A Sleeping Giant: The Rise of Japan’s GSS Bond Market

Green, social and sustainability bonds in Japan are seen as instrumental in achieving the UN’s Sustainable Development Goals and addressing the nation’s social issues

  • Green, social and sustainability bonds are new in Japan but have significant scope for expansion
  • In Japan, GSS bonds can address issues including natural disasters, inequality and a declining and aging population

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Amid rising awareness of the need to ensure the sustainability of the economic system and wider society, there is growing focus on the role finance has to play in making that a reality. Japanese green, social and sustainability (GSS) bonds are a relatively new piece of this puzzle, but one with potential for significant expansion.

In Japan, GSS bonds are being seen as one of the steps towards achieving the UN’s Sustainable Development Goals (SDGs) and therefore have a scope wider than the ‘green’ investment instruments that dominate the category globally.

But as with most areas of impact investing, there remains a lack of clarity around definitions and regulation of GSS bonds. This is something which needs to be addressed, along with clearer metrics on their effect and better data on returns, for growth to continue.

Building Momentum

The first Japanese green bonds were euro-denominated issuances by the Development Bank of Japan in October 2014.

Japan’s Ministry of Environment launched its Green Bond Guidelines in 2017, and the following year began providing subsidies to cover the cost of assessments from external reviewers that support companies, local governments and other entities seeking to issue green bonds.

“In 2018, many Japanese corporates began to issue green bonds and realised there was a big investor base for them, so there have been many repeat issues,” notes Akane Enatsu, Head of Nomura Research Center of Sustainability.

While globally, green bonds made up around 70% of the GSS bonds outstanding at the end of 2020, the proportion of social bonds in Japan has been higher than in other countries largely due to continuous issuance from government agencies such as the Japan International Cooperation Agency (JICA), points out Enatsu.

And the pandemic has given rise to a new kind of social bond, instruments designed to fund the response to COVID-19, which have been issued by many issuers both public and private sector around the globe, including in Japan. These hark back to the roots of social bonds, the very first of which was a vaccine bond issued by the International Financial Facility for Immunisation (IFFIm) in November 2006.

Japan’s largest investor, the Government Pension Investment Fund (GPIF), became a signatory of Principles of Responsible Investment (PRI) in 2015, later broadening that ESG investment from equities to all asset classes including fixed income in 2017. It also started to provide its asset managers with opportunities to invest in GSS bonds in April 2019. The GPIF’s huge presence and influential status in Japanese markets means its moves have been giving a boost to the profile of GSS bonds, suggests Enatsu.

Keidanren, a business federation representing most of Japan’s biggest firms, has also put its weight behind sustainability, asking its members to consider ways to contribute to achieving the SDGs and lay those measures in their management strategies.

Despite the recent growth in the sector, it remains something of a niche product in Japan, which accounts for only around 4% of the more than $1.7 trillion in GSS bonds that have been issued globally. That puts it on a par with South Korea, which has significantly smaller capital markets, and well behind France’s 15% and the US’s 7%.

Call for Clarity

The Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines from the International Capital Markets Association (ICMA), most recently updated in June 2021, are the most widely recognised definitions for GSS bonds, though none of them are binding for issuers. Japanese ministries have thus far largely followed the ICMA guidelines.

The European Green Bond Standard (EUGBS) goes further than previous guidelines in setting out requirements and definitions. But the European Commission’s proposal for legislation, announced in early July, made it clear that abiding by the standards will not be compulsory.

“Many financial market participants are worried they may be investing in greenwashing,” says Enatsu. “On the other hand, if the rules are too strict and complicated, it could slow down the momentum. So there needs to be a balance.”

Complicating the matter of definitions still further are transition bonds, issued by companies to fund shifts to more sustainable business models, but not seen as coming under the GSS category, points out Enatsu.

Japanese shipping giant NYK Line announced the country’s first transition bonds in July as part of a plan to reduce emissions from its vessels and logistics operations. The company is aiming to raise ¥20 billion ($183 million) to invest in LNG-powered ships, the development of zero-emission vessels and green cargo terminals.

Poverty and Inequality

GSS bonds being allied with the SDGs in Japan creates an opportunity to utilise them to address a range of the nation’s sustainability and social issues including energy, natural disasters, inequality and poverty, the declining and aging population, and stagnant regional economies.

“Energy is the largest issue, in my view. The situation is difficult because Japan is very reliant on imports of fossil fuels,” says Enatsu, who points out that with most of Japan’s nuclear power plants still offline since the Fukushima disaster, the government’s goal of carbon neutrality by 2050 will require major investment in the energy sector.

Another area where GSS bonds could make an impact is one where governments have traditionally been seen as the solution: income disparity.

“Issues like poverty and inequality sound like they should be solved by the public sector, but there is a lack of financial resources to tackle every problem,” suggests Enatsu, who points out that these are real and sometimes overlooked challenges in some parts of Japan.

Enatsu acknowledges that one of the hurdles for all forms of GSS bonds, is to show they can deliver a real impact as well as returns. She calls for greater transparency from issuers and for financial institutions/academics to produce more research and data on performance.

More accurate measurements of impact could help drive investors towards GSS bonds, particularly in Japan, where fixed income returns are relatively low.

Everyone’s Problems

“All stakeholders, including financial markets, need to think about sustainability,” says Enatsu. “Everybody needs to participate to solve these problems. There are 17 goals and 169 targets in the SDGs. The public sector can’t do everything.”


    Akane Enatsu

    Akane Enatsu

    Head of Nomura Research Center of Sustainability, NICMR


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