SECTOR BRIEFINGDeveloped for the Green Bond Issuance Promotion Platform – Japan

Chinese banks are active in the waste sectorA total of six Chinese banks have issued green bonds to financemostly waste management assets and projects. The first one camefrom Industrial Bank in January 2016: the USD401m equivalentABS deal comprised an asset pool of 42 green loans from 29borrowers selected against strict criteria from the Bank’s overallloan portfolio and covering areas such as pollution control andmaterials recycling. Huishang Bank adopted a similar approach forits USD154m equivalent bond from September 2017. Two out ofthe six eligible project categories related directly to wastemanagement (pollution prevention and resource conservation &recycling) and received half of the total green bond proceeds.

Local and national governments fund wastemanagement projects through green bondsLocal governments play a key role in financing basic infrastructure.
Funding waste management via green bonds is therefore a naturalfit. Indeed, local governments have so far allocated approximatelyUSD1.1bn to waste management assets and projects,corresponding to 2% of their total green bond issuance volume.
Most of this has come from municipal issuers across the US.
The California Pollution Control Financing Authority has issued fourgreen bonds with a total volume of USD419m. The inaugural dealfrom June 2017 financed a rice straw recycling facility with severalbenefits related to preventing pollution – both by abating theemissions of potent GHGs such as methane, as well as avoidingvolatile organic compound (VOC) emissions. The agriculturalwaste rice straw is treated and then reused for making non-toxicmedium-density fibreboard (MDF), a material commonly used infurniture and building components.
The City and County of Honolulu issued a USD20m green bond inSeptember 2017 and USD190m a year later to refinance theexpansion of the H-Power waste-to-energy facility. The plantconverts some 2,000 tonnes of waste into electricity daily,powering 60,000 homes on the island of Oahu. The expansionadded a third boiler and enabled the plant to begin processingsewage sludge and associated bulky waste. Overall, the facilityallows the city to divert nearly 90% of non-recycled waste fromlandfill and makes it one of the highest-ranking in the country.
The Pennsylvania Economic Development Financing Authorityissued a USD50m green bond in August 2019 to lend fundsonward to a waste-to-energy company called Covanta operatingacross several counties in the Authority’s jurisdiction. Theproceeds were allocated to improving the recycling of non-ferrousmetals as well as on a processing system that allows for thebeneficial re-use of ash from the waste-to-energy operations. Thesystem will allow the company to recover both small metalfractions as well as aggregate for construction material, therebyreducing the amount of ash going to landfill by an estimated 65%.
New Jersey state’s Union County Improvement Authority tappedinto the green bond market to finance a sludge and solid wasteprocessing plant. Its October 2019, USD50m green muni bondfunded a facility that uses a specific gasification technology toprocess sludge waste and convert it into thermal energy alongwith biochar – a charcoal-like substance that can be used tosequester carbon. The facility is estimated to be able to convertabout 430 tonnes of wet sludge into 19 tonnes of useable biocharevery day and is expected to be fully operational by Q1 2021.

The labelled loans marketIn addition to bond issuance, waste management projects have alsobeen financed through the labelled loans market. There has beenample activity, particularly in the broader European market andthe Nordic region more specifically. Examples of borrowers rangefrom local governments to food retailers, steel producers and realestate companies. On the lender side, regionally specialiseddevelopment banks have taken a leading role in providing capitalfor county, city and municipality-level infrastructure projects; onthe corporate side, commercial banks often represent the keysources of funding.

Green and KPI-linked loans for wastemanagement and resource efficiencyGreen and sustainability loans are issued by financialinstitutions to fund green projects and assets, often in line witha recognised set of principles such as the Loan MarketAssociation’s (LMA) Green Loan Principles. An emerging trendin the labelled loan space is the KPI-linked model, where themargin is tied to the borrower meeting a set of sustainabilityrelated Key Performance Indicators (KPIs) within a settimeframe. The LMA has published the Sustainability LinkedLoan Principles as guidance to lenders and borrowers.
Lenders include, for example, Japanese Mizuho Bank. The Bankwas part of a syndicate issuing a SGD65.4bn (USD47bn) greenloan in May 2016 to a special purpose company contracted bythe Singaporean National Environment Agency to construct alarge-scale waste-to-energy plant. The SPC is a joint venture ofSingapore’s Hyflux Group and Japan’s Mitsubishi HeavyIndustries. The plant will be able to process up to 3,600 tons ofwaste per day, generating 120 megawatts (MW) of electricity.
Denmark’s Danske Bank issued a green loan to Finnish wastemanagement firm Kuusakoski Recycling in June 2019. Thefunding will enable the expansion and improvement of thefirm’s recycling operations in the Heinola Plant in southernFinland. The investment is estimated to increase the amount ofmetals recycled by approximately 2,000 tonnes per year.
On the borrower side, European waste managementcompanies have actively utilised the green loan structure.
Tradebe (Spain) was the first to seek a green syndicated termloan in June 2017 to finance general corporate purposes as apureplay company. Spanish bank BBVA headed the syndicate.
In the KPI-linked loan space, Renewi, also a green bond issuer,made headlines when it converted its EUR550m banking facilityinto a syndicated “sustainability improvement loan” in May2018 – said to have been the first of its kind for a UK company.
Italian multi-utility company Hera agreed on a syndicatedEUR200m ESG-linked revolving credit facility in May 2018. Thefacility included a price adjustment mechanism contingent onthree KPIs: reduced CO2 emission intensity, increased wasterecycling rates, and lower energy consumption.
French waste utility Séché Environnement sought greenfinancing through a EUR150m revolving credit facility and aEUR50m term loan in July 2018. Both incorporatedenvironmental, social and governance (ESG) objectives as arequirement for more favourable financing terms.

Financing waste management and resource efficiency in the green bond market Climate Bonds Initiative, March 2020

3SECTOR BRIEFINGDeveloped for the Green Bond Issuance Promotion Platform – Japanalso created the Sharing Economy Trust Mark: an indicator aimedat evoking consumer confidence, a lack of which has been quotedas a barrier to more widespread adoption of the SE applications inthe country.21,22 As this segment of the Japanese economyexpands – as is expected along with its upcoming integration tothe country’s GDP calculations – green and other labelled bondsand loans can support the growth of SE companies.23

Green and sustainable bondsIn addition to the Japanese examples of Daiken Corporation andKaneka Corporation, there are ample examples globally of firmsembracing CE and green bonds. For example, Italian and Dutchbanks Intesa Sanpaolo and ING, Norwegian seafood producerMowi, Dutch electronics conglomerate Philips and US-based glasspackaging manufacturer Owens-Illinois have all issued green /sustainability bonds to finance CE activities in their own industriesor, in the cases of the banks, across multiple ones. Typicalexamples of assets and projects include CE adapted productsaiming to integrate recovered and/or reused resources; researchand development work into new materials that sometimes rely onwastes or otherwise more sustainable feedstock alternatives; aswell as service and sharing based new business lines.

Other investment productsThe wider financial services industry is also taking note of the CEtrend. Over the last few years a number of index providers havelaunched specialist products: for example, ECPI launched a CEequity index, Solactive established a sharing economy focusedindex and MSCI introduced a CE and renewable energyindex.24,25,26 On the investment management side, US-basedBlackRock and Swiss peer RobecoSAM recently launcheddedicated CE equity funds.27,28 The asset management arm ofFrench bank BNP Paribas created an exchange-traded fund (ETF)that tracks the ECPI Circular Economy Leaders Index.29

Green investment barriers and enablersAlthough there is clear investor demand for green products,including those specific to waste management, a lack of supplypersists. Based on Climate Bonds research, the key barriers relateto a lack of common standards around what constitutes green(definitions) and the issuance process itself, including frameworkdesign; external reviews; and ongoing transparency anddisclosure. Standardising definitions and the process itself couldhelp issuers to more easily identify a sufficiently large pipeline ofgreen assets – including for waste management as well asresource efficiency and circular economy more broadly – whilstavoiding greenwashing and boosting investor confidence. A morestreamlined approach would also likely bring down the transactioncosts of issuing green debt especially for debut issuers – anotherperceived barrier highlighted by several market participants.30The role of policymakers and regulators is crucial in addressing theobstacles to scaling up the green bond market. A well-knownexample of a specific policy initiative expected to acceleratemarket growth comes from the European Commission. In 2016,the Commission set up a High-Level Expert Group on SustainableFinance. The HLEG published a Sustainable Finance Action Plan,which recommended the adoption of a common classificationsystem for sustainable economic activities. A Technical ExpertGroup (TEG) tasked with proposing technical performance criteria

was set up in 2018, and published a draft EU Taxonomy onSustainable Finance in June 2019, and a final version in March2020.31 The proposed Taxonomy sets out a framework forassessing the contribution of an economic activity to climatechange mitigation and adaptation. Additionally, it requires thateconomic activities “Do No Significant Harm (DNSH)” to thefollowing areas:•Sustainable Use and Protection of Water and Marine Resources•Transition to a Circular Economy, Waste Prevention andRecycling•Pollution Prevention and Control•Protection of Healthy EcosystemsInitiatives specific to circular economy financing have beenpioneered by, for example, the FinanCE Working Group set up by aconsortium of European banks, investment funds and academia in2014. The Group published an in-depth study of the role of capitalin achieving a circular economy in March 2016.32 Furthermore, asubset of the Group led by Dutch banks ABN AMRO, ING andRabobank released the Circular Economy Finance Guidelines in July2019. The document provides guidance for financiers ondefinitions, as well as outlining the requirements for CEcompanies and projects to access equity and credit markets,including through green bond issuance.
Other European entities have been active in this space as well: forexample, the European Investment Bank (EIB) supports both thepublic and private sectors in CE activities. They engage in risksharing in financing CE projects, define funding gaps throughmarket studies, and structure and implement investmentplatforms applicable to CE-focused companies and projects.
The European Commission’s activities in the CE arena have beenfocused on research and information provision. For example, theEC published a paper titled “Accelerating the Transition to theCircular Economy”, which investigated the barriers of access tofinance for CE projects and companies. It found issues similar tothose that apply to the wider green finance universe, namely thelack of proper standards, definitions and classifications(taxonomy) for circular economy green bonds and otherinvestment. However, as noted in the paper, the EU TEG and theSustainable Finance Taxonomy offer a potential avenue forimplementation: the TEG could “develop a definition of whatconstitutes circular economy activities that could be financedthrough bond issuances”.33 The definitions could then beintegrated into the EU Green Bond Standard, and the model couldbe replicated and adapted to other regions across the world.
Other examples of widely applicable green bond policy instrumentsinclude incentives for making green bond issuance cheaper. Forinstance, governments could introduce tax deductions (seeMalaysian example below) or grants to cover issuance expenses,such as obtaining an external review. Further, especially forincreasing waste management allocations, the importance ofgovernment issuance at various levels cannot be understated.
Demonstration issuances across the world can help to growexisting markets and catalyse new ones. Paired with clearerdefinitions, they can also help to facilitate additional capitalallocations to the sectors (waste management) and themes (CE)with the largest investment gaps.

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SECTOR BRIEFINGDeveloped for the Green Bond Issuance Promotion Platform – Japan

Examples of green bond incentivesHong Kong’s Green Bond Grant Scheme provides up to HKD800k subsidy to offset the cost of obtaining a Green Finance CertificationScheme (GFCS) established by the Hong Kong Quality Assurance Agency. Additionally, the Hong Kong Monetary Authority announced athree-year Pilot Bond Grant Scheme in May 2018, which provides grants of up to half of the issuance expenses of each green bond (up toHKD2.5m) for qualifying issuers.
Japan’s Financial Support Programme for Green Bond Issuance offers subsidies of up to JPY40m (USD0.36m) to cover the expenses inrespect of external services such as granting external reviews and consultation to issue Green Bond in compliance with the Green BondGuidelines, which are consistent with international standards and definitions, such as the Green Bond Principles.
Malaysia offers SRI Sukuk tax deduction on issuance costs until 2020. While not related just to green bonds, it also offers tax incentivesfor green technology activities across several key industries, including waste management as well as energy, buildings andtransportation. It also offers financing incentives under the Green Technology Financing Scheme (GTFS).
Singapore’s Green Bond Grant Scheme assists eligible issuers with 100% of the costs of an external review up to SGD100k (USD73k).

Conclusions and outlookRecent years have seen increasing movement towards thediversification of both the issuer base as well as the industrysector mix of projects and assets financed with green bonds.
Although investments into waste management remain small, thebroader emerging trends of resource efficiency and circularity arelikely to facilitate growth.
The green finance universe is characterised by innovation,evidenced by some of the new circular economy and resourcemanagement focused products, such as funds and indices, thathave already emerged. Once these become better defined andmore mature, corporates relying on traditional debt financing arelikely to take note. This trend is already visible in companies acrossseveral industry sectors ranging from chemicals manufacturing tobanking quoting “circular economy” in their green bondframeworks and applying the concept to their products, servicesand operations.

Japan is already at the forefront of advancing the circular economyagenda, including a focus on minimising and managing differenttypes of waste. The country is well placed to benefit fromleveraging its leadership to scale up activity and financing in thisarea. However, this requires a continued, concerted effort acrosssectors to create a regulatory framework within which there areclear definitions of what circular economy means and howdifferent actors in the economy can seek financing for assets,projects and activities that qualify under such definitions.
Furthermore, there is a continued need for additional consumereducation to eliminate possible negative connotations andemphasise the variety of benefits of using, for example, remadeproducts, sharing platforms or goods as a service. Not only couldall the above provide essential climate mitigation benefits, butalso help to navigate uncertain global economic conditions,facilitate resource independency, and alleviate the challenges ofchanging domestic demographics.

Author: Krista Tukiainen, Climate Bonds Initiative© Climate Bonds Initiative, March 2020www.climatebonds.net

Disclaimer: The information contained in this communication does not constitute investment advice in any form and the Climate Bonds Initiative is not an investment adviser Any reference to afinancial organisation or debt instrument or investment product is for information purposes only Links to external websites are for information purposes only The Climate Bonds Initiative acceptsno responsibility for content on external websites The Climate Bonds Initiative is not endorsing recommending or advising on the financial merits or otherwise of any debt instrument orinvestment product and no information within this communication should be taken as such nor should any information in this communication be relied upon in making any investment decisionCertification under the Climate Bond Standard only reflects the climate attributes of the use of proceeds of a designated debt instrument It does not reflect the credit worthiness of thedesignated debt instrument, nor its compliance with national or international laws A decision to invest in anything is solely yours The Climate Bonds Initiative accepts no liability of any kind, forany investment an individual or organisation makes, nor for any investment made by third parties on behalf of an individual or organisation, based in whole or in part on any information containedwithin this, or any other Climate Bonds Initiative public communication

Footnotes

Completing the Picture: How the Circular Economy Tackles Climate Change. 2Wit, M., J. J. Verstraeten-Jochemsen, J. Hoogzaad, and B. B. Kubbinga,2019. The Circularity Gap Report 2019: Closing the Circularity Gap in a 9% World. 3 Bogner, J., M. Abdelrafie Ahmed, C. Diaz, A. Faaij, Q. Gao, S. Hashimoto, K. Mareckova, R. Pipatti, T.
Zhang, 2007. Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change.
4Kaza, S., Yao, L., Bhada-Tata, P. and Van Woerden, F., 2018. What a Waste 2.0: A Global Snapshot of Solid Waste Management to 2050. World Bank Publications. 5Oberle, B., Bringezu,S., Hatfield-Dodds, S., Hellweg, S., Schandl, H., Clement, J., Cabernard, L., Che, N., Chen, D., Droz-Georget, H. and Ekins, P., 2019. Global Resources Outlook 2019: Natural Resources forthe Future We Want. 6Merkl, A., Stuchtey, M., Russel, S., Crow, A., Simon, E., Wooster, J., & Erdmann, H., 2015. Stemming the Tide: Land-Based Strategies for a Plastic-Free Ocean.
7Climate Bonds Initiative, 2019. Green Bond European Investor Survey. 8Baxter-Derrington, J., Investment Week, 2019. Fidelity Brings Sustainable Water & Waste Fund to the UK.
9Climate Bonds Initiative, 2019. Climate Bonds Standard: Waste Management Criteria . 10Ministry of Environment, Japan, 2018. 4th Fundamental Plan for Establishing a Sound MaterialCycle Society. 11Inoue, Y., 2018. Japan’s Resource Circulation Policy for Plastics. 12Nikkei Asian Review, 2019. Southeast Asia's Trash, Japan Inc.'s Power-Generating Treasure.
13Accenture, 2015. Waste to Wealth: Creating Advantage in a Circular Economy. 14McKinsey & Co., 2017. Mapping the Benefits of the Circular Economy.
15De Wit, M., Hoogzaad, J., and Von Daniels, C., 2020. Circularity Gap Report 2020. 16The Japan Times, 2019. Full text of the G20 Osaka Leaders' Declaration. 17Green Car Congress, 2013.
Honda develops process to reuse rare earth metals extracted from old NiMH batteries for new NiMH batteries for hybrid vehicles. 18Kaneka Corporation, 2019. 19Ohkawa Paper, 2019.
20GAO, L., 2016. International Business and Management, 13(2), pp.1-6. An Analysis on Japan’s Circular Economy and its Effects on Japan’s Economic Development. 21Japan SharingEconomy Association, 2020. 22The Economist, 2018. Can share, won’t share – Why Japan’s sharing economy is tiny. 23Asia Nikkei Review, 2019. Japan to count sharing economy in officialGDP. 24ECPI Circular Economy Leaders Equity Index. 25Solactive Sharing Economy Index, 2020. 26MSCI World Select ESG Circular Economy and Renewable Energy Index. 27BlackRock BGFCircular Economy Fund. 28RobecoSAM Circular Economy Equities. 29BNP Paribas Easy ECPI Circular Economy Leaders. 30Climate Bonds Green Bond Treasurer Survey – upcoming (April2020). 31European Commission, 2020. Sustainable finance: TEG final report on the EU taxonomy. 32 FinanCE Working Group, 2016. Money makes theworld go round (and will it help to make the economy circular as well?) 33European Commission, 2019. Accelerating the Transition to the Circular Economy: Improving access to financefor circular economy projects.*The companies include Fuyo General Lease Co., Ltd; Hitachi Capital Corporation; Mitsubishi Electric Credit Corporation (Mitsubishi Electric Group); Orix;1Ellen MacArthur Foundation, 2019.

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SECTOR BRIEFINGDeveloped for the Green Bond Issuance Promotion Platform – JapanRicoh Leasing Company; Tokyo Century Corp; Toyota Finance Corporation and Toyota Motor Credit Corporation (Toyota). **Data source: Climate Bonds Initiative Green Bond Database –figures as at 31 December 2019

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