Towards "Tokyo Sustainable Finance Week", we will publish a series of columns on sustainable finance. The first two columns will focus on the basics of sustainable finance.


What is Sustainable Finance (2/2)

In the previous column, the outline and background of the rapid expansion of sustainable finance were shared. This article features an overview of the specific methods of typical sustainable financing, such as ESG investment, sustainable loans and bonds.

ESG investment

ESG (Environment, Social, and Governance) investment is a method of investment that takes non-financial information into account when making investment decisions. As mentioned in the previous column, ESG investment is rapidly expanding globally, with an overall increase of 34% from 2016 to 2018. In Japan, the market grew approximately 307% from 57 trillion to 232 trillion JPY during the same period, and is indeed continuing to grow significantly(i). With this background, many companies in Japan have also begun to disclose ESG-related information. In addition, the so-called "ESG rating," which rates companies based on ESG information, has become widespread as a factor for investors to make decisions on ESG investments. Then the next question is: who are the ESG investors who consider environmental, social and governance aspects alongside financial metrics?

The majority of ESG investors are institutional investors and asset managers that owe fiduciary responsibility for maximizing long-term returns, such as pension funds, life insurance companies, and trust banks. These investors evaluate companies’ medium to long term value and future potential before investing. The reason why they emphasize the importance of non-financial information in the investment analysis and decision-making process, such as environmental, social, and governance factors, is that financial information alone has become limited for them to determine corporate value over the medium to long term as the importance of environmental and social issues has increased. Non-financial information is used to analyze whether investee companies can create value over the medium to long term while meeting the expectations and demands of society, and whether they can grow sustainably while responding to changes in the natural and social environment.

As for the typical methods of ESG investment, there are seven approaches as follows.

Sustainable Finance Method | Tokyo Sustainable Finance Week

Looking at the total investment by method, “Negative screening” is the highest worldwide, followed by “ESG integration”. In Japan, on the other hand, “Engagement and voting” is most commonly used(ⅱ). We may say that this happens because the Japanese Stewardship Code, which promotes the engagement, is recognized as an opportunity to expand ESG investment in Japan.

The United Nations “Principles for Responsible Investment (PRI)” is considered as a key promoter to expand ESG investment. PRI consists of six principles intended to incorporate ESG factors into investment decisions. As mentioned in the previous column, the number of signatory organizations is rapidly increasing. Based on this trend, ESG investment is expected to continuously expand in the future.

Sustainable loans

Sustainable loans is a method of investment that considers sustainability factors when providing loans to companies. A typical practice is the formulation of environmental and social policies by banks.

Leading financial institutions have been developing policies for environmental and social risks and also for some specific industrial sectors for more than 10 years. Sector policies are set for the fields that are considered to have a high impact on environment, such as coal-fired power generation, oil and gas, or forests and palm oil. This trend has reached Japan and has been expanding rapidly since 2018. At the moment, major financial institutions, including mega banks, are developing policies for environmental, social related risks and for specific sectors. An increase of expectations from overseas investors due to the expansion of ESG invesment, and the emergence of environmental and social risks seems to be boosting the financial institutions to develop the policies.

Another major initiative with regard to sustainable loans is the Equator Principles. This is a voluntary guideline for the financial industry, and it is aimed at avoiding and reducing environmental and social risks when financing large-scale projects such as power plant construction and mining and infrastructure development. It is the de facto standard with a large share in the project finance market. In fact, over 70 percent of international project finance debt in emerging markets are covered by financial institutions that have adopted the principles(ⅲ). In Japan, eight institutions(ⅳ), including mega banks, have adopted the principles.

In addition to the above, there are other methods of sustainability loans, such as green loans and sustainability-linked loans. All of these methods link borrowing conditions, such as interest rates, with the results of sustainability efforts on the borrowing side. The results of the efforts are measured using Sustainability Performance Targeting (SPTs). By linking pre-established SPTs performances with loan terms, the program aims to promote sustainability efforts on borrowers side.

Sustainable bonds

Sustainable bonds refer to green bonds, social bonds, and sustainability bonds. Together, they are also called SDGs bonds. Among these, Green Bonds has the largest issuance amount. The aim of the issue of sustainable bonds is to raise funds from capital markets, and the usage of the fund is limited to businesses which have positive environmental impacts. In 2008, as a reponse to the request raised by Swedish funds to esatblish bonds which clearly contribute to the environment, World Bank bonds for climate change countermeasures in developing countries were issued. Since then, international orgainizations such as development financial institutions started to follow the trend and in the 2010s the issuers diversified from banks, local goverments and private compaies. These days, in addition to western countries, issuances have been increasing in emerging Asian countries year by year. Green bonds issues are growing rapidly worldwide, reaching 258.9 billion USD in 2019 (increased by 51% from 2018)(ⅴ). Although the scale of the market is still relatively small in Japan, the number of issuers is ranked third after the U.S. and China, and the market is expected to expand more in the future.

With the expansion of the sustainable bond market, a series of guidelines have been formulated, including the Green Bond Principles (GBP), the Social Bond Principles (SBP), and the Sustainability Bond Guidelines (SBG). All of them are established by the International Capital Markets Association (ICMA), and they are used as a common voluntary guidline for bond issuance rather than regulatory guidance. Aiming for orderly development of the market, the guidelines encourage increasing transparency and information disclosure by demonstrating criteria for usage of funds raised, project evaluation / selection process, monitoring of funds raised, and reporting. In 2019, "EU Green Bond Standards", the original gudilne made by the EU, were established. New developments regarding bond guidelines will continue to attract attention.

In the next column, we will cover “Sustainable finance during and post the COVID-19 era”.


  • (i)Global Sustainable Investment Alliance, Global Sustainable Investment Review 2018
  • (ii)Japan Sustainable Investment Forum, Sustainable Investment Survey 2018
  • (iii)From The Equator Principles Association website
  • (iv)Name of eight institutions from The Equator Principles Association website: Development Bank of Japan, Inc., Mizuho Bank, Ltd., MUFJ Bank, Ltd., Nippon Life Insurance Company, The Norinchukin Bank, Shinsei Bank, Limited., Sumitomo Mitsui Banking Corporation, Sumitomo Mitsui Trust Bank, Limited.
  • (ⅴ)Climate Bonds Initiative, GREEN BONDS: GLOBAL STATE OF THE MARKET 2019

Written by: PricewaterhouseCoopers Aarata LLC

Strategic Projects Section, Strategic Projects Division Office of the Governor for Policy Planning Tokyo Metropolitan Government