JAPAN Trends and Developments Contributed by: Reiko Yoshida, City-Yuwa Partners
Relationship between transition-linked loans and sustainability-linked loans With respect to sustainability-linked loans, the basic concepts and framework are set out in the Green Loan and Sustainability-Linked Loan Guidelines published by the Ministry of the Environment of Japan (the “MOE Guidelines”). Under the MOE Guidelines, a sustaina - bility-linked loan is a financing instrument in which the borrower’s sustainability objectives, as reflected in its overall strategy on sustainability and social responsi - bility, are linked to sustainability performance targets (SPTs). Improvements in sustainability performance are assessed by reference to predetermined key per - formance indicators (KPIs), with transparency ensured through post-loan reporting. KPIs refer to indicators used to measure the achieve - ment of specific objectives, while SPTs denote the target levels to be achieved against those indicators. Sustainability-linked loans are designed to encourage borrowers to pursue ambitious and predefined SPTs. Transition-linked loans and sustainability-linked loans share certain structural features. In both cases, finan - cial terms such as interest rates are adjusted based on performance against specified indicators, and, unlike green loans, the use of proceeds is not restricted. At the same time, transition-linked loans exhibit distinct characteristics in terms of scope, design philosophy and evaluation focus. Sustainability-linked loans are characterised by their flexibility, allowing borrowers to set a wide range of sustainability-related indicators, including environ - mental, social and governance matters. By linking economic incentives to performance against borrow - er-selected KPIs, such loans promote improvements in overall corporate sustainability. By contrast, transition-linked loans are primar - ily designed for sectors in which decarbonisation is technically or economically challenging, commonly referred to as “hard-to-abate” sectors. Transition- linked finance does not focus solely on the use of proceeds or short-term quantitative targets, but plac - es emphasis on the credibility and effectiveness of a borrower’s long-term transition strategy at the corpo - rate level. Evaluation typically centres on indicators
directly related to transition efforts, including GHG emission reductions, investments in energy efficiency and fuel switching, and the adoption of decarbonisa - tion-related technologies. Importantly, these targets are expected to be consistent with binding regulatory requirements and internationally agreed decarbonisa - tion pathways, including those developed by the IMO. In this sense, while sustainability-linked loans sup - port broad-based improvements in corporate sustain - ability, transition-linked loans focus more narrowly on progress towards decarbonisation and reflect that progress in financial terms. Government support measures Following the formulation of the Guidelines in 2021, the Japanese government has taken the lead in pro - moting transition finance through initiatives aimed at progressively establishing an enabling market envi - ronment. Since the formulation of the Guidelines, sector-specif - ic technology roadmaps have been developed, in co- operation with the private sector, for ten high-emission sectors, including maritime transport. These sectors are reported to account for more than 80% of Japan’s total GHG emissions. In the maritime sector, under the leadership of the Ministry of Land, Infrastructure, Transport and Tour - ism of Japan, a Roadmap towards Zero Emission from International Shipping was formulated in 2020. The roadmap was developed through collabora - tion among the maritime transport, shipbuilding and marine equipment industries, together with research institutions and public bodies, and organises techno - logical options available over the short, medium and longer term while setting out concrete directions for transition towards decarbonisation. In considering, at each stage, what types of initiatives may be regarded as eligible for transition, reference to such roadmaps is of practical significance. For bor - rowers, they serve as guidance in formulating tran - sition strategies aligned with GHG reduction targets adopted by relevant international bodies. For lenders, they provide a useful basis for assessing the credibility
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