Basic Guidelines on
Climate Transition FinanceMay 2021
Financial Services Agency;
Ministry of Economy,Trade and Industry;
and Ministry of the Environment, Japan

Chapter
Chapter 1 Introduction …………………………………………………………………1
1. Purpose of the Basic Guidelines……………………………………………………………… 1

Chapter 2 Overview of Transition Finance …………………………4
1. Definition of Transition Finance……………………………………………………………… 4
2. Overview of Transition Finance……………………………………………………………… 4
Chapter 3 E
 xpectations in Transition Finance andSpecific Approaches ………………………………………………7
1. Overview of expected disclosure elements in transition finance…………… 7
2. Specific Approaches to respective disclosure elements ……………………… 8(1) Element 1: Fundraiser’s Climate Transition Strategy and Governance ……………………… 8(2) Element 2: Business Model Environmental Materiality………………………………………… 10(3) Element 3: Climate Transition Strategy to be Science-based Including Targets andPathways……………………………………………………………………………………………… 10(4) Element 4: Implementation Transparency……………………………………………………… 12

APPENDIX1. COMMITTEE ……………………………………………………………………………… 14
APPENDIX2. DIALOGUE PARTICIPANTS……………………………………………………… 16

Chapter 1

Introduction

1. Purpose of the Basic Guidelines
The Paris Agreement, which was adopted in 2015, set out a long-term universal goal to “holding the increase in the global
average temperature to well below 2°C above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5°C
above pre-industrial levels”.
In addition, the Special Report on Global Warming of 1.5°C (SR15) published by the IPCC1 (Intergovernmental Panel on Climate
Change) points out that for global warming to be limited to 1.5°C, global human-caused emissions of carbon dioxide would
need to reach “net zero” around 2050.
In Japan, Prime Minister Suga declared in his first policy speech on October 26, 2020 that he would aim to achieve carbon
neutral for a decarbonized society by 2050. Subsequently on December 25, the “Green Growth Strategy Through Achieving
Carbon Neutrality” was formulated. The strategy represents an industrial policy that allows for a shift from the conventionalview where the mitigation of global warming is costly and weighs down economic growth, to one based on aggressive action
to generate innovations in industrial structures and social economy, thereby creating a positive cycle of economic growth andenvironmental protection. The government declared that it will, through every possible measure and means, strongly support
private companies to make forward-looking effort to aggressively invest and innovate. These Basic Guidelines (hereinafter,
referred to as “Guidelines”) are part of such measures.
It is said that cumulative global investment of approximately 7,370 trillion yen by 2040 will be needed to achieve Paris
Agreement (based on IEA World Energy Outlook 2020).
In the financial sector, the number of financial institutions that give consideration to actions to combat climate change haveincreased, driving growth in sustainable investments, while corporations are also strongly encouraged to address climatechange.
Under these circumstances, the EU, which advocates sustainable finance measures, will be put in place “taxonomy” thatclassifies “green” economic activities as the first step in its action plan to mobilize financing for initiatives that promotesustainable development, particularly measures against climate change.
In addition to further promoting “green” investment in areas such as renewable energy, it is also important, from the viewpoint ofsteadily reducing greenhouse gas (GHG) emissions around the world, to promote a transition to decarbonization, including low
carbonization initiatives in hard-to-abate sectors (the industrial and energy conversion sectors that currently face challenges indecarbonization) to achieve the Paris Agreement’s goal.
For this reason, there is a need to actively provide financing for energy efficiency and other initiatives toward low carbonizationin the hard-to-abate sectors and for initiatives that contribute to the transition toward decarbonization, such as long-term
research and development.
On the basis of the above recognition, Singapore, Australia, Canada and other countries are proceeding with initiatives thattake into account the characteristics specific to their respective region. Giving due consideration to the developments of thesecountries, with the aim to share a globally uniform approach, the International Capital Markets Association (ICMA) published the“Climate Transition Finance Handbook” (hereinafter referred to as “ICMA Handbook”) in December 2020.
In Japan, “Concept Paper on Climate Transition Finance Principles2” and “Climate Innovation Finance Strategy 20203” were
formulated as part of the efforts to promote financing for initiatives that contribute to the transition to a decarbonized society.

1 IPCC stands for Intergovernmental Panel on Climate Change. The IPCC provides comprehensive assessments on climate change, its underlying
physical-science-based factors, implications and risks as well as adaptation and mitigation options against climate change from scientific, technicaland social economic viewpoints.
2 The Study Group on Environmental Innovation Finance in Japan published the “Concept Paper on Climate Transition Finance Principles” in March 2020.
3 The Study Group on Environmental Innovation Finance in Japan published the “Climate Innovation Finance Strategy 2020” as an interim report in
September 2020.

Basic Guidelines on Climate Transition Finance1

In light of the above, the purpose of these Guidelines is to strengthen the position of climate transition finance (hereinafterreferred to as “transition finance”) as a means of financing transitions, especially in hard-to-abate sectors, and introduce more
funds in order to contribute to achieving the 2050 carbon-neutral goals and the Paris Agreement, by popularizing transition
finance, which is in its startup phase, and ensuring the credibility of financing in labeling as transition finance.
To this end, these Guidelines provide examples of responses and interpretations so that they can serve as a reference for thefundraiser4, the financier5 and other market participants when they consider concrete actions to transition finance, while taking
into account the alignment with the ICMA Handbook. At the request of the Taskforce on Preparation of Environment for Transition
Finance, ICMA has provided input into these Guidelines while also confirming that it welcomes the proposed alignment with its
Climate Transition Finance Handbook.
These Guidelines provide the standpoint in Chapter 1, Section 2. Chapter 2 provides an overview of transition finance,
focusing on its position in relation to the existing principles and guidelines. Finally, Chapter 3 describes the expectations on thefundraiser in transition finance and how to cope with.
In order to create a sound market for transition finance, it is important to promote active use of transition finance by thefundraiser that refers to this document. What is also extremely vital is the role of the financier that assesses the corporate
initiatives for decarbonization and low carbonization, extends financing, and making investment decisions. Given the need toclarify what transition finance is by building up sample cases, especially when the market for transition finance is in its infancy,
the positive attitude of the fundraiser to take on challenges, the understanding by the financier, and creativity on both sides will
be required.
Through the development and disclosure of the transition strategy, the fundraiser can improve sustainability management
and build relationships with the financier who highly recognize the initiatives taken by the fundraiser, with the aim to balance
the promotion of their own low carbonation and decarbonization and the increase of corporate value while strengthening thefunding base.
The financier can contribute to the achievement of the Paris Agreement and of a sustainable society and growth of the world
including Japan by engagement and extending financing to the fundraiser, who wish to advance business reforms aligning with
the Paris Agreement and who are recognized as credible in their practices, while gaining profit from investments and financing.

4 A fundraiser refers to both a bond issuer and a loan receiver.
5 The financier refers to financial institutions and investors including banks and asset managers, insurance companies and pension funds

Basic Guidelines on Climate Transition Finance22. Standpoint of the Basic Guidelines
The transition finance market should mature through a dialogue based on sufficient information between the fundraiser
and the financier. The fundraiser is an entity considering climate change measures and making efforts towards achieving
a decarbonized society. The financier is an entity that is willing to provide financial support, noting the credibility of thefundraiser’s commitments and practices. It is ultimately up to the market to evaluate how appropriate the fundraiser’s responses
to transition finance are and whether they are eligible for investment and financing.
Meanwhile, organizing the expectations in transition finance will form the basis of dialogue between such the fundraiser andthe financier. In addition, it will be useful when the fundraiser and the financier explain to their respective stakeholders that thefundraising and financing pertain to climate change-related transition.
In shaping the new concept of transition finance in Japan, it is reasonable that the concept aligns with the international capital
market consensus for transition. At the same time, it is also important to understand that a pathway to decarbonization will varyfrom country to country.
Based on the above views, these Guidelines have been formulated with due consideration to alignment with the ICMA
Handbook.
The ICMA Handbook recommends that the fundraiser provides four elements (Element 1: Issuer’s climate transition strategy andgovernance; Element 2: Business model environmental materiality; Element 3: Climate transition strategy to be ‘science-based’
including targets and pathways; and Element 4: implementation transparency) and the Guidelines recommend those elements
are disclosed. We believe that financing in accordance with the provisions of these Guidelines can be recognized as transition
finance domestically and internationally.
An entity that seeks transition finance is: (1) an entity6 that formulates strategies and plans to meet the targets set for achieving
decarbonization and procures funds to put initiatives into practice in line with those strategies and plans; and (2) an entity thatprocures funds for activities (including investments and loans) that enable transition toward decarbonization by another party.
These Guidelines shall be applied to domestic transition finance in light of the above-mentioned concept, but are also
applicable in other countries and regions in need of transition finance.

6 Includes any special purpose company (SPC) established to finance specific projects.

Basic Guidelines on Climate Transition Finance3Chapter 2

Overview of Transition Finance

1. Definition of Transition FinanceTransition finance7 refers to a financing means to promote long-term, strategic GHG emissions reduction initiatives that are
taken by a company considering to tackle climate change for the achievement of a decarbonized society.
In particular, Japan, with the aim to achieve 2050 carbon neutral, defines transition finance as a finance for supporting thefundraiser who have set their target consistent with the Paris Agreement and satisfied the elements set forth in these Guidelines.
Note that a roadmap for decarbonization initiatives will be developed for each industrial sector, allowing companies to refer to in
the development of their own strategies and climate change measures when it is set.

2. Overview of Transition Finance
ICMA Handbook also defines investment as transition finance in debt markets for climate transition-related purposes, whether
this be in the format of:
Use of Proceeds instruments: Bonds defined as those aligned to the Green and Social Bond Principles or the Sustainability
Bond Guidelines; orGeneral Corporate Purpose instruments: Bonds aligned to the Sustainability-Linked Bond Principles.
According to the provisions of the ICMA Handbook, transition finance, as shown in Figure 1, overlaps the existing Greenand Social Bond Principles or the Sustainability Bond Guidelines and the Sustainability-Linked Bond Principles regardless ofwhether the Use of Proceeds is specified or not.
In other words, transition finance is determined not only by the Use of Proceeds of the funds raised, but also by the credibility ofthe strategies and practices of the fundraiser. Therefore, by meeting the four elements of disclosure expected of the fundraiser,some of the bonds, such as green bonds and sustainability-linked bonds, can also be considered as a type of transition
finance-compliant.

7 ICMA’s “Climate Transition Finance Handbook” provides that “the concept of climate transition focuses principally on the credibility of an issuer’s
climate change-related commitments and practices”.

Basic Guidelines on Climate Transition Finance4General Corporate
Purpose instruments

Use of Proceeds
instruments

Figure 1: Definition of Transition Finance – ICMA “Climate Transition Finance Handbook”

Green
Bond
Principles

Sustainability
Bond
Guidelines[ICMA Climate Transition Finance]
SocialBond
Principles

・Use of Proceeds defined as that aligned to the Greenand Social Bond Principles or the Sustainability Bond
Guidelines
or・General Corporate Purpose instruments aligned to
the Sustainability-Linked Bond (SLB) Principles

Transition
Finance
Handbook

Sustainability-Linked Bond
Principles

Concept
・The concept of transition finance can be applied toboth use of proceeds instruments and general
corporate purpose instruments.
・As long as the four elements of transition are met,some Green Bonds and SLBs can also be
considered as transition finance.
(Source) ICMA Climate Transition Finance Handbook

Transition finance provided in these Guidelines pertains to financial instruments that correspond to (1) through (3) in Figure 2.
These financial instruments are expected to meet the four elements of disclosure recommended in the ICMA Handbook andthese Guidelines, as well as the other elements, such as the issuance process, defined in existing principles and guidelines.
Specifically, the Use of Proceeds instruments ((1), (3) in Figure 2) are expected to fulfill the four core elements set forth in theGreen Bond Principles developed by ICMA originally published in 2014 and updated in 2018, or the Green Bond Guidelines,
the original edition of which was developed by the Ministry of the Environment in 2017 and updated in 2020 in consistency withthose principles (Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds, and Reporting).
Note that for the Use of Proceeds instruments, even if the target project does not fall under the specific cases of Use ofProceeds, namely Green Projects, specified in the Green Bond Guidelines, such project that falls under the following concept(1) in the following Figure 2 is eligible for transition finance. In addition, it should be noted that even an instrument issued as agreen bond may be requested by the market to fulfill the elements of transition finance in cases when investing in entities thatare exposed to sectors or technologies where market participants’ opinions are divided.
Meanwhile, the Sustainability-Linked Bonds for which the Use of Proceeds is not specified ((2) in Figure 2) are expected to fulfill
the five core components ( Selection of Key Performance Indicators (KPIs), Calibration of Sustainability Performance Targets(SPTs), Bond Characteristics, Reporting, and Verification) set forth in the Sustainability-Linked Bond Principles.
Note that regardless of (1) through (3) in Figure 2, financial instruments that fulfill the four elements of disclosure for transition
finance may be recognized as transition finance.8

8 Those that meet the existing Social Bond Principles (including guidelines that are to be developed in japan) and the Sustainability Bond Guidelines
and meet the four elements of disclosure for transition finance are also eligible. There are other financial instruments that can be used as transition
finance, but they are not included in these Guidelines because there are no existing principles to refer to.

Basic Guidelines on Climate Transition Finance5Figure 2: Definition of Transition Finance – Basic Guidelines

General Corporate
Purpose instruments

Use of Proceeds
instruments

Transition Finance (Concept)

Transition
Bond / Loan

3

Green
Bond / Loan

1

What is labeled “Transition”?
(1) Use of Proceeds instrument (bond or loan)that meets the four elements of transition(when the Use of Proceeds does not fallunder Green Projects (*) but the process
follows the existing principles and guidelines)(2) General Corporate Purpose instrument (bondor loan) that meets the four elements oftransition, sets targets in line with thetransition strategy, and changes its financial
and/or structural characteristics dependingon the achievement of predefined targets(3) Instrument that meets the four elements oftransition and follows the existing Green
Bond Principles and the Green Bond
Guidelines (when the Use of Proceeds falls
under Green Projects*)* Green Projects: Projects listed as Green Projects in theexisting Green Bond Guidelines or those already issued.

2

Sustainability-Linked
Bond / Loan (SLB/L)
Regardless of (1) through (3), financial instruments that fulfill
the four elements of transition may be recognized astransition finance (however, they are not covered here giventhat there are no principles, etc. to conform to).

(Source) ICMA Climate Transition Finance Handbook

While enabling a wider use of the funds raised, transition finance is a type of financing for entities that will ensure more
ambitious initiatives for the future. This is because the fundraiser is clearly required to develop strategies to achieve long-termgoals that align with the Paris Agreement. Therefore, transition finance, similar to the issuance of green bonds and such like, isan extremely important means for achieving a decarbonized society.
While these Guidelines are written based on cases for bonds, the concept involved can also be applied to loans. When used
for loans, such loans are recognized as transition finance if they fulfill the elements provided in these Guidelines as well as thecomponents provided in the Green Loan Principles and the Sustainability-Linked Loan Principles issued by the Loan Market
Association (LMA) and the Green Loan and Sustainability-Linked Loan Guidelines developed by the Ministry of the Environment
in consistency with those principles and guidelines.

Basic Guidelines on Climate Transition Finance

6Chapter 3

Expectations in Transition Finance andSpecific Approaches

1. Overview of expected disclosure elements in transition finance
The ICMA Handbook identifies the following four key elements in disclosure which are recommended to enhance credibility of
the issuance of bonds to finance climate transition:
Element 1: Issuer’s climate transition strategy and governance
Element 2: Business model environmental materiality
Element 3: Climate transition strategy to be science-based including targets and pathways
Element 4: Implementation Transparency
This chapter provides the issues of disclosure and the approaches for each of the four elements. Such expectations andapproaches are described using three expressions: “should,” “recommended,” and “be considered/possible.” These
expressions are used in the following context.
- Items described with the word “should” are basic elements that financial instruments labeled as transition finance are
expected to have.
- Items described with the word “recommended” are elements that financial instruments labeled as transition finance are
optimally recommended to have under these Guidelines although instruments which do not have these items can also belabeled as “transition”.
- Items described with the word “be considered” or “possible” are elements that these Guidelines provides as examples andinterpretations although it is not considered problematic even if financial instruments labeled as transition finance do nothave them.
These Guidelines are legally non-binding, and no legal penalties will be imposed even if a certain action does not comply withthe expectations and approaches (including those described with the word “should”) provided in these Guidelines. (However,
it is necessary to note that if a certain act infringes upon any other relevant laws or regulations, legal penalties may be imposed
based on those laws or regulations.)
As noted in Chapter 2, transition finance shall be initiated in alignment with the existing principles and guidelines. Any
restrictions already set forth for specific instruments, including matters concerning the issuance process that are not expressly
described in these Guidelines, shall be applied in line with respective principles and guidelines.

Basic Guidelines on Climate Transition Finance7

2. Specific Approaches to respective disclosure elements(1) Element 1: Fundraiser’s Climate Transition Strategy and Governance
Main issuea) Financing through transition finance should aim to implement or incentivize the achievement of transition strategies 9.
Such strategies should incorporate a long-term target to align with the goals of the Paris Agreement, relevant interim
targets on the trajectory towards the long-term goal, disclosure on the levers towards decarbonization, and fundraiser’s
strategic planning.
b) A transition strategy should serve to explicitly communicate the implementation of an issuer’s strategy to transform thebusiness model in a way which effectively addresses climate-related risks and contributes to achieving the goals of theParis Agreement10. Transformation of a business model is not limited to initiatives as an extension of existing businesses
but can also be transformation based on various other perspectives. It includes fuel conversion that achieves
significant carbon and GHG reduction benefits, introduction of innovative technologies, improvement of / changes inmanufacturing processes and products, and development and provision of products and services in new fields.
c) The implementation of a transition strategy assumes cases where it affects society and environment other than climatechange, such as employment or stable provision of products and services, through transformation of a business model.
In such cases, it is recommended that the fundraiser also takes into consideration the impact of business innovations tosociety and environment other than climate change.
d) Climate change-related scenarios11 should be referenced in developing transition strategies. The pathway to transition
should be planned for respective sector and regions of individual fundraiser, who may generally be placed in a different
starting point and pathway to transition.
e) Transition strategies and plans must be highly credible in terms of their effectiveness. Therefore, it is recommended
that a transition strategy and plan are linked to management strategy and business plan, including medium-term
management plans.
f)However, because such strategies and plans run for a long period of time, it is possible that the content may be
modified or adjusted in the event of a major change in the assumed external environment and so on.

g) In the initial phase of developing a transition strategy by the fundraiser, it is considered as an option for the fundraiser
to indicate a plan for future implementation of items described with the words “recommended” and “be considered/possible” in these Guidelines.
h) In order to secure the effectiveness of the transition strategy, the fundraiser should establish an organizational
structure12 for the board of directors and/or other such committee to oversee the activities addressing climate change
and for management to play a role in assessing and managing such climate-related activities.

9 Transition finance is available for not only entities with strategies and plans for reducing emissions associated with their corporate economic activities,
but also entities that plan to take initiatives that enable others to implement transition strategies through their own products and services. In such casesof financial institutions, a financier should articulate how the underlying projects or activities themselves fit into the fundraiser’s strategy while, similary,a subsidiary or an SPC to make use of its group’s or its sponsors’ strategy. However, doing so they should explain how their strategy will contribute to
the strategy as a whole. In addition, it can be considered that parent company or the group who established the strategy would explain the transition
elements as the main fundraiser.
10 The Paris Agreement sets out a goal to Holding the increase in the global average temperature to well below 2°C above pre-industrial levels andpursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels.
11 Climate-related scenarios are listed in the “Task Force on Climate-related Financial Disclosures (TCFD) Technical Supplement” and the document
issued by the Ministry of the Environment: “Practical Guide for Scenario Analysis in line with TCFD Recommendations ”. In addition, Principles for
Responsible Investment (PRI) disclose a set of climate scenario tools
12 Assumes matters provided for under “governance” in the TCFD Recommendations.

Basic Guidelines on Climate Transition Finance8i)While a transition strategy shall be basically developed by a company in need of finance, it is possible for entities toutilize the strategy of companies that are wholly or partially responsible for the initiatives to establish or explain theirown strategy, given that the finance supports GHG emissions reduction initiatives of not just a single company but its
supply chain.

Disclosuresj)Transition strategies should be disclosed in advance in a company’s integrated report, sustainability report, statutory
documents and other materials for investors (including such disclosures on the website). This also applies to the otherthree elements.

k)

It is possible to disclose transition strategies and elements concerning the governance guaranteeing that the executionof transition strategies is in alignment with the reporting frameworks such as the Recommendations of the Task Forceon Climate-Related Financial Disclosures (TCFD; Final Report)13.

l)

If the implementation of a transition strategy assumes impacts on society and environment other than climate change,
it is recommended that the fundraiser explain the view underlying its approach14, etc. to address such impacts anddisclose how the strategy on the whole contributes to achieving the Sustainable Development Goals (SDGs) so that theeffects can be appropriately evaluated by the financier.

m) Considering the length of application and other factors, there may be instances when a transition strategy and plan willneed to be modified due to major changes in the external environment and relevant conditions that were assumed at aplanning phase. In this case, the contents of the modification should be disclosed together with the underlying reason
in a timely manner.
n) In terms of governance, it is recommended that disclosures include an organizational structure for overseeing theimplementation of a transition strategy and for assessing and managing related initiatives. It is also recommended that
disclosures include the specific roles of the constituent organizations and the management and the process by which
the content of deliberations is reflected in management.

Independent review, assurance, and verificationo) In cases where the fundraiser determines the need for an objective assessment regarding the transition strategy, it isrecommended that a review, assurance and verification by an external organization for its transition strategy.
p) It is recognized useful to obtain a review particularly concerning the following in connection with the transition strategy:- Alignment of short-term, mid-term and long-term targets (for targets, refer to Element 3) with the overall scenario- Credibility of the fundraiser’s strategy to reach the targets- Appropriateness of the management process and governance for the transition strategy

13 As for the approach to disclosure aligned with TCFD Recommendations, refer to “Guidance on Climate-related Financial Disclosures (TCFD
Guidance) 2.0”, “Guidance for Utilizing Climate-related Information to Promote Green Investment (Green Investment Guidance)” (both publishedby the TCFD Consortium), and the document published by the Ministry of the Environment: “Practical Guide for Scenario Analysis in line with TCFD
Recommendations”.
14 An example of the approach may be to identify, eliminate, reduce, and manage potential negative effects.

Basic Guidelines on Climate Transition Finance9(2) Element 2: Business Model Environmental Materiality
Main issuea) Initiatives for achieving the transition strategy should be such that contribute to transforming core business activities
that are environmentally material parts today and in the future.15b) When identifying business activities that are environmentally material parts, it is recommended that the fundraiser
consider multiple climate change-related scenarios that may possibly impact its judgment on the identification16.
c) In terms of considering materiality, it is possible to apply existing guidance provided by an organization that creates
standard criteria concerning sustainability reporting17.

Disclosuresd) The fundraiser should indicate that climate change is an environmentally material part of business activities18.
e) It is recommended that disclosures include the contents of climate change-related scenarios used in identifying
business activities that are environmentally material parts along with the underlying reasons (e.g., regional andindustrial characteristics) for selecting such scenarios.

(3) Element 3: Climate Transition Strategy to be Science-based Including Targets andPathways
Main issuea) The fundraiser should reference science-based targets in developing its transition strategies.
b) This should include mid-term targets (short- to mid-term targets) in addition to long-term targets for 2050 and bequantitatively measurable based on a measurement methodology which is consistent over a long period of time.
c) In addition, it is recommended that GHG reduction targets, which could be formulated either in intensity and absoluteterms, should consider environmental materiality and cover Scopes 1 through 3 of GHG Protocol, the international
standard on supply-chain emissions. It is recommended that targets covering Scope 3 be set using a practical
calculation method when it could be subject to significant reduction in the fundraiser’s business model19. It is also
possible to disclose the avoided emissions as necessary.
d) Science-based targets are GHG reduction targets required for achieving the goals of the Paris Agreement and should
be set while taking into account differences in regional characteristics and industries. In so doing, it is possible to referto the following trajectories.

15 They include activities that are environmentally material parts are considered to be business activities of the fundraiser that identifies climate change
as part of its materiality.
16 Scenario analysis using multiple climate-related scenarios is similar to that required by the TCFD Recommendations, and it is considered useful torefer to relevant guidelines and such like for implementation methods. An example is the document issued by the Ministry of the Environment: “Practical
Guide for Scenario Analysis in line with TCFD Recommendations”.
17 “The SASB Materiality Map” issued by the Sustainability Accounting Standards Board serves as a guidance concerning materiality.
18 As for the approach to identifying environmentally material business activities, it is possible to use the materiality map and such like and outline thelevel of materiality of climate change for one’s entity.
19 Since an appropriate method for calculating Scope 3 emissions for specific industrial sectors is under development, it is possible to estimate Scope
3 emissions on a provisional “best effort” basis. When disclosing, it is recommended that boundaries, calculation methods and other relevant factors
be also reported. “Basic Guidelines on Accounting for Greenhouse Gas Emissions Throughout the Supply Chain”(METI, MoE; 2017 Japanese only.
Related information in English) can be used for calculation references.

Basic Guidelines on Climate Transition Finance10

- Scenarios widely recognized in the international community(Examples include the Sustainable Development Scenario (SDS) outlined by the International Energy Agency (IEA)20)- Objectives verified under the Science Based Targets Initiative (SBTi) and such like- Nationally Determined Contributions (NDC) of countries aligned with the goals of the Paris Agreement, roadmaps byindustry sector21, industries set out plans that are science-based achieving the Paris Agreement22 and so on.
e) Short- to mid-term targets (with a term of three to fifteen years) should be set by referencing the aforesaid trajectories
or on the pathway toward the long-term targets planned as benchmarks23.
f)

In doing so, since short- to mid-term targets will likely be set in consideration of various factors (including the starting
point and track records of the issuer, timing of capital investments, economic rationality, cost-benefit analysis, andavailability of technology necessary to achieve the targets), it is possible that the pathway may not necessarily be linearwith the same slope at all times but may be nonlinear.

Disclosuresg) The fundraiser should disclose the short- to mid-term and long-term targets they have set, including the base years etc.
h) In order to show that long-term targets are science-based, disclosures should explain the methodology or trajectory
used to define target, including the underlying reasons (e.g., characteristics specific to a region or industry). In
particular, when reference is made to plans and industry roadmaps established by an industry, etc., the explanation
should include that they are grounded in scientific basis.
i)

It is possible that disclosures explain the pathway toward a long-term target and the alignment between the short- to
mid-term targets on the pathway and the transition strategy, based on the investment plan (refer to Element 4) andother plans.

Independent review, assurance, and verificationj)Concerning targets and trajectories, obtaining expert reviews on the following is considered to be particularly useful:- Whether the long-term target is aligned with science-based targets
Whether the disclosed information explains the alignment with the Paris Agreement- Whether the short- to mid-term targets are determined using a GHG emissions forecast calculated based on a
climate change scenario analysis
Whether scenarios, etc. widely recognized in the international community are used or referenced- Whether the actual values of the indicators used for the targets are quantitatively measured using consistentmeasurement methods
Whether a specific GHG emissions reduction measure has been developed to achieve short- to mid-term targets
aligned with long-term goals

20 In addition to benchmarks indicated by the IEA, there are those referenced by the IPCC, such as RCP 2.6 (keep global warming to below 2°C), RCP 1.9(keep global warming to below 1.5°C) and other related Transition Pathway Initiative (TPI) benchmarks. Meanwhile, scenario listings are available in
the TCFD Technical Supplement and in the document published by the Ministry of the Environment: “Practical Guide for Scenario Analysis in line with
TCFD Recommendations”.
21 An example of a sector-specific roadmap formulated by a public organization is the “Roadmap to Zero Emission from International Shipping” (Ministryof Land, Infrastructure, Transport and Tourism; 2020). The Ministry of International Trade and Industry also plans to formulate a roadmap for highemission industries.
22 In utilizing a plan formulated at a sector level, it is necessary to have a credible proposition that the alignment with the Paris Agreement can be
explained with scientific grounds.
23 While it is possible to set short- to mid-term targets by determining the standard based on an assumed use of best available technologies (BAT),
consideration should be made as to whether the use of such technologies might make it difficult to achieve long-term targets.

Basic Guidelines on Climate Transition Finance11(4) Element 4: Implementation Transparency
Main issuea) In implementing transition strategies, the fundraiser should provide transparency of the basic investment plan to theextent practicable.
b) The investment plan includes not only capital expenditure (Capex) but also capital and operational expenditure (Opex).
Therefore, costs related to research and development, M&A, and dismantling and removal of facilities are also subject
to the investment plan. In other words, it is recommended that the investment plan incorporate, to the extent possible,
expenditure and investment necessary for implementing the transition strategy.
c) It is recommended that the investment plan outline the assumed climate-related outcomes and impacts 24 in aquantitative fashion where possible, along with the calculation methods and prerequisites25. If quantification is difficult,the use of external certification systems can be considered as a substitute for qualitative assessment.
d) In particular, when outlining the assumed climate-related outcomes and impacts, it is recommended that the disclosure
include not only GHG emission reduction and other initiatives to ease climate change but also report how considerationof a “just transition”26 is incorporated into the transition strategy.
e) If implementing the transition strategy has the potential of having a negative impact on employment or the environmentand communities other than climate change, it is recommended that any expenditures to mitigate such negative
impacts be added to the plan.
f)Moreover, the outcomes arising from investments included in the investment plan should align with the targets.

g) Transition finance is a means to financially support the implementation of a transition strategy, and it is recommended
that financing be provided for new initiatives. However, in the case of transition finance in the format of Use of Proceeds
instruments, refinancing for a reasonably set lookback period (the period during which refinancing is to be applied for
projects that have already started) is considered to be eligible.

24 The Ministry of the Environment, in its “Concept Paper on Impact Finance”, refers to impact as “a positive or negative change to the environment,
society or economy caused by an organization and is not a direct deliverable or output but an outcome as a change brought about in terms of theenvironment, society or economy.”
25 In disclosing impacts, outlining the amount of contribution to reducing CO2 emissions in the global value chain on the whole and the entire lifecycle,
including the consumption phase, can be considered. For the amount of contribution to the reduction, it is possible to reference the “Guideline
for Quantifying GHG Emission Reduction Contribution” (METI, 2018). Furthermore, as for outcomes on research and development, it is possible
to reference the IEA Measuring Innovation by Technology Readiness Level (TRL) or Importance for Net-Zero Emission, among others, and outline
the progress in the R&D phase or the potential of reducing CO2 emissions with the relevant technology by highlighting the importance of net-zeroemissions.
26 A just transition is an attempt to ensure the wide sharing of virtual profits created through a transition to a green economy, as well as to support any
party who will experience an adverse economic impact (be it a country, a region, an industry, a community, a worker, or a consumer). The concept of ajust transition corresponds to several SDGs.

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Disclosuresh) It is recommended that investment plans be disclosed by linking the outcomes and impacts with the expenditures tothe extent practicable27.
i)

It is recommended that the fundraiser, after securing financing, reports any deviations between the initial plan andthe actual expenditure, outcomes and impacts. For any deviations, it is recommended that the underlying reasons be
explained.

j)

In cases where the Use of Proceeds bonds include refinancing, the fundraiser should provide an explanation on the
lookback period set under the framework or other relevant methods along with the underlying reasons and factors.

k)

While there are differences in business practices, such as the fact that loans are traditionally made based on thebilateral relationship between a borrower and a lender, it is recommended that disclosure on the above be made to theextent possible in order to ensure transparency and credibility of transition finance. However, if it is difficult to disclosesuch information to the public from the standpoint of confidentiality and competition, it is possible to report suchinformation only to lenders or external evaluation organizations without disclosing it to the public.

l)

Similarly, in cases where the fundraiser is a small-to-medium-sized enterprise and it is difficult to disclose to the public
the same content as that reported to the financier or an external evaluation institution, it is possible for the fundraiser tosimplify the content of disclosure, for example, by limiting disclosure to a summary of h) to j) of this section.

27 In particular, disclosure of investment plans is expected to be required for projects applicable to Use of Proceeds.

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Appendix1. Committee
Chair

Kunio Ito
Director of Hitotsubashi CFO Education and Research Center

Committee members Keigo AkimotoGroup Leader/Chief Researcher, Systems Analysis Group,
Research Institute of Innovative Technology for the Earth
Takahiro Ueno
Senior Researcher, Socio economic Research Center, Central ResearchInstitute of Electric Power Industry ISO/TC 322 Expert
Shunsuke Oshida
Managing Director, Head of Credit Research, Japan, Manulife Investment Management (Japan) Limited
Atsuko Kajiwara
Head of Sustainable Finance Evaluation Dept, Japan Credit Rating Agency, Ltd
Akihiro Kato
Director, Sustainable Business Unit, Solution Product Division, MUFG Bank, Ltd.
Tadahiro Kaneko
General Manager, Sustainable Business Promotion Dept., Planning Dept., Wholesale Banking Unit,
SUMITOMO MITSUI BANKING CORPORATION
Masato Kanedome
Principal, Sustainability Service Group. DNV Business Assurance Japan K.K.
Hitomi Kibo
Director, Sales Department, AXA Investment Managers, Ltd.
Shinichiro Kon
Nippon Life Insurance Company, Finance & Investment Planning Department, Deputy General Manager
Yukari Takamura
Professor, Institute for Future Initiatives, The University of Tokyo
Naoto Takeuchi*
General Manager, Credit Dept, The Dai-ichi Life Insurance Company,Limited.
Keisuke Takegahara
Executive Officer, Deputy Chief Research Officer, Development Bank of Japan
Masami Hasegawa
Director, Environment & Energy Policy Bureau, Keidanren(Japan Business Federation)
Reiko Hayashi
Director and Deputy President, BofA Securities Japan Co., Ltd.,Board Member, International Capital Markets Association (ICMA)
Tomoko Hirabayashi
Joint General Manager, Syndicated Finance Department, Mizuho Bank, Ltd.
Michiaki Wada*
Line Manager, Investment Planning Dept., The Dai-ichi Life Insurance Company, Limited*From 3rd commission, Michiaki Wada took over the committee from Naoto Takeuchi.

Basic Guidelines on Climate Transition Finance

14

Observer

The Life Insurance Association of Japan
Japanese Bankers Association
JAPAN INVESTMENT ADVISERS ASSOCIATIONJAPAN EXCHANGE GROUP
United Nations Environment Programme Finance Initiative
Principles for Responsible Investment
Japan Securities Dealers Association

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Appendix2. Dialogue participants
1. Securities
Nomura Securities Co., Ltd.
Mizuho Securities Co., Ltd.
BNP Paribas Securities (Japan) Ltd.
JPMorgan Securities Japan Co., Ltd.
Goldman Sachs Japan Co., Ltd.
Daiwa Securities Co. Ltd.
Tokai Tokyo Securities Co., Ltd.
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
SMBC Nikko Securities Inc.
BofA Securities Japan Co., Ltd.
Crédit Agricole CIB - Tokyo Branch

2. External Evaluation Organizations
Vigeo-Eiris
Rating and Investment Information, Inc.
DNV BUSINESS ASSURANCE JAPAN K.K.
Japan Credit Rating Agency, Ltd.

3. Industry Sectors
Japan Automobile Manufacturers Association
Japan Paper Association
Petroleum Association of Japan
Japan Iron and Steel Federation
Japan Cement Association
The Japan Gas Association
Japan Chemical Industry Association
The Federation of Electric Power Companies of Japan
Japan Electrical Manufactures’ Association

4. ESG Ratings
CDP Worldwide-Japan
MSCI
Sustainalytics.
FTSE Russell
S&P Dow Jones Indices LLC.

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