JAPAN Trends and Developments Contributed by: Reiko Yoshida, City-Yuwa Partners
(e) expansion of low- and zero-carbon businesses through group-wide initiatives. Case 2 • Implementation period of the business adaptation plan – ten years. • Environmental objectives – by addressing key issues related to the sustainable development goals (SDGs), namely safety, the environment, and human resources, the company aims to create both corporate and social value and contribute to the achievement of the SDGs. Specifically, through initiatives towards the decarbonisation of vessels, the company seeks to reduce total GHG emissions under Scope 1 and Scope 2 by 45% by fiscal year 2030, and to achieve net-zero emissions by 2050, including Scope 3. • Financial performance objective – to improve con - solidated adjusted ROA by at least 2% points. • Actions to be taken to achieve the objectives – (a) introduction of LNG-fuelled vessels; (b) development of new propulsion systems; (c) use of ammonia as a marine fuel; and (d) deployment of more efficient vessel operation technologies. Documentation of transition-linked loans Transition-linked loans share many conceptual fea - tures with sustainability-linked loans in terms of their underlying financial structure. Accordingly, irrespec - tive of the governing law of the relevant loan docu - mentation, when considering loan terms specific to transition-linked loans, it is practically useful to refer to the Draft Provisions for Sustainability-Linked Loans published by the LMA in May 2023. By way of illustration, such documentation may include, inter alia: • provisions in the interest clause addressing sus - tainability margin adjustments; • provisions in the borrower’s undertakings requiring the submission of a framework forming the basis for assessing the achievement of SPTs, together with reports issued by external reviewers evaluat - ing such framework; • provisions imposing an obligation on the borrower to submit periodic reports to the lenders during the
life of the loan, as well as provisions addressing the consequences where the contents of such reports are deemed insufficient; and • provisions governing the treatment of mate - rial changes to the borrower’s climate transition strategy, or situations where relevant principles are determined not to have been complied with. With respect to the criteria for determining whether an interest rate reduction is applicable, certain trans - actions incorporating a performance-linked interest subsidy scheme include a mechanism under which the government makes such determination. How - ever, irrespective of whether such a scheme applies, the achievement status of the SPTs in each transac - tion ultimately requires lenders to conduct their own review and reach a determination. In this context, in addition to making use of evalua - tions conducted by independent third-party review - ers, it may also be effective for lenders to incorporate quantitative assessment methods as part of their cov - enant monitoring practices. For example, where an SPT is established by reference to the Energy Efficien - cy Operational Indicator (EEOI) as a key performance indicator, the relevant calculation methodology is set out in guidelines issued by the IMO, and the relation - ship with GHG emission reduction targets is relatively clear. As a result, such an indicator allows for objec - tive, science-based quantitative assessment and is comparatively straightforward for lenders to monitor. That said, the environment surrounding transition finance continues to evolve rapidly. Owing to tech - nological developments, further regulatory tighten - ing, and changes in social and economic conditions, it cannot be ruled out that indicators determined at the time of structuring a transaction may, over time, cease to contribute meaningfully to the sustainable growth of the relevant company or to broader societal develop - ment. In such circumstances, it may become neces - sary to revisit the applicable KPIs, and there is also a risk of divergence between the originally assumed evaluation criteria and actual circumstances. On the other hand, having independent third-party reviewers assess whether initiatives aligned with a rel - evant roadmap are being appropriately implemented
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