrial nations and the Group of 20 advanced and emerging economies.

Many financial institutions have set reduction targets for financed emissions. In some cases, the amount of emissions could increase temporarily during the long transition period. "It is necessary to develop evaluation criteria so that financial institutions can actively support recipients of their loans and investment even in such cases," a Norinchukin Bank official says, adding that an international level playing field should be prepared and that comparability should be fully taken into consideration.

◆Government’s Leadership Imperative

The leadership of the government is also important in spreading transition finance. Nomura Securities underlines the need for the introduction of preferential treatment for not only transition-related investment vehicles but also sustainability-themed financial products. As one example, the company points to a request by the Japan Securities Dealers Association (JSDA) that the government allow special tax deductions for individuals and organizations relating to investment in bonds meeting certain conditions. The JSDA made the request to the government as part of its tax system reform proposals. Climate Bonds Initiative (CBI), a British nongovernmental organization (NGO), which is working to utilize global capital for actions against climate change and is also an opinion leader in the market, is showing a readiness to support transition finance, including by announcing criteria for the steelmaking and basic chemicals industries. “The support from CBI, which proposes various methods to promote decarbonization, is expected to help spur the growth of transition finance abroad,” a Nomura Securities official says. To help transition finance come into wider use in Asia, it is necessary to speed up work to craft related standards for each industry and region.

Norinchukin Bank is pinning hopes on intergovernmental coordination to make sure that consistency, transparency and comparability are secured regarding the concepts related to long-term action plans for each region and entity for realizing decarbonization, classification criteria for assessing whether each measure is effective in curbing climate change and guidelines on transition finance. A Norinchukin Bank official says: “Gaps between regional perspectives and criteria could lead to increases in financial institutions’ burdens in responding to the situations, and there also is a risk of being criticized as greenwashing in regions with relatively strict criteria. So these could be hurdles in promoting transition finance.”

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Public-private “all-Japan” team event
“FinCity Global Forum—Transition Finance, Challenges and opportunities for Tokyo”
https://bit.ly/40eM4FO
*Applicants will be notified about archive streaming.

Organizer: FinCity.Tokyo
Date & Time: Thursday, February 2, 2023 13:30-17:50 (JST)
Venue: KABUTO ONE Hall & Conference (7-1 Nihonbashi Kabuto-cho, Chuo-ku, Tokyo)
Sponsors: Financial Services Agency; Ministry of Economy, Trade and Industry, Ministry of the Environment; Japanese Bankers Association; The Investment Trusts Association, Japan; Japan Securities Dealers Association, Japan Investment Advisers Association; The Securities Analysts Association of Japan; CFA Society Japan; Japan Exchange Group; Tokyo Stock Exchange, The Alternative Investment Management Association (AIMA), The Consortium for Japan International Asset Management Center Promotion (JIAM)