July 15, 2020
Directorate-General for Financial Stability,
Financial Services and Capital Markets Union
European Commission
1049 Brussel, Belgium
Japanese Bankers Association

JBA Comments on "Consultation on the Renewed Sustainable Finance Strategy” by
the European Commission (EC)Dear Directorate-General for Financial Stability, Financial Services and Capital Markets Union:
We, the Japanese Bankers Association1 (JBA), appreciate the opportunity to provide comments on the Consultative
Document "Consultation on the Renewed Sustainable Finance Strategy" released by the European Commission (EC)on April 8, 2020.
We hope that our comments will contribute to further discussions at the EC.

[General Comments]
The EU has been taking the lead of the discussions in the sustainable finance area, by launching the sustainablefinance strategy in 2018 and the follow up actions. Based on the strategy, many innovative initiatives, such as theEuropean Green Deal in December 2019 and the EU Taxonomy Regulation in June 2020, were put in place. These
initiatives truly established the baseline of the EU regulatory framework of sustainable finance and we assume moredetailed measures/requirements and regulatory frameworks will be proposed based on the Renewed Sustainable
Finance Strategy (hereafter “the Strategy”).
Although we understand the Strategy is principally applied to financial institutions established in the EU, weappreciate the Strategy is important and relevant to Japanese banking groups with a footprint in the EU jurisdictions.
We assume it will affect Japanese banks’ global business strategies and operations in the longer term. We, thus,
respectfully request that this letter and the specific comments separately submitted on the consultation paper be given
careful thought for the purpose of fruitful discussion as the strategy may directly and indirectly affect the Japanesebanking industry.
Our top priority is to seek clarification about how the policies and regulatory frameworks developed under theStrategy would be applied to Japanese banking groups. In this regard, we consider the following three points are
particularly important and encourage international dialogue. We would be delighted to be actively involved in thediscussions and contribute to the future deliberations on the scope of activities covered by the EU Taxonomy.
-

From a non-EU bank’s perspective, it should be clarified whether our business operations on a global basis
would be in scope of the possible regulatory requirements deriving from the Strategy. We believe the scopeshould be limited to the entities established within the EU, but the scope of application should be clarified, sothat non-EU stakeholders can appropriately provide input to the future consultations.
It is extremely important for EU policy makers to consider that if and when our home regulator (or other major
host regulators in other jurisdictions where we operate) sets forth supervisory expectations/requirements indealing with climate change, Japanese banks would be required to comply with those expectations/requirements.
However, if there are differences and/or inconsistencies between such expectations/requirements and theregulatory requirements deriving from the Strategy, the compliance exercise would unavoidably be inefficientand possibly ineffective to comply with multiple requirements. To avoid such inefficiencies and additional
fragmentation in requirements, we encourage the EU policy makers to incorporate the framework of

1

The Japanese Bankers Association is the leading trade association for banks, bank holding companies and bankers associations in Japan. As of July
15, 2020, JBA has 117 Full Members (banks), 3 Bank Holding Company Members (bank holding companies), 73 Associate Members (banks & bankholding company), 58 Special Members (regionally-based bankers associations) and one Sub-Associate Member for a total of 252 members. Several of
its largest member banks are active participants in the EU financial markets.

1equivalency/deference and substituted compliance with respect to the third country regulatory requirements.
-

To secure the consistency of the regulatory framework globally and avoid such fragmentation, the consistency
with other existing and future international regulatory frameworks, such as Basel requirements, should beensured. Further, we request the EC to coordinate with other regulators, not only within the EU, but in othermajor jurisdictions.

-Finally, we agree that it is important to clearly define and expand “green activities” to promote a sustainableeconomy from a medium- to long-term perspective. Yet, we are of the view that the scope of the EU Taxonomy
is extremely narrow and believe it may reduce the sustainable financing activities due to the short list nature of
the Taxonomy. We strongly suggest the inclusion of the concept of transition/innovation which helps economic
activities be more “green”, avoiding the unintended effect of the EU Taxonomy.

[Specific comments]
Please refer to each answer/comment to questions in the designated answer format.
(End)

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July 15, 2020[Specific Comments to each question]
Items

Q

ChoicesComments

General questions

4

No*At the present stage, it is important to firstly promote the voluntary initiative such as TCFD.

General questions

6-

Three main challenges;*Consistency with globally coordinated policies to address global challenges*Policies that provide appropriate incentives*Stocktaking of best practices of forward-looking risk scenario analysis and enhancement of thecomparability given available historical data is limited
Three main opportunities;*Financing activities aimed at mitigating physical and transitional risks based on the TCFD
approach*Provision of hedging instruments against identified risks*Support for new technologies and innovation

General questions

8-*Avoiding abrupt policy changes and encouraging medium- and long-term corporate self-help
efforts by improving predictability.
*Policy support, such as through just transition, to balance with promoting economic growth
and reducing transition risk
*Capacity rebuilding of workers based on changes in industrial structure

General questions

95*It should be clearly explained if the definition of the classification of those assets can bejustified and where there is a risk difference between those assets on what time frame suchrisk is considered to arise, because NGFS has not concluded that there is a risk difference
between green and brown assets.
*In order to avoid economic turmoil caused by short-term policy changes, it is important tocreate a framework that enhances the predictability of medium- and long-term policies and1

ItemsQ

ChoicesComments
encourages companies to make self-help efforts, taking into account the scenario analysis
performed by private sectors.

General questions

10

No

-

ESG ratings and data

17

4*The methodologies and quality of ESG ratings have not yet been fully established, and there
are significant differences in the methodologies used by rating agencies. It is hoped that morecredit rating agencies will enter the market and compete, thus improving the quality ofratings and promoting healthy competition.

ESG ratings and data

19

3

*From the perspective of issuers subject to ESG ratings and researches, their valuation
methodologies are not adequately disclosed. It is difficult to analyze the factors and comparethem with other companies in the same industry. In the case of private-sector ESG research,while there is an opportunity to review the report before it is published, we request to improve
the transparency of research methods.

ESG ratings and data

21

Yes

*ESG ratings and research conducted in the private sector are still in their infancy, and nocorrelation between them or correlation with issuers’ performance has been demonstrated.
Under these circumstances, excessive involvement of the EU public sector should in principle
be kept to a minimum.
*However, there is a concern that the methodologies of ESG ratings differ among rating
agencies and the market participants focus only ESG ratings (score). There may be room for
improvement not only in giving some alerts to credit rating agencies, but also in promoting
disclosure of methodology/information as a background of scores.

Definitions, standards

24

Yes

*It is assumed that non-EU issuers may be requested by EU investors to comply with the EU

and labels for

GBS rules if Euro-denominated bonds or other securities are distributed to EU investors.

sustainable financial

However, the EU Taxonomy is strictly defined and there is a concern that the assets covered

assets and financial

will be extremely limited and the market size will not expand. We understand that the

products

current green bond market represents only a few percent of the general bond market, but EU2

ItemsQ

ChoicesComments
GBS is a more limited definition. In order to mainstream sustainable finance, it will be
desirable to establish an EU GBS with a broader definition.

Green securitisation

54

4*We believe that the expansion of green securitization will increase the amount of green loans
and other loans extended by financial institutions and expand the range of entities that canraise funds through sustainable finance. Currently only some large companies can issue suchbonds because, as a barrier to issue green bonds and social bonds, the amount of eligible
assets is often less than sufficient for debenture issue.
*On the other hand, a significant amount of underlying asset in the market and a complianceframework to deal with investor risk should be the prerequisites for the expansion of green
securitization.

Green securitisation

55

Yes

*Green securitization is not yet widespread due to the lack of guidelines for risk analysis andassessment of green assets and frameworks for risk guarantees. For example, with auto
securitization, as it is currently difficult to measure residual value risk in electric vehicles, itis therefore difficult for banks and investors to create products similar to securitized products
backed by conventional internal combustion locomotives.
*Within the framework of green securitization, guidance and specific measures on a framework
for analyzing and guaranteeing residual value risk for green assets such as electric vehicles
would also facilitate "Green securitization and collaboration between banks and investors,"
which is referred on page 22 of the Consultation.

Green securitisation

56

Yes

*In order to avoid failing to confirm the eligibility of individual assets and resulting ingreenwash with the expansion of green securitization, we believe that it is necessary toestablish principles and standards for eligible assets for green securitization, such asmortgages limited to buildings that have obtained environmental certification.
*However, the following points should be taken into consideration:- The concept of green securitization is understood to be aimed at promoting green finance by3

ItemsQ

ChoicesComments
allowing favorable treatment in prudential regulation, for example, reducing risk weight of
securitization products meeting certain green requirements under bank’s capitalrequirements.
The NGFS report "A Status Report on Financial Institutions’ Experiences from working
with green, non-green and brown financial assets and a potential risk differential"
published in May 2020 states that no conclusions can be drawn on the risk differential
between green and brown assets.
If it is statistically confirmed that the relevant securitized products are relatively low-riskin the long term, it is reasonable to grant such preferential treatment. However, if it is not,there is a risk that the purpose of the regulation will be undermined and unintended
market distortions will be created.
- In addition, if EU banks with global operations operate in other jurisdictions, they mustmeet the Basel international regulatory framework. Therefore, the preferential treatment
for green securitizations need to be established in a manner consistent with the Basel STC
requirements. If more favorable treatment than Basel requirements were allowed for EU
banks with global operations, it should be demonstrated that the extent and impact of suchtreatment would not be contrary to the purpose of the Basel international regulatory
framework.

Incentives to scale up

67 -1

4

67 -2

-

-

sustainable
investments
Incentives to scale up
sustainable

Types of incentives

Bonds

Loans

EquityOther

Revenue - Neutral Subsidiaries for issuers

n.a.

4

n.a.

n.a.

investments

4

ItemsQ

ChoicesComments
De-raising mechanisms such as guarantees

n.a.

4

n.a.

n.a.

Technical Assistance

n.a.

n.a.

n.a.

n.a.

Any other public sector incentives - Please

n.a.

n.a.

4

n.a.

and closed financing instruments at EU levelspecify in the box below.
Incentives to scale up

67 -3

-

tax incentives*In cases where there is little difference in risk/return between asset classes, the following threesustainabletypes of public support seem to be effective as incentives for the desired asset classes: (1) tax

investments

incentives, (2) interest subsidies, and (3) capital relief in holding assets. (1) and (2) are
categorized as Revenue-neutral subsidies for issuers, (3) is categorized as the de-risking
mechanism.
*As for de-risking mechanism, public guarantees and co-financing with public institutions are
effective in cases where private financial institutions alone cannot finance loans (Forexample, projects in countries with high country risk). With regards to technical assistance,
when the risk is relatively high such as in the case of new technology which cannot be coveredby the amount of return, public subsidies and aid are effective.
*Degree of risk appetite is as follows; public subsidy/aid > equity > bond ≧loans.

The use of sustainable

73

Yes

-

76

2

*As the number of companies adopting the TCFD and other disclosure frameworks forfinance tools andframeworks by publicauthorities
Promoting sustainablefinance globally

addressing climate change is increasing, it is important to expand these voluntary efforts
under international cooperation in the future.
*In addition, the development of a framework through international cooperation on sustainablefinance initiatives, including the coordination among authorities through NGFS, is significant
5

ItemsQ

ChoicesComments
to expand the scale of sustainable finance and market participants. In order to build aframework for the expansion of sustainable finance that encourages each country to address
its goal in a feasible manner, we request that experts from Japan should be allowed to join the
EU project and their views are reflected in the rule making in the EU.

Global coordination

77-*The situation of private sector depends on the nature of their business and the businessenvironment. Specifically, the following measures should be taken while the situation andimpact of each company and country should be considered in policies and regulations:- Clarify the long-term direction of EC’s policy to improve the predictability of private
enterprises- Collect and share information on best practices of leading companies- Comprehensively consider policies involving non-EU regions to address global issues in aninternationally coordinated manner

Promoting sustainable79-

finance globally*We welcome the following public support measures in the promotion of sustainablecross-border finance:- Strengthen financial support, including the ability to supply local currencies through foreignexchange hedging and interest rate hedging, and country risk insurance for private
financial institutions.
- Political support and advice through government-to-government channels to accelerate theintroduction of renewable energy in emerging countries (Example: CfD, FIT deployment,
etc.)

Promoting sustainablefinance globally

80

These tools need

*As the scope of the EU Taxonomy is too restricted, mobilizing funds to this extent alone may

to be adapted to

fail to reduce CO2 emissions and may rather interfere the feasibility of the Paris Agreement

local

contribution goal for each country.

specifications inemerging*It is desirable for companies and financial institutions to promote the use of a flexible andincreasingly widespread disclosure framework such as TCFD as the basis for promoting green
6

ItemsQ

ChoicesComments

markets and/or

finance in each country, and draw up their own taxonomies under international cooperation

developing

based on the experience gained from such use. However, since it is not feasible at thiseconomies.

moment, it should be allowed for market participants to use the review by an externalorganization with sufficient expertise and to make decisions by themselves.
*Guidelines for matters requiring information disclosure are useful for assessing theenvironmental impact of undertakings and projects in other regions as well as EU, and thebenefits of a uniform set of guidelines are commensurate.

Promoting sustainable81

No

finance globally*Energy diversity and energy resilience, which are essential for the economic activities inemerging countries, are not taken into account in the EU Taxonomy. Therefore, we consider it
appropriate that each country adapts its own taxonomy with flexibility to fit for eachcountry's economic development stage.

Identifying exposuresto harmful activities

82

Yes
Other

*As some common standard is necessary in promoting sustainable finance, we support the
progress of taxonomy itself.

and assets and*However, we believe that the priority at this stage is the promotion of the transition to green,

disincentivisingand the establishment of brown taxonomy should be carefully considered from following

environmentally-harmf

perspectives:

ul investments- Views and approaches to sustainability vary from country to country. As consideration for astable supply of energy is also an important issue that cannot be ignored by each country, it
is desirable to avoid a uniform approach. Even in activities that are supposed to beclassified as brown, their contribution to the transition to a decarbonized society throughinnovation and the value chain is fully conceivable.
- In addition, an excessive credit crunch in certain sectors/businesses classified as brown or an
excessive concentration of credit in certain sectors/businesses classified as non-brown could
constitute a risk to financial stability in the short term.
- On the other hand, even if brown taxonomy is to be developed, we believe that adequate and7

ItemsQ

ChoicesComments
appropriate consideration should be given particularly when using it as a prudential
regulation tool. The NGFS report "Status Report On financial institutions’ experiences fromworking with green, non-green and brown financial assets and a potential risk differential"
published in May 2020 states that no conclusions can be drawn on the risk differential
between green and brown assets. The prudential rules should not be adjusted for purposes
other than to ensure the soundness of the banking system and brown taxonomy should not
be used to be incorporated into prudential rules without objective and substantiatedevidence that brown exposures are at higher risk than green exposures.

Identifying exposures

83

No

-

84

Transition Risks*Acute risks of physical risks usually do not necessarily lead to immediate losses for banks

to harmful activities
and assets anddisincentivising
environmentally-harmf
ul investments
Financial stability risk

because some of them are generally covered by insurance or the company in its strategy.
However, transition risks and chronic risks of physical risks are subject to gradual changes,
making it difficult to recognize such risks and to take immediate action through relations
with stakeholders, which may result in losses for financial institutions.
*For example, examining longer-maturity projects, such as project finance in sectors affected bypolicies, requires accurate estimate and projections of long-term transition risks, which are
difficult to analyze at this stage. Therefore, it may become difficult for financial institutions totake long-term risks, and as a result, transition risks may become apparent at a relatively
early stage, leading to funding difficulties and credit uncertainty.
Financial stability risk

85-

*Unique policy framework to enhance predictability for financial institutions’ actions, enhanced
8

ItemsQ

ChoicesComments
Due Diligence, risk awareness and scenario analysis based on TCFD
*Reflection on business strategy*Sharing best practices by UNEP-FI, NGFS, etc.

Financial stability risk

86

2

*Given that acute physical risks of climate change risks impact bank customers, it is important
to implement policies that promote businesses’ preparedness in their strategies and risk
management, including insurance, BCPs, backup facilities, and supply chain diversification.
The risk in this case first directly affects their equity valuation, and it is assumed that therisk to bank loans is indirect.
*Chronic physical risks or transition risks are expected to shift gradually and steadily over acertain period of time, and if they are expected to be large, preparations for riskmaterialization may be necessary. At present, however, the NGFS report "Status Report On
financial institutions’ experiences from working with green, non-green and brown financial
assets and a potential risk differential" published in May 2020 states that it cannot conclude
on the risk gap between green and non-green, brown assets. Therefore, discussions on capitalrequirement should not be hasty without data support.
*While historical data are currently scarce to measure future risk, it should be discussed at astage where practices such as scenario analysis will be accumulated and the extent ofsystemic risk for banks can be measured in the future.

Financial stability risk

88

Yes

*However, the following points should be taken into consideration:- ESG risk analysis initiatives are not yet mature in the market and there are cases with nocorrelation between the indicators. Consideration of hasty incorporation into prudential
regulation (Risk Weighted Capital Requirements, etc.) before completion of these empiricalanalyses should be carefully considered, as it may create unintended distortions ineconomic activities and accumulate risks in the financial system.
- If EU banks with global operations act in other jurisdictions, it needs to meet the Basel
9

ItemsQ

ChoicesComments
internationally regulatory framework as minimum global standard. In addition, if thetreatment beyond such Basel framework is allowed, it should be demonstrated that theextent and impact of this would not be contrary to the concept of the Basel international
regulatory framework.
- There is currently no global consensus on the impact of climate change risks. We believe thatthe first step should be to establish international consensus on the impact of future climatechange risks through thorough quantitative analysis, and then to consider what measures
are necessary to mitigate such impacts from the perspective of prudential regulations.

Financial stability risk

89

Yes

*While regulatory capital relief for green assets should be based on clear evidence, we canspecify TCFD, project pipeline (Q 60) and taxonomy penetration to prevent greenwashing.

Improving resilience toadverse climate andenvironmental impacts

99

Yes

(Loss Data)*To identify industries affected by changes in social structure and to improve the accuracy of
forecasting future risk amount when estimating transition risk
(Physical Risk Data)*To improve the accuracy of physical risk calculations*For all data specified above, however, it is necessary to clarify the definition of the scope of datacollection (i.e. What do you define as climate change related losses and disasters?).
*In addition, in order to draw a statistically reliable conclusion from the relevant data, it isnecessary to carry out observation over a sufficiently long period of time, for example, datapreparation for geographical disaster maps, etc., utilizing insurance company’s expertise.

End

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