Japan Finance Organization for Municipalities (JFM)
Green Bond Framework
March, 2024

Table of Contents
1. Introduction
2. Approach to Sustainability
2.1 Local Government in Japan and JFM’s contribution
2.2 JFM’s Initiative for Sustainability
3. Background of Green Bond Issuance
3.1 Eligible Projects of JFM’s Green Bond
3.2 Development of Sewerage System in Japan
3.3 Development of Water System in Japan
4. Alignment with the Green Bond Principles, 2021 (GBP)
4.1 Use of Proceeds
4.2 Process for Project Evaluation and Selection
4.3 Management of the Proceeds
4.4 Reporting
5. External Review
5.1 Second Party Opinion
5.2 Compliance Review

11. Introduction
Japan Finance Organization for Municipalities (JFM) is a joint funding organization for all local
governments, wholly owned by Japanese local governments under the special law, with a mission of"Supporting Local Governments through Finance to Create a Future for Regions". Under the
management philosophy of "Being Responsive to Local Government Needs," "Strengthening
Confidence from the Capital Markets," and "Ensuring Responsible Corporate Governance as a Joint
Organization of Local Governments," JFM provides Japanese local governments 1 with long-term
funding at low interest rates and contributes to the sound financial operation of local governments
and improve the welfare of citizens.

2. Approach to Sustainability
2.1 Local Government in Japan and JFM’s contribution
In Japan, the national government focuses on affairs relating to Japan as a nation in the international
community and affairs relating to various activities of the people that should be handled in a
uniform, nationwide manner. Meanwhile, local governments, based on the fundamental principle ofpromoting the welfare of citizens, autonomously and comprehensively undertake regional
administration, and provide administrative services broadly which are closely related to the daily
lives of citizens, such as social welfare, education, fire defense, and the development of
infrastructure, including roads and waterways in accordance with the standards established by thenational government. Local expenditure accounts for approximately 60% of the total fiscal
expenditure in Japan, highlighting the significant role that local governments play in the daily lives ofcitizens.
The national government formulates the Local Government Finance Programme (LGFP) each fiscal
year based on assessments of local government finance scale and forecasts of overall revenues andexpenditures. In response to annual national budget plans, the national government balances thetotal amount of local government revenues and expenditures in the LGFP. Under this Programme,
revenue sources for all local governments, including local allocation tax as well as local government
borrowings, are secured so that local governments can ensure uniform public service standards.
Local government borrowings are bonds and loans to be issued by local governments for securing
necessary external funds in accordance with the Local Government Borrowing Programme (LGBP) 2,
which is an annual plan that the national government prepares for local government funding.
JFM provides funds exclusively to local governments based on LGBP, with the aim of efficiently andeffectively complementing local government fund-raising from the capital market. JFM funds areclassified as public funds in LGBP, and provided to local governments which obtain consents fromapproval of the Minister for Internal Affairs and Communications or the respective prefectural
governors.

Local governments include prefectures, cities and special wards of Tokyo, government- designated cities,
towns and villages, and some local government associations
2
It specifies the amount and sources of local government fundraising each fiscal year in parallel with thenational budget, and each local government raises funds in accordance with the LGBP.
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As of 31 March 2023, JFM’s total outstanding loans stood at JPY 23.3tn (USD 174.6bn) 3, of which
over JPY 6.6tn (USD 49.8bn)3 was for sewerage and JPY 3.0tn (USD 22.2bn)3 was for water supply,
i.e., projects that are characterized as sustainable water and waste management.
Figure 1: SDGs Mapping – Fund Usage by JFM 4

Others 20.8%
Sewerage 28.5%
Disastor
Management and
Mitigation 3.6%
Transportation
3.1%
Hospitals 5.0%
Temporary Financial
Countermeasures Funding
25.6%

Water Supply 13.4%

2.2 JFM’s Initiative for Sustainability
Sustainability, which aims to achieve a sustainable society, is attracting growing global interest. In
the international community, each country is implementing initiatives based on the goal set by theParis Agreement, to hold 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 preindustrial levels. The Japanese Government is, in line with the Paris Agreement, working on creatinga sustainable and recycling-oriented society, setting a goal to achieve carbon neutrality by 2050
through reducing greenhouse gas emissions by 46% in fiscal year 2030 from its fiscal year 2013 levels
and continuing strenuous efforts in its challenge to meet the lofty goal of cutting emissions by 50% 5.
In addition to climate change measures, various initiatives such as the Sustainable Development
Goals (SDGs) are being pursued to achieve a sustainable, diverse, and inclusive society.
In light of these circumstances, JFM has established a system to promote sustainability initiatives,
recognizing the importance of contributing to the realization of sustainability as a joint fundingorganization for local governments. The "Sustainability Committee," chaired by the president andCEO and composed of all senior executive directors, deliberates, and promotes sustainability
initiatives throughout the organization. Under the " Sustainability Policy of Japan Finance
Organization for Municipalities", which sets forth the basic policy, the organization is committed tocontributing to the sustainable development of local communities, while incorporating andpracticing considerations of ESG factors such as "Consideration for the Environment," "Fulfilling
USD 1 = JPY 133.48 as of 31 March 2023
As of 31 March 2023
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Agency for Natural Resources and Energy
343

Social Responsibility," and "Robust Governance" throughout its business activities. It also aims toactively engage in dialogue with stakeholders such as local municipalities and investors and topromote information disclosure.
In addition, local municipalities recognize the growing importance of working towards sustainablecommunity development and regional revitalization in the face of a declining population. They are
addressing issues such as measures against the declining birthrate and aging population,
revitalization of regions, renovation of deteriorating public infrastructure, and measures against
large-scale and intensifying natural disasters. As a joint funding organization for local government
borrowings, JFM will support local governments’ projects in line with the SDGs, such as sewerage
and water supply projects, through the issuance of green bonds and loans using the funds raised
from green bonds and others.

3. Background of Green Bond Issuance
3.1 Eligible Projects of JFM’s Green Bond
Local governments, which are responsible for the administration of matters closest to the lives ofresidents, provide a wide range of administrative services, including school education, fire
protection, and the maintenance of roads and rivers. The sewerage and water supply projects
carried out by local governments play a crucial role in contributing to sustainable economic
development and public health. JFM provides loans for sewerage and water supply projects
undertaken by numerous local governments 6. By raising funds through green bonds, JFM supports
the efforts of local governments involved in sewerage and water supply projects. Through theissuance of green bonds, JFM responds to the demand from responsible investors who prioritize
environmental and social considerations.
It should be noted that in the future, JFM is also considering the possibility of extending Green
Bonds to projects other than sewerage and water projects, taking into account the financial needs ofthe target projects and the needs of investors, based on their compliance with the International
Capital Market Association's Green Bond Principles and other relevant guidelines.

3.2 Development of Sewerage System in Japan
In the late 19th century, insufficient drainage of sewerage caused by the concentration of populationin cities such as Tokyo and flooding from heavy rainfall led to the spread of diseases such as cholera
and other diseases, resulting in the deterioration of the sanity environment. In light of suchcircumstances, Japan’s first sewerage system was constructed in 1884, with the aim of improving
living conditions through maintaining public health. Subsequently, Japan experienced rapid
economic growth in the 1950s-70s, and during this time the sewerage system in Japan expanded
rapidly. Meanwhile, water pollution in rivers and bodies of water became a serious issue across thecountry in this period.

In the initial LGBP for FY 2023, the planned amount for the sewerage projects is approximately 1.26 trillion
yen (USD 9.5 billion), of which the lending plan amount by JFM accounts for about 27.6%. The planned amountfor the water supply projects is approximately 0.60 trillion yen (USD 4.5 billion), of which JFM's lending planamount occupies about 33.2%.

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This situation led to the revision of the Sewerage Act in 1970 in which an article on “preserving thequality of water in areas of public waters” was added and became the foundation for today’s
Sewerage Act. Additionally, the Water Pollution Prevention Act was established in 1971 to preventthe pollution of water in areas of public waters and groundwater. These laws prescribe thestandards for the water quality of effluent from a sewerage business for over 40 substances. Local
governments operate their sewerage projects in compliance with these water quality standards. In
this way, the sewerage business contributes to the improvement of public health, the preservationof the living environment and the water quality in areas of public waters, and therefore plays animportant environmental and societal role.
The government has formulated the "Priority Plan for Social Infrastructure Development" topromote the development of social infrastructure such as roads and rivers in a focused, efficient,and effective manner. This plan also addresses issues related to sewerage projects, such as resolving
areas with limited sewerage coverage and reducing environmental burden through the effective
utilization of sewerage sludge. Under this plan, local governments establish "Master Plans" that set
future goals for promoting sewerage treatment, flood control measures, and water quality
preservation in public water areas. They also develop "Comprehensive Plans" that outline theplacement of sewerage facilities for the next 20 to 30 years based on these goals, as well as "Project
Plans" that specify the placement of facilities to be implemented within a 5 to 7-year timeframe.
Through these plans, the government aims to achieve planned improvements and maintenance offacilities, ensuring the sustainable functionality of sewerage systems 7.
As of the end of fiscal year 2022, the sewerage treatment coverage rate in Japan was 92.9%, thetotal length of installed sewer pipe reached approximately 490,000 km (300,000 miles) 8, and thenumber of sewerage treatment plants was approximately 2,200 9. However, many of the sewer pipes
and facilities were rapidly constructed during the 1960s-80s, meaning that the number of pipes aged
50 years and over is expected to grow, while more than half of the sewerage treatment facilities are
now over 15 years old. It is expected that there will be an increasing demand for the renewal andreconstruction of sewerage-related facilities in the future. In addition, Japan has seen a rise innatural disasters such as typhoons and earthquakes in recent years, leading to an increased need toprotect and upgrade lifeline sewerage facilities as lifelines to be able to minimize the impact of suchnatural disasters.

3.3 Development of Water System in Japan
Japan’s water supply operations have been promoted in line with the times and social conditions,
including the enforcement of the Water Supply Act and the development of water supply facilities
throughout the country. Later, in the Meiji Era, as more foreign ships visited Japan after the openingof the country, infectious diseases such as cholera invaded Japan and spread in cities near harbors.
In order to ensure public health and prevent outbreaks of infectious diseases, Japan's first modern
water supply system was constructed in Yokohama City in 1887. In 1890, the Japanese government
enacted the Waterworks Ordinance to regulate water supply projects, stipulating that municipalities
should develop and manage their local water supply systems. Following this, water supply facilities
In Japan, a target has been set to achieve a utilization rate of approximately 85% for sewage sludge and an
energy recovery rate of 37% by the fiscal year 2030
8
Ministry of Land, Infrastructure and Transport. As of 31 March 2021
9
Ministry of Land, Infrastructure and Transport. As of 31 March 2021
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were developed especially in major cities such as Tokyo, Osaka, and Kyoto, as well as in cities such as
Nagasaki, Hakodate, Niigata, and Kobe. During World War II, Japan’s water supply facilities suffered
severe damage, resulting in the country’s water supply coverage declining to as low as 26.2% as of1950.
In 1957, the Water Supply Act was enacted in order to supply wholesome, plenty and affordable
water, to enhance public health and to improve the living environment for residents of thecommunity, and the developments of water supply facilities were promoted, with the aim ofsupplying high quality water resources to all citizens. In the 1960s and 1970s, the demand for watersupply service surged, along with the penetration of electric washing machines, home baths andflushing toilets, as well as the urban population concentration, driven by housing developments andthe increase in nuclear families. The development of water supply facilities progressed dramaticallyin line with the growth of the Japanese economy. As of the end of fiscal year 2021, the water supply
coverage rate stands at 98.2%.
In order to appropriately address the issue of a safe and comfortable water supply, the government
has formulated the "New Water Supply Vision", which outlines the ideal state and key initiatives forthe water supply industry in the next 50 to 100 years. Based on this vision, local municipalities havedeveloped their own "Water Supply Business Vision" and business plans, which include efforts to
respond to the increasing demand for updating water supply facilities, reducing environmental
burden through energy-saving measures and the promotion of the use of renewable energy 10.
As of the end of fiscal year 2020, the ageing rate of pipelines (the proportion of pipeline extensions
that have exceeded their legal service life (40 years) of total pipelines) amounts to 20.6%. In recent
years, renewal and measures against aging of facilities, such as pipes developed in the period of
expansion, and seismic reinforcement of pipelines have become important challenges in the watersupply industry 11. Leakage from deteriorating pipes can lead to a decrease in the efficiency of theentire water supply system, as well as an increase in environmental burden. Furthermore, watersupply operations have a significant environmental burden as shown by the fact that the annual
electricity consumption of water supply utilities accounts for about 1% of Japan’s total electricity
consumption.

In Japan, a target has been set for the water supply industry to achieve energy savings of 750.54 million kWh
by FY 2030 from FY 2013.
11
Ministry of Land, Infrastructure and Transport
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4. Alignment with the Green Bond Principles, 2021 (GBP)
JFM's Green Bond Framework is aligned with the four core components defined by the International
Capital Market Association's Green Bond Principles (GBP) 2021 and the Ministry of theEnvironment's Green Bond Guidelines (2022 edition). These components include the "Use ofProceeds," "Process for Project Evaluation and Selection," "Management of Proceeds," and"Reporting."

4.1 Use of Proceeds
The proceeds from the issuance of the bonds based on this framework, “the Green Bonds”, will beallocated to loans for local municipalities' sewerage and water supply projects. Through sewerage
projects, local municipalities are committed to conserving water resources due to the improvementof water quality, and utilizing energy efficiently and recycling of sewerage sludge, which helps the
reduction of greenhouse gas emissions. Through water supply projects, they are committed topromoting the effective use and conservation of water resources by reducing water leakage indistribution. JFM contributes to such initiatives through providing loans to local governments thatcarry out these projects.
JFM will use an amount equal to the net proceeds of the Green Bonds, “the Proceeds from Green
Bonds” to finance or refinance, in whole or in part, existing or future projects that satisfy theeligibility criteria set forth below (together, the Eligible Projects) by way of loans made by JFM to
local municipalities. Such loans made by JFM to local municipalities shall include those made tofinance or refinance Eligible Projects up to 36 months preceding the issue date of a relevant series ofGreen Bonds.
JFM will allocate the Proceeds from Green Bonds before the end of the fiscal year when the Green
Bonds are issued.

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Eligibility Criteria:
Eligible Green
Project Category
Sustainable
water andwastewater
management

Eligibility Criteria

Environmental Objective

Development, construction,
maintenance, updates,
operation of sewerage related
assets, which comply withsewerage drainage standards
set by Japanese law 12.
Development, construction,
maintenance, renewal, andoperation of water supplyrelated facilities that meet thestandards prescribed by
Japanese law 13.

Pollution Prevention andControl
Water Resource Conservation
Energy use of sewerage sludge,
sewerage sludge recycle

Alignment with UN
SDGs

Effective utilization andconservation of water resources

4.2 Process for Project Evaluation and Selection
JFM’s Sustainability Working Group, which is placed under the Sustainability Committee, consists ofmembers of the corporate planning department, administration department, finance department,
loan department and the local government support department including members who haveexperience in local municipalities’ projects related to the environment. The Sustainability Working
Group is responsible for ensuring that the Proceeds from Green Bonds are allocated to loans orrefinancing of Eligible Projects. The loan department will confirm that the borrower has obtained
consent or approval from the Minister for Internal Affairs and Communications, or the respective
prefectural governors on the borrowing, in accordance with the requirements of Japanese law.
In addition, JFM's Sustainability Working Group will conduct surveys with the relevant local
municipalities to gain impact metrics. The Eligible Projects to allocate the Proceeds from Green
Bonds will be finally selected based on the surveys.

Sewerage Act (Act No. 79 of 1958, as amended):https://www.japaneselawtranslation.go.jp/en/laws/view/2810
Water Pollution Prevention Act (Act No. 138 of 1970, as amended):
http://www.japaneselawtranslation.go.jp/law/detail/?vm=04&re=01&id=2815
Purification Tank Act (Act No. 43 of 1983, as amended):
http://www.japaneselawtranslation.go.jp/law/detail/?printID=&re=01&id=1111&vm=03
13
Water Supply Service Act (Act No.177 of 1957, as amended)128

Figure 2: Process for Project Funding 14

Step 1. Local government formulates a business plan, in compliance with applicable laws
Step 2. Local government will seek consent or approval on the borrowing from either the national
government or prefecture accordingly, in order to conduct its business plan
Step 3. Local government will receive consent or approval from the relevant authority (the national
government or prefecture)
Step 4. Local government will apply to JFM for funding, and be funded with the approved amount
Step 5. Evaluation and selection by JFM Sustainability Working Group

Figure 3: Consultation, consent/approval process between local governments and the national
government or the prefecture
A. When the borrower is a city/town/village,
the consultation body is the prefecture

B. When the borrower is a prefecture, theconsultation body is the national Government

National Government (Minister ofInternal Affairs and Communications)

National Government (Minister ofInternal Affairs and Communications)

Prefecture (Prefecture Governor)
Prefecture (Borrower)
City/Town/Village (Borrower)

4.3 Management of Proceeds
JFM’s Sustainability Working Group will track, monitor and account for the allocation of theProceeds from Green Bonds and ensure that the Proceeds from Green Bonds are appropriately
managed in cash or cash equivalents until they are allocated to loans or refinancing for Eligible
Projects.
In addition, JFM will conduct inspections and examinations on projects which JFM has funded tomake sure that the Proceeds from Green Bonds are allocated to Eligible Projects.

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As shown in figure 3

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4.4 Reporting
JFM’s Sustainability Working Group will conduct a survey on Eligible Projects that are selected toensure that the total amount of loans exceeds the amount of the Proceeds from Green Bonds.
Subsequently, the group reports on the Eligible Projects that receive effective response on thesurvey.
Additionally, JFM plans to report the following information on its website annually until the full
Proceeds from Green Bonds are allocated:
(i)
(ii)

(iii)

Total amount of Eligible Projects surveyed
Breakdown of Eligible Projects surveyed (number of projects and loan amounts byfacility type and by new/construction or renovation/replacement)
Business
Sewerage business

Facility Type
•
•
•
•
•
•

Sewerage treatment facilities
Advanced treatment facilities
Sludge treatment facilities
Pump stations
Pipes
OthersWater supply
business

•
•
•
•
•

Water intake facilities
Water purification facilities
Water distribution facilities
Pipes
Others(Estimated) key impact indicators for the borrowing entity or the water treatment area for
the Eligible Projects surveyed
Business
Sewerage business

Estimated Key Impact Indicators
•
•
•
•
•
•

Project description
Total project cost
Population of the covered area
Water management capacity and water quality impact (where relevant)
Newly constructed pipe length and/or total pipe length (where relevant)
Other positive environmental impacts

Water supply
business

•
•
•
•
•
•
•

Project descriptions
Total project costs
Population of the covered area
Water supply/purification/intake volumes (m3)
Water Efficiency Rate in certain water treatment area
Newly constructed pipe length and/or total pipe length (where relevant)
Other positive environmental impacts(iv) Case studies on selected Eligible Projects(v) Refinancing Rate
Projects which are subject of such reporting are expected to be in line with the eligible Green Project
category of Green Bond Principles; "Sustainable water and wastewater management".

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5. External Review
5.1 Second Party Opinion

JFM concluded a contract with Moody’s to provide a Second Party Opinion (SPO) on theenvironmental benefits of “JFM Green Bond Framework” as well as the alignment to the GBP and
the Ministry of the Environment's Green Bond Guidelines (2022 edition). The SPO is available on
JFM’s website.
https://www.jfm.go.jp/en/investors/bond/international/green_bond2.html(As of March 2024)

5.2 Compliance Review
Until the Proceeds from Green Bonds have been fully allocated, JFM will have Moody’s (or any otherparty appointed by JFM as a successor for Moody’s) conduct a compliance review on an annual basis
to provide assurance as to the amount of net proceeds that has been allocated in compliance withall material respects of the eligibility criteria set forth in this Green Bond Framework.

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Disclaimer
The information and opinions contained in this JFM Green Bond Framework (the Framework) areprovided as at the date of the Framework and are subject to change without notice. None of JFM or
any of its affiliates assume any responsibility or obligation to update or revise such statements,
regardless of whether those statements are affected by the results of new information, future
events or otherwise. The Framework represents current JFM policy and intent, is subject to change
and is not intended to, nor can it be relied on, to create legal relations, rights or obligations.
The Framework is intended to provide non-exhaustive, general information. The Framework may
contain or incorporate by reference public information not separately reviewed, approved or
endorsed by JFM and accordingly, no representation, warranty or undertaking, express or implied, ismade and no responsibility or liability is accepted by JFM as to the fairness, accuracy,
reasonableness or completeness of such information. The Framework may contain statements about
future events and expectations that are forward looking statements. None of the future projections,
expectations, estimates or prospects in this document should be taken as forecasts or promises nor
should they be taken as implying any indication, assurance or guarantee that the assumptions on
which such future projections, expectations, estimates or prospects have been prepared are correct
or exhaustive or, in the case of assumptions, fully stated in the Framework.
No representation is made as to the suitability of any Green Bonds to fulfil environmental andsustainability criteria required by prospective investors. Each potential purchaser of bonds should
determine for itself the relevance of the information contained or referred to in the Framework or
the relevant bond documentation for such Green Bonds regarding the use of proceeds and its
purchase of Green Bonds should be based upon such investigation as it deems necessary. JFM has
set out its intended policy and actions in the Framework in respect of use of proceeds, project
evaluation and selection, management of proceeds and reporting, in connection with the Green
Bonds. However, it will not be an event of default or breach of contractual obligations under theterms and conditions of any such Green Bonds if JFM fails to adhere to the Framework, whether by
failing to fund or complete Eligible Projects or by failing to ensure that proceeds do not contributedirectly or indirectly to the financing of the excluded activities as specified in the Framework, or by
failing (due to a lack of reliable information and/or data or otherwise) to provide investors with
reports on uses of proceeds and environmental impacts as anticipated by the Framework, orotherwise.
In addition, it should be noted that all of the expected benefits of the Eligible Projects as described in
the Framework may not be achieved. Factors including (but not limited to) market, political andeconomic conditions, changes in government policy (whether with a continuity of the government or
on a change in the composition of the government), changes in laws, rules or regulations, the lack ofavailable Eligible Projects being initiated, failure to complete or implement projects and otherchallenges, could limit the ability to achieve some or all of the expected benefits of these initiatives,
including the funding and completion of Eligible Projects. Each environmentally focused potential
investor should be aware that Eligible Project may not deliver the environmental or sustainability
benefits anticipated, and may result in adverse impacts.

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