SECOND PARTY OPINION

1

ON THE SUSTAINABILITY OF JAPAN FINANCING ORGANIZATIONFOR MUNICIPALITIES’ GREEN BOND FRAMEWORKJanuary 2020

SCOPE
Vigeo Eiris was commissioned to provide an independent opinion (thereafter the “Second Party Opinion” or “SPO”)
on the sustainability credentials and management of the Green Bonds 2 (the “Bonds”) to be issued by Japan
Financing Organization for Municipalities (“JFM” or the “Issuer”) under its Green Bond Framework (the“Framework”).
Our opinion is established according to Vigeo Eiris’ Environmental, Social and Governance (“ESG”) exclusive
assessment methodology and to the latest version of the Green Bond Principles guidelines (the “GBP”) edited inJune 2018.
Our opinion is based on the review of the following components:
1)

Issuer: we assessed the Issuer’s Integration of ESG factors in its commitments and strategy, the Issuer’s
management of potential stakeholders-related ESG controversies and its involvement in controversial
activities3.

2)

Issuances: we assessed the Issuer’s Framework, including the coherence between the Framework andthe Issuer’s environmental commitments, the Bonds’ potential contribution to sustainability and theiralignment with the four core components of the GBP 2018.

Our sources of information are multichannel, combining data from (i) public information gathered from public
sources, press content providers and stakeholders,(ii) information from Vigeo Eiris’ exclusive ESG rating database,and (iii) information provided by the Issuer through documents and interviews conducted with Issuer’s managers
and stakeholders involved in the Bond issuance, held via face-to-face meetings in Tokyo and a telecommunications
system.
We carried out our due diligence assessment from October 29th, 2019 to January 13th, 2020. We consider that wewere provided with access to all the appropriate documents and interviewees we solicited. We consider that the
information made available enables us to establish our opinion with a reasonable level of assurance on its
completeness, precision and reliability.

VIGEO EIRIS’ OPINION
Vigeo Eiris is of the opinion that the JFM’s Green Bond Framework is aligned with the four corecomponents of the Green Bond Principles voluntary guidelines 2018.
We express a reasonable assurance4 (our highest level of assurance) on the Issuer’s commitments andon the Issuances’ potential contribution to sustainability.
In addition, the Eligible Categories are likely to contribute to six of the United Nations’ Sustainable
Development Goals (“SDGs”), namely: Goal 3. Good Health and Well-being, Goal 6. Water and Sanitation,
Goal 11. Sustainable Cities and Communities, Goal 13. Climate Action, Goal 14. Life Below Water and
Goal 15. Life on Land.
1) Issuer (see Part I):
 As of January 2020, JFM’s integration of ESG factors in its commitments and strategy is considered
moderate. The Issuer’s managerial approach appears moderate in the Environmental, the Social and
the Governance pillars, respectively.
 No stakeholders-related ESG controversy involving JFM was identified over the last 3 years.
 The Issuer is not involved in any of the 15 controversial activities screened under our methodology.

1This opinion is to be considered as the “Second Party Opinion” described in the GBP voluntary guidelines (June 2018 Edition) edited by theInternational Capital Market Association (www.icmagroup.org).

2

The “green bond” is to be considered as the bond to be potentially issued, subject to the discretion of the Issuer. The name “green bond” has been
decided by the Issuer: it does not imply any opinion from Vigeo Eiris.
3
The 15 controversial activities analysed by Vigeo Eiris are: Alcohol, Animal welfare, Chemicals of concern, Civilian firearms, Fossil Fuels industry,
Coal, Tar sands and oil shale, Gambling, Genetic engineering, High interest rate lending, Military, Nuclear power, Pornography, Reproductive
medicine, and Tobacco.
4

Definition of Vigeo Eiris’ scales of assessment (as detailed in the Methodology section).

2) Issuance (see Part II):The Issuer has described the main characteristics of the Bonds within a formalized Green Bond Framework
which covers the four core components of the GBP 2018 (the last updated version of the Framework wasprovided to Vigeo Eiris on January 10thth, 2020). In addition, the Issuer has committed to make this document
publicly accessible on its website5 on the day the Bond’s issuance is announced, in line with good market
practices.
We are of the opinion that the Framework is coherent with the Issuer’s main sector sustainability issues andthat it contributes to achieve its sustainable development commitments.
Use of Proceeds
 The net proceeds of the Bond will exclusively finance or refinance, in whole or in part, projects(the “Eligible Projects”) falling under one single Eligible Green Category (the “Eligible
Category”): loans made by JFM to local Japanese municipalities in order to finance sewerage
projects.
 The Eligible Category is formalized in the Framework and considered clearly defined. The
Eligible Projects are intended to contribute to 3 main environmental objectives, namely :Pollution Prevention and Control, Water Resource Conservation, and Renewable energy
generated from sewage sludge, seweage sludge recycling (Material Recycling). These
objectives are formalized in the Framework and considered clearly defined and relevant.
 The environmental benefits are defined in the Issuer’s Framework. The Issuer has committed
to assess and, where feasible, to quantify the environmental benefits of the Bonds. An area for
improvement consists in defining ex-ante quantified environmental benefits (targets) in the
Framework.
 The Issuer has not transparently communicated on the ex-ante estimated refinancing share.
Nevertheless, the Issuer has committed to report the ex-post refinancing share and that, incase of refinancing, a look-back period of maximum 12 months from each Bond’s issuancedate will be applied, in line with best market practices.
Process for Project Evaluation and Selection
 The governance and the process for the evaluation and selection of the Eligible Projects areformalized in the Framework. We consider that the process is reasonably structured,transparent and relevant.
 The evaluation and selection of Eligible Green Projects is based on relevant internal expertise,with defined roles and responsibilities. The traceability and verification are ensured throughout
the process.
 The process relies on explicit eligibility criteria (selection and exclusionary), relevant to theclaimed environmental objectives.
 The identification and management of the material environmental and social risks associatedwith the Eligible Category are considered good.
Management of Proceeds
 The rules for the management of proceeds are overall defined and will be verified internally.
We consider that they would enable a documented and transparent allocation process.
Reporting The reporting process and commitments appear to be good, covering both the funds allocationand the environmental benefits of the Eligible Projects.

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http://www.jfm.go.jp/

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JFM has commited that its Bonds issuances will be supported by external reviews:-

A pre-issuance consultant review: the hereby Second Party Opinion delivered by Vigeo Eiris, covering all
the features of the Bond, based on pre-issuance assessment and commitments, to be made publicly
accessible by the Issuer on its website.

-

An annual review: Vigeo Eiris (or any other party appinted by JFM) will conduct a review on allocation of
the net proceeds, on an annual basis until full allocation.

This Second Party Opinion is based on the review of the Framework and of the information provided by the Issuer,
according to Vigeo Eiris’ ESG assessment methodology and to the GBP 2018
January 13th, 2020

Project team
Julien SOURIAU
Product Manager - Green & Social Bonds
Senior Project Manager

For more information, contact:
Muriel CATONPaul COURTOISIER

Sustainable FinanceDirector
Supervisor

Head of sustainability bonds & bonds(+33) 6 85 35 43 51
paul.courtoisier@vigeo-eiris.com

Disclaimer
Transparency on the relation between Vigeo Eiris and JFM: Vigeo Eiris has not carried out any audit mission or consultancy activity for
JFM out of this SPO. No established relation (financial or commercial) exist between Vigeo Eris and the Issuer.
This opinion aims at providing an independent opinion on the sustainability credentiCeetrus and management of the Bond, based on theinformation which has been made available to Vigeo Eiris. Vigeo Eiris has neither interviewed stakeholders out of the Issuer’s employees,
nor performed an on-site audit nor other test to check the accuracy of the information provided by the Issuer. The accuracy,
comprehensiveness and trustworthiness of the information collected are a responsibility of the Issuer. Providing this opinion does not meanthat Vigeo Eiris certifies the effectiveness, the excellence or the irreversibility of the assets to be financed by the Bond. The Issuer is fully
responsible for attesting the compliance with its commitments defined in its policies, for their implementation and their monitoring. The opiniondelivered by Vigeo Eiris neither focuses on the financial performance of the Bond, nor on the effective allocation of its proceeds. Vigeo Eiris
is not liable for the induced consequences when third parties use this opinion either to make investments decisions or to make any kind of
business transaction.
Restriction on distribution and use of this opinion: the opinion is provided by Vigeo Eiris to the Issuer and can only be used by JFM. The
distribution and publication are at the discretion of the Issuer, submitted to Vigeo Eiris approval.

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Part I.

ISSUER

Japan Finance Organization for Municipalities (JFM) is a joint funding organization, the objective of which is toprovide Japanese local governments (prefectures, cities, towns and villages) with long-term funding at low interest
rates. Since its establishment, JFM has been playing a pivotal role in the public sector finance in Japan, funding
municipalities based on its founding principles.
Level of the Issuer’s integration of ESG factors in its commitments and strategy
As of January 2020, the Issuer’s Integration of ESG factors in its commitments and strategy is considered moderate.
DomainComments

OpinionWe reach a moderate level of assurance on JFM’s capacity to integrate its
most material environmental factors in its strategy.

Reasonable

JFM has issued a formalised environmental policy, promoting environmental
protection and sustainable development through its lending activities to themunicipalities.
Environment

JFM's lending activities are based on the related laws and regulations andtherefore related environmental criteria are built-in in its lending practices.
Besides, JFM also has a formalised committment to reduce its environmental
impacts in its offices through various initiatives such as the promotion of paperlessand material recycling, the enforcement of Cool Biz (the Japanese government's
energy-saving campaign for late spring and summer) and sourcing moreenvironmentally friendly lighting devices like LEDs.

SocialWeak

We reach a moderate level of assurance on JFM’s capacity to integrate its
most material social factors in its strategy.

ReasonableAs a joint funding organisation for municipalities, JFM has committed to promotesocial and economic development through its lending activities. JFM's lending
activities target only municipalities and all borrowers are expected to comply withall related laws and regulations in Japan. JFM has established a monitoring system
to check borrowers’ compliance in their lending practices.

Moderate

As a public entity, JFM's own commitments to the integration of social factors arealso based on related laws and regulations. Although JFM has formalisedcommitments on key issues such as non-discrimination, labour relations, employee
training, and health and safety, most of these commitments are not made public,
which is considred to be an area of improvement.

GovernanceModerate

Weak

We reach a moderate level of assurance on JFM’s performance in the
Governance pillar.

Reasonable

The Representative Board consists of one prefectural governor, one city mayor,
one town/village mayor and three members from among experts in local
administration, economics, finance, law or accounting to ensure the board’s
diversity .

Moderate

The Representative Board has the authority to make decisions on important mattersrelated to the overall management, including budgets, settlement of accounts andbusiness plans and to appoint and dismiss the President and CEO as well as
Corporate Auditors.
The Issuer describes in detail its corporate governance framework. It has
communicated information on auditors fees and board meetings attendance, butmore information is needed on how the board of directors is evaluated.

Weak

Management of stakeholders-related ESG controversies
As of January 13th, 2020, no stakeholders-related ESG controversy involving JFM was identified over the last 3
years.

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Involvement in controversial activities
As of today, JFM is not involved in any of the 15 controversial activities screened under Vigeo Eiris methodology,
namely: Alcohol, Animal welfare, Chemicals of concern, Civilian firearms, Fossil Fuels Industry, Coal, Tar sands
and oil shale, Gambling, Genetic engineering, High interest rate lending, Military, Nuclear Power, Pornography,
Reproductive Medicine and Tobacco.
The controversial activities research provides screening on companie and organisations to identify involvement inbusiness activities that are subject to philosophical or moral beliefs. The information does not suggest any approvalor disapproval on their content from Vigeo Eiris.

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Part II. ISSUANCE
Coherence of the issuanceContext note: 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 Japanese 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 charge of a wide range of public services that areclosely related to the daily lives of citizens such as public health, social welfare and education. These Local
Governments require substantial funds to build and maintain public infrastructures and facilities such as watersupply and sewerage systems, roads, schools and hospitals and cover around 60% of the total public expenditurein Japan
We are of the opinion that JFM’s Green Bond Framework is coherent with the Issuer’s main sector
sustainability issues, with its publicly disclosed strategic sustainable development priorities, and that it
contributes to achieve its sustainable development commitments.
Today, the sewerage system in Japan is well established, with a penetration rate of 91.4% (approximately 470,000
km - 290,000 miles- in total sewer pipe installed). The number of sewerage treatment plants was approximately
2,200 as of the end of fiscal year 20176. 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, meaning that 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 the impact of such natural
disasters. The Japanese Government and local municipalities are working together to establish sustainablesewerage systems through protecting and upgrading the system by applying new technologies. The seweragebusiness is considred to contribute 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 seweragebusiness is operated as a municipal enterprise and the quality of water is regulated under the laws of Japan.
In a broader context, the Japanese Government is moving to create a sustainable and a recycling-oriented society,with the aim of reducing CO2 emission by 26% between 2013 and 2030, in line with the Paris Agreement 7 .
Sewerage is not an exception, and the Japanese Government has set a policy goal of achieving a recycle rate ofsewage sludge of 85% by fiscal year 2025. Moreover, in accordance with the Act on Promoting of Global WarmingCountermeasures and its related policies, Japan has set a policy goal of achieving the utilization rate of sewage
sludge as energy of 30% by fiscal year 2020 and 35% by fiscal year 2030. The main form of energy recycling forthis purpose is biomass power generation using sewerage remains, which has been promoted in accordance with
the Basic Act for the Promotion of Utilization of Biomass8.
In light of this, with the objective of providing local governments with long-term funding at low interest rates, JFM isfunding the reconstruction and upgrade of sewerage systems through the Local Government Borrowing Programme(LGBP), which is an important guideline to secure the funding source for local governments in Japan. This
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 the national
budget, and each local government raises funds in accordance with the LGBP. The LGBP specifies the amountand source of fundraising of sewerage business as well as other businesses.
In fiscal year 2019, the total amount of funds to be raised in respect of the sewerage business in Japan is planned
to be approximately JPY1.27 tn (USD 11.4bn)9, of which funding JFM is expected to cover approximately 30.9%10.
As of 31 March 2019, JFM’s total outstanding loans stood JPY 23.5tn (USD 211.9bn), of which over JPY 7.4tn(USD 66.7bn)9 was for sewerage, i.e., projects that are characterized as sustainable water and waste management
and which JFM believes to contribute to a sustainable economy and to promote public health. The sewerage is thelargest loan category, accounting for 31.6% of total loans as of 31 March 201911.
By issuing Green Financial Instruments to finance or refinance its Green Projects, the Issuer coherently aligns with
its sustainability strategy and commitments and it addresses the main issues of its sector in terms of sustainable
development.
6

Ministry of Land, Infrastructure and Transport
Agency for Natural Resources and Energy
Ministry of Land, Infrastructure and Transport
9
USD 1 = JPY 110.92 as of 31 March 201910
Ministry of Internal Affairs and Communications
11
JFM Annual Report 20197
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Use of proceeds
The net proceeds of the Bond will exclusively finance or refinance, in whole or in part, projects (the “Eligible
Projects”) falling under one single Eligible Green Category (the “Eligible Category”): loans made by JFM
to local Japanese municipalities in order to finance sewerage projects. The Eligible Category is formalized
in the Framework and considered clearly defined.
The Eligible Projects are intended to contribute to 3 main environmental objectives, namely : Pollution
Prevention and Control, Water Resource Conservation, and Renewable energy generated from sewage
sludge, seweage sludge recycling (Material Recycling). These objectives are formalized in the Frameworkand considered clearly defined and relevant.
The environmental benefits are defined in the Issuer’s Framework. The Issuer has committed to assess
and, where feasible, to quantify the environmental benefits of the Bonds. An area for improvement consists
in defining ex-ante quantified environmental benefits (targets) in the Framework.
The Issuer has not transparently communicated on the ex-ante estimated refinancing share. Nevertheless,the Issuer has committed to report the ex-post refinancing share and that, in case of refinancing, a lookback period of maximum 12 months from each Bond’s issuance date will be applied, in line with best market
practices.
Issuer’s Framework
Eligible
Category

Sustainable
water andwastewater
management

Definition and Eligibility criteria
Development,
construction,
maintenance,
updates,
operation of sewerage related
assets, which comply withsewage drainage standards set
by Japanese law12 including:
Sewerage
Management-Related
Facilities

Facility/Equipment（e.g. sludge
treatment facilities）

Pipes

Environmental Objectives
and benefits
Pollution Prevention andControl
improvement of water quality--Water Resource
Conservation

Vigeo Eiris’ Analysis
The definition of the category
is clear.
The environmental objectiveareconsidered
clearlydefined and relevant.

----Energy use of sewage
sludge, seweage sludge
recycleThe expected environmental
benefits are defined by theIssuer in its Framework, while
not quantified. The Issuer has
committed to report on theestimated
quantified
environmental benefits of theBonds in the reporting.

efficient use of energy andthe recycling of sewage
sludge.

An area of improvement is toprovide ex-ante estimates ofthe expected environmental
benefits.

improvement of water quality

12 Sewerage 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 Ac(Act No. 43 of 1983, as amended)t: http://www.japaneselawtranslation.go.jp/law/detail/?printID=&re=01&id=1111&vm=03

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In addition, the Eligible Categories are likely to contribute to six of the United Nations’ Sustainable
Development Goals (“SDGs”), namely : Goal 3. Good Health and Well-being, Goal 6. Water and Sanitation,
Goal 11. Sustainable Cities and Communities, Goal 13. Climate Action, Goal 14. Life Below Water and Goal
15. Life on Land.
Eligible
Category

UN SDGs identified
The UN SDG 3 consists in ensuring healthy lives and promoting wellbeing for all at all ages.

UN SDGs
targets
3.9

By 2030, substantially reduce the number of deaths and illnesses
from hazardous chemicals and air, water and soil pollution andcontamination
The UN SDG 6 consists in ensuring availability and sustainable
management of water and sanitation for all.

6.3

By 2030, improve water quality by reducing pollution, eliminating
dumping and minimizing release of hazardous chemicals andmaterials, halving the proportion of untreated wastewater andsubstantially increasing recycling and safe reuse globally
The UN SDG 11 consists in making cities and human settlements
inclusive, safe, resilient and sustainable.

Sustainable
water andwastewater
management

11.5

By 2030, significantly reduce the number of deaths and the numberof people affected and substantially decrease the direct economic
losses relative to global gross domestic product caused by disasters,
including water-related disasters, with a focus on protecting the poorand people in vulnerable situations
The UN SDG 13 consists in taking urgent action to combat climatechange and its impacts.

13.1

Strengthen resilience and adaptive capacity to climate-related
hazards and natural disasters in all countries.
The UN SDG 14 consists in conserving and sustainably using theoceans, seas and marine resources for sustainable development.

14.1

By 2025, prevent and significantly reduce marine pollution of all
kinds, in particular from land-based activities, including marine
debris and nutrient pollution
The UN SDG 15 consists in sustainably managing forests, combating
desertification, halting and reversing land degradation, halting
biodiversity loss.

15.1

By 2020, ensure the conservation, restoration and sustainable use ofterrestrial and inland freshwater ecosystems and their services, inparticular forests, wetlands, mountains and drylands, in line withobligations under international agreements

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Process for Projects Evaluation and Selection
The governance and the process for the evaluation and selection of the Eligible Projects are formalized in
the Framework. We consider that the process is reasonably structured, transparent and relevant.
The project funding process is as follows:1.

Local government will consult with either the national government or prefecture as appropriate
and formulate a sewerage business plan, compliant with applicable laws

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 plan3.

Local government will receive consent or approval from the relevant national government orprefecture

4.

Local government will apply to JFM for funding, and are funded the approved amount5.

Evaluation and selection by JFM Green Bond Working GroupThe evaluation and selection of Eligible Green Projects is based on relevant internal expertise, with definedroles and responsibilities. The traceability and verification are ensured throughout the process.
-JFM’s Green Bond Working Group consists of members of the corporate planning department, financedepartment and the loan department including members who have experience in local government
projects related to the environment, and is responsible for ensuring that the allocation of the net
proceeds (or an amount equal 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 thatthe borrower has obtained consent or approval on the borrowing, in accordance with the requirementsof Japanese law.

-

Following the extension of loans by JFM to the Eligible Projects, JFM's Green Bond Working Groupwill conduct 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 fromthe Eligible Projects based on projects run by local governments which return effective responses toa follow-up survey.

The process relies on explicit eligibility criteria (selection and exclusionary), relevant to the claimed
environmental objectives.
--

Selection criteria: the sewerage business is operated in accordance with the Sewerage Law,
Purification Layer Law and Water Pollution Control Law. The law stipulates discharge water
standards, and local governments are required to make regular measurements. (For example, BOD
is 10 mg / L or 15 mg / L or less, phosphorus is 3 mg / L or less, 1 mg / L or less, or 0.5 mg / L orless) In addition, as environmental targets for sewerage projects, targets for up to 2030 are set for
sewage sludge energy conversion rates and greenhouse gas emission reductions based on the
Global Warming Countermeasures Plan (decided by the Cabinet on May 13, 2016), etc.
Exclusionary criteria: Projects without consent or approval from the relevant national government orprefecture.

The identification and management of the material environmental and social risks associated with the
Eligible Category are considered good.


As stated above, to obtain consent or approval on borrowing from the relevant authority, the borrower
must formulate a sewerage business plan in accordance with all the applicable laws (covering socialand environmental aspects).

In addition, the sewerage business has to meet standards for effluent water under the Sewerage Act,
Septic Tank Act and Water Pollution Control Act. If the standards are not met, penal regulations will
be applied.



JFM identifies the main ESG risks of the eligible projects including, but not limited to,
Biodiversity/Pollution prevention and control (for both accidental and chronical contamination), Waste
management (of sludges and by-products), User/neighbours safety, Health and safety for workers
and Integration of E&S in supply chain (for construction and operation).

9These risks are covered by monitoring and correction processes set by related organizations in all thebusinesses to which JFM is allowed to finance. When the borrower takes actions that do not comply
with the law and the above-mentioned processes, JFM can redeem the loan based on the contract
with the borrower. This condition is specified in the special provisions of the borrowed certificate.



Since JFM only provides loans to local governments, etc., there is no risk of an illegal situation
continues to be ignored. However, to take a sewerage project as an example, the process forrequesting reimbursement of loans is as follows.
(i) Mandatory compliance with local governments in related laws and regulations (Basic Law on
Biodiversity, Sewerage Law, Law on Promotion of Global Warming Countermeasures, Labor
Standards Law, etc.)(ii) Administrative guidance by the country or prefecture when it violates compliance obligations, suchas not meeting drainage standards (JFM's loan management department confirms the administrative
guidance)(iii) If the administrative guidance is not followed, or if the business is suspended, JFM's loan
management department reviews the situation. And if JFM determines that it is not suitable for theloan, JFM demands reimbursement based on the provisions to the borrower.



Moreover, JFM regularly conducts borrowers' inspection to see if loans are being used properly though
document checks and on-site visits.

An area of improvement would be to have an external verifier to review the compliance of the selection processwith the Issuer’s commitments.

Management of proceeds
The rules for the management of proceeds are overall defined and will be verified internally. We consider
that they would enable a documented and transparent allocation process.
-Prior to the allocation to loans for Eligible Projects, an amount equal to the net proceeds of theissuance of the Green Bonds will be invested in JFM’s liquidity portfolio in cash and cash equivalents.

-

The Issuer intends to allocate an amount equal to the net proceeds to Eligible Projects before the endof the fiscal year when the Green Bonds are issued.

-

The Issuer has committed that the unallocated proceeds, if any, will be exclusively managed in cash
and cash equivalent.

An area of improvement would be to specify what will be the Issuer process in case of project postponement,cancellation or ineligibility, and if it will replace the no longer Eligible Project.
Traceability and verification of the funds are partially ensured throughout the process.
-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.

-

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 is allocated to
the Eligible Projects.

An area of improvement would be to have an external verifier also review the tracking method and the allocation of
the proceeds.

Monitoring & Reporting
The reporting process and commitments appear to be good, covering both the funds allocation and theenvironmental benefits of the Eligible Projects.
The process for data monitoring, collection, consolidation, validation and reporting is defined in the Framework.
-

As stated above JFM's Green Bond Working Group will conduct a survey in respect of its local
government borrowers in respect of the environmental impact of their sewerage projects and theamounts of the loans made by JFM that have been distributed in respect of such projects.

10-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 theGreen Bonds. The Green Bond Working Group will then report on the Effective Portfolio as set out
below.

The Issuer has committed to report annually until full allocation of the proceeds, and to make publicly accessible its
reports on the Issuer’s official website.

The Issuer has committed to transparently communicate on reporting indicators, at portfolio level:-

Allocation of proceeds: the selected reporting indicators of appear to be relevant
Allocation of proceeds indicators







The amount of net proceeds (or amount equal to the net proceeds) allocated to Eligible Projects in the
Effective Portfolio
A list of projects (Project-by-project reporting on Effective Portfolio)
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 as others)
Refinancing rate (in % of the total amount of proceeds)

An area of improvement would be to report on the temporary placement of the unallocated funds.
-

Environmental benefits: the selected reporting indicators appear to be relevant
Examples of Environmental benefits indicators
Eligible subcategories ofProject

New Construction / Update of
Sewerage Management
Related Facilities

New Construction / Update ofFacility/Equipment

New Construction / Update of
Pipes

Output, Outcome and Impact Indicators

Covered area population (nb. of inhabitants)

Water Management Capacity (wastewater treated to appropriate
standards in m³ per month/year)Water Quality Impact (will confirm the treated water is compliant
with related laws and regulations in Japan)

Other Positive Environmental Impact (If any)Covered area population (nb. of inhabitants)Absolute amount of sludges treated and disposed of (in tonnes ofdry solids per month/year) (if any).



Other Positive Environmental Impact (If any)

Newly constructed pipe length (m) and/or Total Pipe length (m)Covered area population (nb. of inhabitants)

Other Positive Environmental Impact (If any)

JFM also commits to report on case studies of JFM’s lending to sewerage projects and overview of sewerage
projects in Japan.
In case of material developments relating to the Eligible Projects and assets, including in case of ESG controversies
or assets modification, the Issuer has committed to report it to the investors on its webstie website.
An area for improvement is (i) to commit to publicly disclose the key methodologies and assumptions used to
calculate the benefits of Eligible Projects in each annual report and (ii) to an external verification of the data used
to report on the environmental benefits of the bonds.

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METHODOLOGYIn Vigeo Eiris’ view, Environmental, Social and Governance (ESG) factors are intertwined and complementary. As
such they cannot be separated in the assessment of ESG management in any organization, activity or transaction.
In this sense, Vigeo Eiris writes an opinion on the Issuer’s Corporate Social Responsibility as an organization, andon the process and commitments applying to the intented issuance.
Vigeo Eiris’ methodology for the definition and assessment of the corporate’s integration of ESG factors in its
commitments and strategy is based on criteria aligned with public international standards, in compliance with the
ISO 26000 guidelines, and is organized in 6 domains: Environment, Human Resources, Human Rights, Community
Involvement, Business Behaviour and Corporate Governance. Our evaluation framework of the material ESG
issues have been adapted, based on our generic Specific Purpose Banks & Agencies ESG assessment frameworks
and on specific issues considering the Issuer’s business activity.
Our research and rating procedures are subject to internal quality control at three levels (analysts, heads of cluster
sectors, and internal review by the audit department for second party opinions) complemented by a final review andvalidation by the Direction of Methods. Our SPO are also subject to internal quality control at three levels(consultants in charge of the mission, Production Manager, and final review and validation by the Direction of
Sustainable Finance and/or the Direction of Methods. A right of complaint and recourse is guaranteed to allcompanies under our review, following three levels: first, the team linked to the company, then the Direction of
Methods, and finally Vigeo Eiris’ Scientific Council.
All employees are signatories of Vigeo Eiris’ Code of Ethics, and all the consultants have also signed its add-on
covering financial rules of confidentiality.
Part I. ISSUER
NB: The Issuer’s level of integration of ESG factors in its commitments and strategy has been assessed through acomplete process of rating and benchmark developed by Vigeo Eiris.
Level of the Issuer’s integration of ESG factors in its commitments and strategy
JFM’s ESG strategy has been assessed by Vigeo Eiris on the basis of its:
- Leadership: relevance of the commitments (content, visibility and ownership).
Management of stakeholder-related ESG controversies
A controversy is an information, a flow of information, or a contradictory opinion that is public, documented andtraceable, allegation against an Issuer on corporate responsibility issues. Such allegations can relate to tangible
facts, be an interpretation of these facts, or constitute an allegation on unproven facts.
Vigeo Eiris reviewed information provided by the Issuer, press content providers and stakeholders (partnership with
Factiva Dow Jones: access to the content of 28,500 publications worldwide from reference financial newspapers tosector-focused magazines, local publications or Non-Government Organizations). Information gathered from thesesources is considered as long as they are public, documented and traceable.
Vigeo Eiris provides an opinion on companies’ controversies risks mitigation based on the analysis of 3 factors:
Frequency: reflects for each ESG challenge the number of controversies faced. At corporate level, thisfactor reflects on the overall number of controversies faced and scope of ESG issues impacted (scale:
Isolated, Occasional, Frequent, Persistent).
Severity: the more a controversy will relate to stakeholders’ fundamental interests, will prove actual
corporate responsibility in its occurrence, and will have adverse impacts for stakeholders and the company,
the highest its severity. Severity assigned at corporate level will reflect the highest severity of all cases
faced by the company (scale: Minor, Significant, High, Critical).
Responsiveness: ability demonstrated by an Issuer to dialogue with its stakeholders in a risk management
perspective and based on explanatory, preventative, remediating or corrective measures. At corporate
level, this factor will reflect the overall responsiveness of the company for all cases faced (scale: Proactive,
Remediate, Reactive, Non- Communicative).
The impact of a controversy on a company's reputation reduces with time, depending on the severity of the eventand the company's responsiveness to this event. Conventionally, Vigeo Eiris' controversy database covers any
controversy with Minor or Significant severity during 24 months after the last event registered and during 48 monthsfor High and Critical controversies.

12Involvement in controversial activities
15 controversial activities have been analysed following 30 parameters to verify if the company is involved in anyof them. The company's level of involvement (Major, Minor, No) in a controversial activity is based on:
An estimation of the revenues derived from controversial products or services.
The precise nature of the controversial products or services provided by the company.
Part II. ISSUANCE
The Framework has been evaluated by Vigeo Eiris according to the GBP 2018 and on our methodology based oninternational standards and sector guidelines applying in terms of ESG management and assessment.
Use of proceeds
The definition of the Eligible Projects and of their sustainable objectives and benefits are a core element ofGreen/Social/Sustainable Bonds or Bonds standards. Vigeo Eiris evaluates the definition of the Eligible Categories,
as well as the definition and the relevance of the aimed sustainability objectives. We evaluate the definition of the
expected benefits in terms of assessment and quantification. In addition, we evaluate the potential contribution of
Eligible Projects to the United Nations Sustainable Development Goals’ targets.
Process for evaluation and selection
The evaluation and selection process has been assessed by Vigeo Eiris regarding its transparency, governanceand relevance. The eligibility criteria have been assessed regarding their explicitness and relevance vs. the intended
objectives of the Eligible Projects. The identification and management of the ESG risks associated with the Eligible
Projects are analysed based on material issues considered in Vigeo Eiris’ ESG assessment methodology based oninternational standards and sector guidelines applying in terms of ESG management and assessment.
Management of proceeds
The rules for the management of proceeds and the allocation process are evaluated by Vigeo Eiris regarding theirtransparency, coherence and efficiency.
ReportingMonitoring process and commitments, Reporting commitments, reporting indicators and methodologies are definedby the Issuer to enable a transparent reporting on the proceeds allocation and tracking, on the sustainable benefits(output and impact indicators) and on the responsible management of the Eligible Projects financed by the issuance.
Vigeo Eiris has evaluated the reporting framework regarding its transparency, exhaustiveness and relevance.
VIGEO EIRIS’ ASSESSMENT SCALES
Performance evaluation

Level of assurance

Advanced

Advanced commitment; strong evidence ofcommand over the issues dedicated to achieving
the objective of social responsibility. Reasonablelevel of risk management and using innovative
methods to anticipate emerging risks.

Reasonable

Able to convincingly conform to theprescribed principles and objectivesof the evaluation framework

Good

Convincing
commitment;
significant
andconsistent evidence of command over the issues.
Reasonable level of risk management.

Moderate

Compatibility or partial convergencewith the prescribed principles andobjectivesoftheevaluation
framework

LimitedCommitment to the objective of social
responsibility has been initiated or partiallyachieved; fragmentary evidence of commandover the issues. Limited to weak level of risk
management.

Weak

Lack or unawareness of, orincompatibility with the prescribedprinciples and objectives of theevaluation framework

Weak

Commitment to social responsibility is nontangible; no evidence of command over theissues. Level of insurance of risk management isweak to very weak.

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Vigeo Eiris is an independent international provider of environmental, social and governance (ESG)
research and services for investors and public & private organizations. We undertake risk assessments
and evaluate the level of integration of sustainability factors within the strategy and operations oforganizations.
Vigeo Eiris offers a wide range of services: For investors: decision making support covering all sustainable and ethical investment
approaches (including ratings, databases, sector analyses, portfolio analyses, structured
products, indices and more).
 For companies & organizations: supporting the integration of ESG criteria into business
functions and strategic operations (including sustainable bonds, corporate ratings, CSR
evaluations and more).
Vigeo Eiris is committed to delivering The Issuer products and services with high added value: a resultof research and analysis that adheres to the strictest quality standards. Our methodology is reviewed byan independent scientific council and all our production processes, from information collection toservice delivery, are documented and audited. Vigeo Eiris has chosen to certify all its processes to thelatest ISO 9001 standard. Vigeo Eiris is an approved verifier for CBI (Climate Bond Initiative). Vigeo
Eiris’ research is referenced in several international scientific publications.
With a team of more than 240 experts of 28 different nationalities, Vigeo Eiris is present in Paris,
London, Brussels, Milan, Montreal, Hong Kong, Casablanca, Rabat, Santiago.
The Vigeo Eiris Global Network, comprising 4 exclusive research partners, is present in Brazil, Germany,
Israel and Japan.
For more information: www.vigeo-eiris.com

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