INFRASTRUCTURE AND PROJECT FINANCEASSESSMENT
27 December 2022

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

Contacts
Atsushi Goto
Associate Lead Analyst
Moody’s Japan K.K.

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

manon.inomata@moodys.com
Jeffrey Lee
VP-Sustainable Financesukjoonjeffrey.lee@moodys.com
Rahul Ghosh
MD-Sustainable Finance
rahul.ghosh@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
2022, 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.

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 29.2%2 of the total outstanding loans and was the largest category as of the end of March 2022.

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

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

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for themost updated credit rating action information and rating history.

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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» 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 Green Bond Working Group 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» 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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MOODY'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 law4 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» 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.
The issuer has already published the Impact Report 20205 and 20216, and disclosed the draft Impact Report 2022 to us. Based on thedraft Impact Report 2022, we believe that the organization has adhered to the commitments made in the framework.

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MOODY'S INVESTORS SERVICEBest practices identified» 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%7 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 92.1%8 as of March 31, 2021.
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 to

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decarbonize the sewage facilities9, and municipalities are likely to establish and follow plans to reduce GHG emissions based on the Act
on Promotion of Global Warming Countermeasures10.
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.
Based on the draft Impact Report 2022, we believe that the bonds issued in 2022 have positively contributed to sustainability. Of
the total loans extended in the fiscal year ended March 2022, 60% were toward pipe-related projects, which are an essential part ofwastewater treatment, contributing to maintaining a sound sewage system in Japan.
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 2021.

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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 and impact reports 2022
Summary of eligible categories
Eligible Cateogry

Description

Sustaianble Objectives

Impact Reporting Metrics

Sustainable water andwastewater management

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

Pollution Prevention and Control
Water Resource Conservation
Energy use of sewage sludge,
sewage sludge recycle- Population of the covered area
- Water management capacity and water
quality impact (where relevant)- Absolute amount of sludge treated anddisposed of (where relevant)- Newly constructed pipe length and/or total
pipe length (where relevant)- Other positive environmental impacts

Summary of impact reports 2022

9Green bond terms

Total extension of pipes (km) Covered area population

Water management capacity (m3)Amount of electricity saved (kWh)Issue date: 27 January 2022
Maturity date: 27 January 2025
Issue amount: USD 750 million

319.5

4,653,649,358

577,278

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Moody’s related publications
Second Party Opinion analytical framework:» Framework to Provide Second Party Opinions on Sustainable Debt, October 2022
Topic page:» ESG Credit and Sustainable FinanceEndnotes
1 The Japan Finance Organization for Municipalities Act
2 Annual Report 2022.
3 The laws are the Sewage Act, the Water Pollution Prevention Act and the Purification Tank Act.
4 Article 45 of Japan Finance Organization for Municipalities Law.
5 JFM Green Bond Impact Report 2020.
6 JFM Green Bond Impact Report 2021.
7 Committee on reducing the GHG emissions from sewage system by half.
8 Sewage system penetration rate in FY2020, August 31, 2021.
9 Report on contributing to the net-zero society, March 2022.
10 Act on Promotion of Global Warming Countermeasures.

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Moody’s assigns SPOs in alignment with the main tenets of the ICMA Guidelines for Green, Social, Sustainability and Sustainability-Linked Bonds External Reviews and the LSTA/
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REPORT NUMBER

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