Japan lender turns to green bonds to meet climate finance demand – Nikkei Asia

TOKYO — The Japan Bank for International Cooperation is looking to play a leading role in mobilizing private finance to support Asia’s energy supply decarbonization, even as its legacy of coal financing persists in Southeast Asia.

Ahead of the COP26 climate summit, the Japanese government lender released its first-ever policy on environmental, social and governance standards last week, aiming for a carbon neutral financial portfolio by 2050 as well as net-zero emissions in its operations by 2030.

The bank will also begin issuing green bonds to finance renewable energy, clean transportation and energy-efficient real estate projects overseas.

“Because of the government’s new policy of carbon neutrality announced last year, I feel the behavior of Japanese companies has been transformed dramatically,” Hiroki Sekine, JBIC director-general for ESG, told Nikkei Asia in an interview.

“Now our customers in Asian countries are also looking in the same direction and also looking at carbon neutrality, affecting demand,” he added.

With the world set to undershoot an annual target of $100 billion in public climate finance and private finance trailing far behind, JBIC’s green bond framework could shift capital in developing Asia toward electric vehicle manufacturing, hydrogen supply chains and energy storage systems.

“JBIC’s commitment to achieve net zero emissions in its finance portfolio by 2050 is an important market signal to the region,” said Tom Arup, director at the Asia Investment Group on Climate Change.

The new policy aligns JBIC with Japan’s pledge, along with the Group of Seven countries, to end public finance for unabated coal projects overseas this year. While JBIC has not financed a coal-fired power plant since Vietnam’s Vung Ang 2 in December, Japanese public finance institutions have provided $10.9 billion for fossil fuels between 2018 and 2020. That was the second highest among the G-20 countries, according to a report by Oil Change International and Friends of the Earth.

“Although JBIC’s green bond framework excludes fossil fuels, JBIC will not be applauded if it continues financing new fossil fuel projects,” said Eri Watanabe, Japan finance campaigner at 350.org. On the same day as its ESG policy, JBIC announced financing of up to $850 million for an LNG project in Canada.

Gas will be part of JBIC’s “realistic plan” to support recipient countries with a more gradual transition from coal, said Sekine.

“Some countries need fossil fuels to get on the pathway to a low-carbon economy,” said Sekine. “Divestment is not a solution. We want to hear from host countries about what they want to do for these existing projects, and when they want to upgrade or introduce technology to reduce emissions, we would like to propose solutions or financial support.”

The bank plans to work with governments to improve the local conditions for low-carbon energy. Many recipient countries, particularly in Southeast Asia, have aging and disconnected grids with minimal power storage capacity.

“Japanese companies are very keen to invest in that, but the host countries should make an appropriate plan to attract private money by improving transmission lines,” Sekine said.

Due to their mandates, any climate ambition from public financial institutions such as JBIC and the U.S. Development Finance Corporation is limited to proposals by private companies. Sekine said the bank will not set a target number of projects or yen amount for green finance, instead allowing clients to submit plans to eventually align JBIC with a net zero portfolio by 2050.

“They’re ultimately trying to catalyze private sector investment and not leading investment,” said Courtney Weatherby, deputy director for Southeast Asia at the Stimson Center, a Washington think tank.

The impact of JBIC’s new policy will depend on what portion of JBIC commitments, totaling 1.68 trillion yen ($14.6 billion) in 2019, will be allocated to green finance relative to other instruments.

“If this green bond framework is just one of many options on the table, and the other options could support coal projects, then I think that significantly weakens the green bond framework here,” Weatherby added.

The word “unabated” in the G-7 pledge provided a carveout for Japanese exports of ultra-supercritical coal technology, which can be up to 45% more efficient than traditional alternatives. Japan also exports carbon capture, utilization and storage technology, and is looking to export dual fuel plants that burn coal with ammonia, which does not emit carbon dioxide.

“JBIC could provide more confidence that it will not unnecessarily prolong the life of coal power by detailing the conditions under which it would continue to finance new projects with CCUS technology or ammonia co-firing,” said Arup.