Japan Finance Organization for Municipalities (JFM)
Green Bond Framework
December, 2022

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Table of Contents
1. Introduction
2. Approach to Sustainability
3. Rationale for Issuance
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

21. Introduction
Japan Finance Organization for Municipalities (JFM) is a joint funding organization, the objective of
which is to provide Japanese local governments with long‐term funding at low interest rates and tocontribute to the sound financial operation of local governments and improve the welfare of citizens.
JFM was originally established in 1957 as a government financial institution, and as part of governmental
reform in 2008, a new JFM was established under a special law and wholly capitalized through capital
contributions from 1,7891 local governments2. Although its ownership structure changed after thereform, JFM continues to play a key role in the public sector finance in Japan.
Japan’s public services are jointly provided by the national government and local governments. The
national government is responsible for foreign affairs, national defense, monetary policy and othermatters related to the nation’s existence. On the other hand, based on the principle of residents′ self‐
governance, local governments, which mainly consist of prefectures, cities, towns and villages, provide
local services. JFM’s role is to fund such municipalities based on its founding principles.

2. Approach to Sustainability
Local Governance in Japan and JFM’s contribution
In Japan, the legislature creates and decides the national level basic legal frameworks. In theadministration phase, based under the laws set by the National Diet, the national government is
responsible for matters related to the nation’s existence and sets policy goals and more detailed
standards within the frameworks. Local governments act in line with such frameworks and are in chargeof a wide range of public services that are closely related to the daily lives of citizens such as publichealth, social welfare and education. These local governments require substantial funds to build andmaintain public facilities such as water supply and sewerage systems, roads, schools and hospitals andcover around 60% of the total public expenditure in Japan.
JFM only funds municipalities through the Local Government Borrowing Programme (LGBP), which is an
important guideline to secure the funding source for local governments in Japan. The Programme
consists of long‐term borrowing guidelines for local governments prepared by the national government.
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.
As of 31 March 2022, JFM’s total outstanding loans stood JPY 23.5tn (USD 192.4bn)3, of which over JPY
6.8tn (USD 56.1bn)3 was for sewerage, i.e., projects that are characterized as sustainable water andwaste management and which JFM believes contributes to a sustainable economy and promotes publichealth. As shown in figure 1, sewerage is the largest loan category accounting for 29.2% of total loans asof 31 March 20224.

1

As of 31 March 2022. References to fiscal years are to the years ending on 31 March of the year following theyear indicated (e.g. fiscal year 2021 = fiscal year ended 31 March 2022).
2
Local governments comprise all of the prefectures, cities and special wards, government‐designated cities, towns
and villages, as well as some local government associations.
3
USD 1 = JPY 122.40 as of 31 March 2022
4
JFM Annual Report 2022

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Figure 1: SDGs Mapping – Fund Usage by JFM5, 6
Others, 14.6%
Sewerage, 29.2%

Public housing, 0.9%

Three Special Projects,
1.7%
Transportation, 3.2%

Hospitals, 4.8%
Temporary Financial
Countermeasures Funding,
25.6%

Water Supply, 13.6%

The Development of Sewerage System in Japan
In Japan, historically human waste generally had not been directly drained to rivers or thrown outside,
but instead had been used as manure for agriculture. However, as people started to gather in cities suchas Tokyo towards the end of the 19th century, insufficient drainage of sewage and flooding from heavy
rainfall caused the spread of cholera and other diseases. This led to the construction of the first
sewerage system in Japan in 1884, with the aim of improving living conditions through maintaining
public health. Similarly, prevention of floods was a major role of the sewerage, especially in a country
with abundant rainfall including seasonal typhoons. Japan experienced rapid economic growth in the
1950s‐70s, and during this time the sewerage system in Japan expanded rapidly. However, this period of
economic growth also led to water pollution in rivers and bodies of water across the country. Thesewater quality issues led to revision of the Sewerage Act in 1970 in which a paragraph on “maintaining
the water quality 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 prevent pollution anddisease caused by water contamination. Further, the Water Pollution Prevention Act and the Sewerage
Act prescribes the standards on the water quality of effluent by a sewerage business for over 40
substances. In meeting the standards of water quality of final effluent prescribed by each of the Acts,
sewerage projects have played a vital role environmentally and socially in Japan by contributing to theimprovement of public health and the preservation of living conditions and water quality of public
waters.

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As of 31 March 2022
Three Special Projects includes development projects for local roads, rivers and other waterways, and high schoolbuildings
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Today, the sewerage system in Japan is well established, with a penetration rate of 92.1% as of the endof fiscal year 2020, and approximately 490,000 km (300,000 miles) in total sewer pipe installed. The
number of sewerage treatment plants was approximately 2,200 as of the end of fiscal year 20207. With
such a high penetration rate, the need for the maintenance of sewer pipes and treatment plants is
growing. Many of the sewer pipes and facilities were rapidly constructed during the 1960s‐80s, meaningthat the number of pipes aged 50 years and over is expected to grow, while more than half of the water
treatment facilities are now over 15 years old. As a result, the demand for reconstruction is strong. In
addition, Japan has seen a rise in natural disasters such as typhoons and earthquakes in recent years,
leading to an increased need to protect and upgrade lifeline water facilities to be able to minimize theimpact of such natural disasters. The Japanese Government and local municipalities are working
together to establish sustainable sewerage systems through upgrading and protecting the system byapplying new technologies.

Further initiatives and towards the achievement of SDGs
In a broader context, the Japanese Government is moving to create a sustainable and a recycling‐oriented society, by reducing CO2 emission by 46% in fiscal year 2030 from its fiscal year 2013 levels andfurthermore continuing strenuous efforts in its challenge to meet the lofty goal of cutting by 50%, in linewith the Paris Agreement8. Sewerage is not an exception, and the Japanese Government has set a policy
goal of achieving a recycle rate of sewage sludge of 85% by fiscal year 2025. Moreover, in accordancewith the Act on Promoting of Global Warming Countermeasures and its related policies, Japan has set a
policy goal of achieving the utilization rate of sewage sludge as energy of 37% by fiscal year 2030. The
main form of energy recycling for this purpose is biomass power generation using sewerage remains,which has been promoted in accordance with the Basic Act for the Promotion of Utilization of Biomass9.
In light of this, with the objective of providing local governments with long‐term funding at low interest
rates, JFM is funding the reconstruction and upgrade of sewerage systems through the Local
Government Borrowing Programme. This programme specifies the amount and source of fundraising ofsewerage business as well as other businesses. In fiscal year 2020, the total amount of funding plan inrespect of the sewerage business in Japan was approximately JPY1.30tn (USD 10.7bn)10, of which
funding JFM was expected to cover approximately 30.3% of the sewerage business.
The sewerage business contributes to the improvement of living conditions, prevention of floods
through waste water treatment and rain water drainage, and preservation of water quality in area of
public waters. In Japan, the sewerage business is operated as a municipal enterprise and the quality ofwater is regulated under the laws of Japan.

3. Rationale for IssuanceJFM recognizes the important role that the sewerage industry can contribute to a sustainable economy
and public health. Through the issuance of Green Bonds in accordance with this framework, JFM hopes
to continue to broaden its investor base by attracting like‐minded investors that seek to manage their

7

Ministry of Land, Infrastructure and Transport
Agency for Natural Resources and Energy
9
Ministry of Land, Infrastructure and Transport
10
USD 1 = JPY 122.40 as of 31 March 2022
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investments in a responsible manner by prioritizing potential investments which value environmental
and social priorities.

4. Alignment with the Green Bond Principles 2021 (GBP)The Green Bond Principles, 2021 (GBP) as administered by the International Capital Market Association(ICMA) are voluntary process guidelines that recommend transparency and disclosure and promote
integrity for best practices when issuing Green Bonds. JFM’s Green Bond Framework is aligned with thefour core components of the GBP.

4.1 Use of Proceeds
JFM finances a broad spectrum of activities for municipalities, however, for the Green Bonds JFM will
only include loans made to finance sewerage projects for which the purposes are the conservation ofwater resources through the improvement of water quality and the reduction of greenhouse gas
emissions through the efficient use of energy and the recycling of sewage sludge.
JFM will use an amount equal to the net proceeds of the Green Bonds to finance or refinance, in whole
or in part, existing or future projects that satisfy the eligibility criteria set forth below (together, theEligible Projects) by way of loans made by JFM to local municipalities. Such loans made by JFM to local
municipalities shall include those made to finance or refinance Eligible Projects up to 36 months
preceding the issue date of a relevant series of Green Bonds.
JFM will allocate an amount equal to the net proceeds to finance or refinance Eligible Projects before
the end of the fiscal year when the Green Bonds are issued.
Eligibility Criteria:
GBP Eligible Green
Project Category
Sustainable water andwastewater
management

Eligibility Criteria

Environmental
Objective

Development, construction, maintenance,
updates, operation of sewerage related
assets, which comply with sewage
drainage standards set by Japanese law11
including: Sewerage Management‐Related
Facilities
 Facility/Equipment Pipes

Pollution
Prevention andControl

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Water Resource
Conservation
Energy use of
sewage sludge,
sewage sludge
recycleSewerage Act (Act No. 79 of 1958, as amended) :http://www.japaneselawtranslation.go.jp/law/detail/?id=2810&vm=04&re=01
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

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Alignment with UN
SDGs

4.2 Process for Project Evaluation and Selection
JFM’s Green Bond Working Group consists of members of the corporate planning department,
administration department, finance department, loan department and the local government support
department including members who have experience in local government projects related to theenvironment, and is responsible for ensuring that the allocation of the net proceeds (or an amountequal to the net proceeds) of the issuance of the Green Bonds is in alignment with the eligibility criteria
set forth in its Green Bond framework. The loan department will confirm that the borrower has
obtained consent or approval on the borrowing, in accordance with the requirements of Japanese law.
Following the extension of loans by JFM to the Eligible Projects, JFM's Green Bond Working Group willconduct surveys with the relevant local governments to gain impact metrics. The net proceeds (or an
amount equal to the net proceeds) of the issuance of the Green Bonds will only be allocated to Eligible
Projects, and a portfolio (the Effective Portfolio) will then be selected from the Eligible Projects based on
projects run by local governments which return effective responses to a follow‐up survey.
Figure 2: Process for Project Funding12

Step 1. Local government will consult with either the national government or prefecture as
appropriate13 and formulate sewerage business plan, compliant 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 national government
or prefecture
Step 4. Local government will apply to JFM for funding, and be funded the approved amount
Step 5. Evaluation and selection by JFM Green Bond Working Group12

As shown in figure 3

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Figure 3: Consultation, consent/approval process between local governments and the national
government or 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

National Government

Prefecture

Prefecture (Borrower)

City/Town/Village (Borrower)

4.3 Management of Proceeds
JFM’s Green Bond Working Group will track, monitor and account for the allocation of the net proceeds(or an amount equal to the net proceeds) of the issuance of the Green Bonds. Prior to allocation of anamount equal to the net proceeds to loans for Eligible Projects, the net proceeds of the issuance of theGreen Bonds will be invested in JFM’s liquidity portfolio in cash and cash equivalents.
In addition, JFM will conduct inspections and examinations on projects which JFM has funded to makesure that the net proceeds (or an amount equal to the net proceeds) of the issuance of the Green Bonds
is allocated to Eligible Projects.

4.4 Reporting
JFM's Green Bond Working Group will conduct a survey of its local government borrowers in respect of
the environmental impact of their sewerage projects which JFM finances. Projects with respect to which
the relevant local government returns effective responses will form the Effective Portfolio, and JFM will
select such projects up to the full amount of the net proceeds of the Green Bonds. The Green Bond
Working Group will then report on the Effective Portfolio as set out below.
JFM will report annually on its website(https://www.jfm.go.jp/en/investors/bond/international/green_bond2.html) the following information
until full allocation of the net proceeds (or an amount equal to the net proceeds) from the issuance of
the Green Bonds:(i)

The amount of net proceeds (or an amount equal to the net proceeds) from the issuance of theGreen Bonds that has been allocated to Eligible Projects in the Effective Portfolio;(ii)

A breakdown of the Effective Portfolio by project type (expected to include sewerage treatment
plants, advanced treatment plants, sludge treatment plants, pump stations and pipes, as well asothers);(iii)

Certain expected or estimated key performance indicators for each Eligible Project in the
Effective Portfolio (expected to include project descriptions, total project costs, population of8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), and other positive environmental impacts of
new construction or update of sewerage management‐related facilities, sewerage facilities or
equipment and sewerage pipes);(iv)

Case studies of certain specific Eligible Projects in the Effective Portfolio; and(v)

Refinancing rate (in % of the total amount of proceeds).

Projects which are subject of such reporting are expected to be in line with the Green Bond Principles
eligible Green Project category "Sustainable water and wastewater management". A sample image ofreporting is specified in the Appendix hereto.

5. External Review
5.1 Second Party Opinion
JFM had retained Vigeo Eiris to provide a Second Party Opinion (SPO) on the environmental benefits of
JFM’s Green Bond Framework as well as the alignment to the GBP. As Vigeo Eris was reorganized into
Moody’s in October 2022, JFM concluded a contract with Moody’s to provide a SPO thereafter. The SPO
is available on our website
https://www.jfm.go.jp/en/investors/bond/international/green_bond2.html

5.2 Compliance Review
Until the net proceeds (or an amount equal to the net proceeds) of the issuance of the Green Bonds has
been fully allocated, JFM will have Moody’s (or any other party 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 with all material respects of the eligibility criteria set
forth in this Green Bond Framework.*As Vigeo Eris was reorganized into Moody’s in October 2022,
compliance reviews will be integrated into SPO thereafter9

Appendix
Image of Reporting(i)

Amount of net proceeds of the Notes allocatedEffective Portfolio = Selected from Eligible Projects in respect of which local governments return survey
responses. Survey will be conducted mainly on projects with large loan amount.
(ii)

Break down of Effective Portfolio(iii)

Project-by-project reporting on Effective Portfolio and expected or estimated KPIs (listof environmental impact on each project)

Note: Projects reported are in line with GBP Eligible Green Project Category;“Sustainable water and wastewater management”(iv)

Case studies of JFM’s lending to sewerage projects(v)

Refinancing rate (in % of the total amount of proceeds)

For illustrative purposes only
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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 anyof its affiliates assume any responsibility or obligation to update or revise such statements, regardless ofwhether 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, is made and no
responsibility or liability is accepted by JFM as to the fairness, accuracy, reasonableness or completenessof such information. The Framework may contain statements about future events and expectations thatare forward looking statements. None of the future projections, expectations, estimates or prospects inthis 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 ofGreen 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 andselection, 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 the terms 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 contribute directly or indirectly to thefinancing 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 andenvironmental impacts as anticipated by the Framework, or otherwise.
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 ona 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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