SUB-SOVEREIGNASSESSMENT
13 December 2023

Japan Finance Organization for
Municipalities
Second Party Opinion – Green Bond Framework Assigned
SQS2 Sustainability Quality Score
Summary

Contacts
Atsushi Goto
Sustainable Finance Analyst
Moody’s Japan K.K.

atsushi.goto@moodys.com
Manon Inomata
Sustainable Finance Associate
Moody’s Japan K.K.

manon.inomata@moodys.com
Jeffrey Lee
VP-Sustainable Financesukjoonjeffrey.lee@moodys.com

We have assigned an SQS2 sustainability quality score (very good) to Japan Finance
Organization for Municipalities' (JFM) green bond framework dated December 2022. JFM
has established its use-of-proceeds framework with the aim of financing a single eligible
green project category: sustainable water and wastewater management. The frameworkis aligned with the four core components of the International Capital Market Association's(ICMA) Green Bond Principles 2021 (including June 2022 Appendix 1) and demonstrates ahigh contribution to sustainability.

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Scope
We have provided a Second Party Opinion (SPO) on the sustainability credentials of JFM's green bond framework, including theframework's alignment with the ICMA's Green Bond Principles (GBP) 2021 (including June 2022, Appendix 1). Under its framework, theorganization plans to issue use-of-proceeds green bonds to finance a single eligible green project category — sustainable water andwastewater management — as outlined in Appendix 2 of this report.
Our assessment is based on the latest version of JFM's framework dated December 2022 and the draft JFM Green Bond Impact Report
2023, and our opinion reflects our point-in-time assessment of the details in this version of the framework, the impact report, andother public and non-public information provided by the agency.
We produced this SPO based on our Framework to Provide Second Party Opinions on Sustainable Debt, published in October 2022.

Recent developments
Following finalization of its green bond framework in December 2022, JFM issued its green bond in February 2023. Net proceeds fromthe EUR 500 million offering have been fully allocated to the sustainable water and wastewater management related projects, which isthe single eligible green project category in the organization's framework (Appendix 2).
The organization intends to publish its JFM green bond impact report 2023 in December 2023, which covers all aspects originally
anticipated under the organization's framework, including details on the specific projects - the amount of proceeds allocated at lending
project level, as well as the sustainable benefits with relevant environmental reporting indicators. The company did not identify any
material developments, issues or controversies related to the eligible category, and thus did not report on any of these items in its
report.
As highlighted in the organization's impact report, 61% of the proceed was allocated to the installation, renewal, and reconstructionof pipes. The rest of the proceeds were allocated to other sewage related projects such as construction, renewal, and reconstruction ofsewerage treatment plant, sludge treatment plant, pump station, as well as advanced treatment plant. The company has fulfilled all thecommitments made in the framework and the details of the projects align with the assumptions in our original analysis. We are thus
maintaining all assigned scores in this updated SPO.

Issuer profile
Japan Finance Organization for Municipalities (JFM) is a financial institution dedicated to providing long-term, low-cost funding toJapanese regional and local governments (RLGs). Established in 2008 based on the Japan Finance Organization for Municipalities Act1,
it is jointly owned by Japanese RLGs.
JFM has increased its lending to cover the RLGs' tax-supported activities since 2009, in addition to increasing its traditional lending
to the RLGs' public enterprise funds that manage non-tax-supported, fee-based operations, such as water, sewage and masstransportation.
Sewage-related lending accounts for 28.5%2 of the total outstanding loans and was the largest category as of the end of March 2023.

Strengths» Financing of sustainable water and wastewater management projects, which is likely to have a high contribution to sustainability» Comprehensive and transparent project evaluation and selection process, including robust environmental and social risk mitigation
practices» Clearly defined and relevant environmental objectives associated with the eligible category» Granular reporting, which includes a list of financed projects and detailed impact metrics» Short allocation period of no more than 12 months

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Challenges» Reporting will only be conducted until full allocation of proceeds» There is no commitment to undertake verification or an independent review of the allocation, or impact reporting

Alignment with principles
JFM's green bond framework is aligned with the four core components of the ICMA's Green Bond Principles 2021 (including June 2022
Appendix 1).

Use of proceeds

Clarity of the eligible categories – BEST PRACTICESJFM has clearly and comprehensively communicated the nature of the spending, the eligibility and exclusion criteria for the financed
projects, and the anticipated location of the projects. The organization plans to extend loans to municipalities to finance the sewagerelated assets that comply with Japanese laws3, which set the detailed standards and requirements of sewage systems in Japan.
Clarity of the environmental or social objectives – BEST PRACTICESJFM has clearly outlined the environmental objectives associated with the eligible category. These objectives include conservation ofwater resources and reduction of greenhouse gas emissions. The organization also referenced the UN Sustainable Development Goals(SDGs) as shown in Appendix 1 in articulating the objectives of the eligible category, and the objectives are coherent with the SDGs.
Clarity of expected benefits – ALIGNEDJFM has identified clear, relevant and measurable expected environmental benefits, which include pollution prevention and control,
water resource conservation, recycling of sewage sludge and use of sewage sludge as an energy source. The organization plans to reporton these quantitative benefits in its ongoing reporting.
The organization does not disclose the expected share of refinancing in its framework; however, it states that the lookback period is 36
months and the organization commits to report on the share of refinancing in its impact report.

Best practices identified - use of proceeds» Eligibility criteria are clearly defined for all project categories» Objectives set are defined, relevant and coherent for all project categories» Relevant benefits are identified for all project categories» Benefits are measurable and quantified for most projects, either ex-ante with clear baselines or with a commitment to do so infuture reporting» Commitment to transparently communicate the associated lookback period(s) where feasible

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Process for project evaluation and selection

Transparency and quality of process for defining eligible projects – ALIGNEDJFM has established a clear process for determining the eligibility of projects and disclosed the details in its public framework. In
addition to following the standard loan screening procedure, which includes the loan department confirming that the borrower has
fulfilled the requirements of Japanese laws related to the sewage projects, the Sustainability Working Group4 will be responsible for
evaluating and selecting the projects to be financed by any specific green bond. In evaluating and selecting the projects, the working
group will conduct surveys to understand the impact. The roles and responsibilities for project evaluation and selection are clearly
disclosed and include relevant expertise.
The monitoring of continued compliance will be done through an on-site inspection. The process for evaluation, selection andmonitoring is documented and internally traceable.
Environmental and social risk mitigation process – ALIGNEDThe inclusion of the environmental and social risk mitigating process is required by Japanese sewage-related laws, and JFM will only
extend loans to projects that fulfill this requirement and receive consent or approval from the relevant authorities. The breach of
sewage laws, including those related to water quality standards, could lead to legal actions. Furthermore, JFM conducts surveys toensure that the loans are exclusively used for the stated projects, and can request a full repayment if the results are unsatisfactory.

Best practices identified - process for project evaluation and selection» The roles and responsibilities for project evaluation and selection are clearly defined and include relevant expertise» The process for project evaluation and selection is traceable» Material environmental and social risks for most project categories are identified» Presence of corrective measures to address environmental and social risks across projects

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SUB-SOVEREIGNMOODY'S INVESTORS SERVICEManagement of proceeds

Allocation and tracking of proceeds – BEST PRACTICESJFM has defined a clear allocation and tracking process, which is disclosed in the framework. Net proceeds from any bonds issued
under the framework will be placed in JFM's general treasury account and will be separately tracked under a formalized internal process
to ensure that the proceeds are used for eligible projects only. The working group will ensure that the balance of the net proceeds
will match allocations to eligible projects by extending loans that have longer maturities than the green bonds. In case the loans are
redeemed, the organization commits to replace such projects.
Management of unallocated proceeds – BEST PRACTICES

Temporarily unallocated proceeds will be invested in JFM's liquidity portfolio as cash and cash equivalents. Based on the law5 that
regulates JFM's investment policy and JFM's internal rule, the unallocated proceeds will not be invested in carbon-intensive orcontroversial activities.

Best practices identified - management of proceeds» Broad disclosure of a clearly articulated and comprehensive management of proceeds policy to external stakeholders;
bondholders or lenders at a minimum» Short allocation period, for example typically less than 24 months» Disclosure on temporary placement and presence of exclusion criteria toward environmentally or socially harmful activities» Commitment to reallocate proceeds to projects that are compliant with the framework

ReportingTransparency of reporting – ALIGNEDJFM will report annually on the allocation and impact of the bonds issued under its framework, and this reporting will be madepublicly available on the organization's website. Reporting will occur until the full allocation of the funds and in the event of significant
developments.
The reporting will be exhaustive, covering the amount of net proceeds, breakdown of projects, environmental reporting indicators thatare clear and relevant such as water management capacity, and case studies. The methodologies and assumptions used to report on
the environmental impacts will follow the relevant standards and guidelines stipulated by the Japanese sewage-related laws.

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SUB-SOVEREIGNMOODY'S INVESTORS SERVICEBest practices identified - reporting» Reporting covers material developments and issues related to the projects or assets» Reporting on allocation of proceeds and benefits done at least at eligible category level» Clear and relevant indicators to report on the expected environmental/social impact of all the projects, where feasible, or
eligible categories» Disclosure of reporting methodology and calculation assumptions to bondholders or lenders at a minimumContribution to sustainability
The framework demonstrates a high expected contribution to sustainability.

Expected impact
The expected impact of the eligible projects on environmental objectives is high. A detailed assessment is provided below.
Sustainable water and wastewater management

The project exhibits significant relevance overall. The continued investments in sewage-related assets are very important to Japan's
efforts to manage wastewater, especially because the country is prone to natural disasters. Typhoons and extreme rains could
overwhelm the sewage systems and earthquakes could damage them, and therefore, the facilities need to be maintained well tominimize the impact of such natural disasters. In addition, the facilities need to be renewed or upgraded, or both, because thesewere mostly constructed in 1960-80. Furthermore, sewage treatment is an energy-intensive process, accounting for 35%6 of total
greenhouse gas (GHG) emissions by the Metropolitan Government of Tokyo in 2020, for example. Therefore, use of sewage sludge
as an energy source and recycling of sewage sludge are crucial to reducing GHG emissions. On the other hand, the sewage system inJapan is already well-established, with a penetration of 92.9%7 as of the end of March 2023.
The category is likely to have a high magnitude and a highly positive impact in terms of preventing water pollution. With very strict
standards on water quality in Japan following the several water quality issues during the 1950s-70s, the funded sewage projects that
follow the standards are likely to effectively minimize the water pollution. Furthermore, the use of sludge as an energy source would
help reduce GHG emissions. It will play an important role in achieving net zero emissions under the Japanese government's plan to6

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decarbonize the sewage facilities8, and municipalities are likely to establish and follow plans to reduce GHG emissions based on the Act
on Promotion of Global Warming Countermeasures9.
Overall, this category is highly likely to advance the environmental objectives of pollution prevention and control, water resource
conservation, use of sewage sludge as an energy source and recycling of sewage sludge.
In addition, the category is likely to help Japan adapt to the impact of the climate change, though this is not explicitly included in
the framework. The upgrade and maintenance of the sewage facilities are highly important because the expected change in the
precipitation pattern, including the typhoons, could undermine the wastewater treatment capacity.
ESG risk management
We have not applied a negative adjustment for ESG risk management to the expected impact score. The sewage-related activities
are regulated by Japan's sewage-related laws, and JFM will review necessary consent/approvals to prevent and minimize the relevant
negative externalities.
Coherence
We have not applied a negative adjustment for coherence to the expected impact score. The project to be financed under JFM'sframework aligns with its broader sustainability priorities because sewage-related lending was the largest loan category as of the end of
March 2023.

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Appendix 1 - Mapping eligible categories to the United Nations’ Sustainable Development Goals
The eligible category included in JFM's framework is likely to contribute to six of the United Nations’ Sustainable Development Goals(SDGs), namely:
UN SDG 17 Goals

Eligible Category

SDG Targets

GOAL 3: Good Health and Wellbeing

3.9: Substantially reduce the number of deaths and illnesses from hazardous
chemicals and air, water and soil pollution

GOAL 6: Clean Water andSanitation

6.3: Improve water quality by reducing pollution, eliminating dumping and minimizing
hazardous chemicals and materials

GOAL 11: Sustainable Cities andCommunities
GOAL 13: Climate Action

Sustainable Water andWastewater Management

11.5: Reduce deaths, people affected and economic losses caused by disasters,
particularly for people in vulnerable situations
13.1: Strengthen resilience and adaptive capacity to climate-related hazards andnatural disasters in all countries

GOAL 14: Life Below Water

14.1: Prevent and significantly reduce marine pollution of all kinds, in particular fromland-based activities

GOAL 15: Life on Land

15.1: Ensure the conservation and sustainable use of terrestrial and inland freshwater
ecosystems and their services

The United Nations’ Sustainable Development Goals (SDGs) mapping in this SPO consider the eligible project categories (or key
performance indicators) and associated sustainability objectives/benefits documented in the issuer’s financing framework, as well as
resources and guidelines from public institutions, such as the ICMA SDG Mapping Guidance and the UN SDG targets and indicators.

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Appendix 2 - Summary of eligible categories in JFM's framework and projects financed with proceeds from February 2023 Green Bond

Eligible Cateogry

Description

Sustaianble Objectives

Sustainable water and wastewater
management

Development, construction,
maintenance, updates,
operation of sewerage related
assets, which comply withsewage drainage standards set
by Japanese law including:- Sewerage ManagementRelated Facilities- Facility/Equipment- Pipes

Pollution Prevention andControl
Water Resource
Conservation
Energy use of sewage
sludge, sewage sludge
recycleProceeds Allocation(Feb 2023 Green Bond)

EUR 500 million

Impact Reporting Metrics

Reported Impact- Population of the covered
area- Water management
capacity and water quality
impact (where relevant)- Absolute amount of sludge
treated and disposed of(where relevant)- Newly constructed pipe
length and/or total pipe
length (where relevant)- Other positiveenvironmental impacts- Total population of treated area:
25,293,694- Amount of electricity saved:
7,329,619 kWh- Total extension of pipes: 340.5 km- The volume of treated water:
2,999,187,751 m3

Endnotes
1 The Japan Finance Organization for Municipalities Act
2 Annual Report 2023.
3 The laws are the Sewage Act, the Water Pollution Prevention Act and the Purification Tank Act.
4 The working group was renamed from the “Green Bond Working Group”.
5 Article 45 of Japan Finance Organization for Municipalities Law.
6 Committee on reducing the GHG emissions from sewage system by half.
7 The sewage system penetration as of the end of March 2023, accessed on 12 December 2023
8 Report on contributing to the net-zero society, March 2022.
9 Act on Promotion of Global Warming Countermeasures.

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REPORT NUMBER

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