MHI: The wrong kind of transition
Cedric Rimaud, CFA (*), Ulf Erlandsson
Ammonia co-firing, in which ammonia ‘dilutes’ coal during power generation, forms an importantpart of Japan’s transition plan for net-zero1. The technique is regularly included as a 'use-ofproceeds' by issuers of transition bonds - debt instruments developed to support companies’
moves towards an improved environmental impact.
With the news that Japan’s Mitsubishi Heavy Industries (MHI) has just launched a transition bond
(MITHI 0.31 09/27, ISIN JP390000AN97) that includes ammonia co-firing among its potential uses,
we revisit the transition bond label in this context.
Our view is that there is a significant risk for investors in transition bonds that ammonia co-firing
will not reduce emissions but rather prolong and lock-in the use of coal plants. Recent research
has stressed that to have a positive impact on carbon emissions, co-fired ammonia must be
delivered using green hydrogen throughout the production cycle. Yet there is a global lack oftechnical capacity to produce ammonia based on renewables.
We encourage investors to engage specifically around the accounting of upstream emissions,when looking at these ‘transition’ proposals. Japan is the world’s fifth biggest GHG emitter andcurrently generates more than 30% of its electricity with coal.2 The country is expected to raise up
to YEN20trn in a government transition bond at some point in the future.3 While the forthcoming
MHI deal is expected to be small at around YEN10bn (~USD75mn), investor engagement now could
help to improve future issuances at a much larger scale by ensuring solid credentials.
Furthermore, we would advise against providing bond-related documentation with diverging
meanings on key terms between different language versions. “Coal-fired power” should nottranslate into “steam power” when going from Japanese to English, as is the case in the secondparty opinion on the MHI transition bond.4“Japan’s roadmap to ‘Beyond Zero’ carbon”, Japan government web-page, accessed 6 Sep 2022.
We note that there are important strategic considerations on energy going on in the country right now, c.f.
“Japan turns back to nuclear power in post-Fukushima shift”, Financial Times, 24 Aug 2022, which further
strengthens the opportunity for investors to engage.
3“Japan lays out plan to issue $157 bn in 'green transition' bonds”, Reuters, 19 May 2022.
4
For the avoidance of doubt, AFII is not providing legal advice. The statement is based on issuers’ likely needto maintain good relations and trust with investors. In our experience, altering the meaning of documents indifferent language versions is not conducive to that.
1
2

Not investment advice. This version 6 Sep 2022. Important disclaimers at the end of the document.
(*) Anthropocene Fixed Income Institute (www.anthropocenefii.org), cri@anthropocenefii.org

Ammonia co-firing: unlikely to reduce GHG emissions
According to IRENA5, “the ammonia production industry produces annual emissions of 0.5
gigatonnes (Gt) of carbon dioxide (CO2), representing around 1% of global CO2 emissions and 1520% of the chemical sector’s CO2 emissions.” Making green ammonia remains a technologicalchallenge. All raw materials, including the energy used, must be renewable for ammonia to betruly “green”.
Researchers have found that “without policy settings that ensure emissions are accounted for
across the supply chain, the co-combustion of ammonia could result in little to no benefit in
reducing global greenhouse gas emissions.”6 Only the use of expensive carbon capture
technologies (CCS) or renewable electricity use for hydrogen production yields a substantial
reduction in GHG emissions across the supply chain.7 CSS in particular appears to encounter
technological difficulties, making a cost-efficient achievement of 100% capture unlikely in theforeseeable future.8 It seems reasonable that any downstream power generation – such as the casein ammonia use – should factor in the probability of the technology not being available whenlooking at upstream carbon emissions.
According to energy research company Wood Mackenzie, the assumption behind cost-effective
ammonia co-firing9 is that green ammonia becomes cost competitive soon enough to achieve a
viable alternative and this assumption is in turn based on a high carbon price. It requires that theinvestment planned to ramp up production will be sufficient to deliver the quantities needed tomeet global demand and that Japan will maintain enough supply from far-away sources (such as
Australia, Canada, Chile and the Middle East). It also requires that other, more immediate uses ofgreen ammonia (e.g., shipping, fertilizers) will leave a sufficient supply for co-firing purposes.
Another risk factor is that ammonia co-firing is successful in its stated intention to prolong the life
span of coal plants - so called ‘lock-in’ effects. There will be capital expenditure on combined plants and, if the ammonia reductions fail to materialize, what will remain are refurbished coal plants.
This is a clear downside risk to investors, especially those with “no-coal” funding restrictions.
Lastly, investors should recognize Japan’s important role in terms of the energy transition acrossSouth Asia, both in terms of providing technology and manufacturing capacity as well as in termsof funding. Our view it that the track record is not consistent,10 and investors should seek out
better climate alignment going forward. A push for ammonia together with coal runs the risk of
crowding out renewable power development and funding, even in areas where the latter might bebetter suited.11“Innovation Outlook: Renewable Ammonia”, IRENA, May 2022.
“Global emissions implications from co-combusting ammonia in coal fired power stations: an analysis ofJapan-Australia supply chain”, Journal of Cleaner Production 336:130092, December 2021,
7
CCS technology is lagging and among the carbon capture technologies of today, most CO2 is used forenhanced oil recovery, see ”The carbon capture crux: Lessons learned”, IEEFA, 1 Sep 2022.
8
For example, there has been recent pursuits of litigation around the use of CCS – a requirement for making
carbon-reductive ammonia viable – in Australia: “Australasian Centre for Corporate Responsibility expands
landmark Federal Court case against Santos”, ACCR web-site, 25 Aug 2022.
9“Ammonia co-firing in power plants could be worth $100bn in 2050”, EnergyVoice, 18 May 2022.
10“The Reformed SSA Trader: ‘Be aware of’ ideas of March”, AFII, 21 Mar 2021, discusses JICA funding ofdevelopment of coal in Bangladesh, and JBIS’s funding of the Vung An II coal expansion in Vietnam.
11
See for example “Japan’s IHI starts ammonia co-firing study in Indonesia”, Argus, 25 Apr 2022.
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Transition bonds in the Japanese market
According to a government statement, “Japan will strive for cooperative decarbonization acrossAsia by promoting joint demonstrations, international investment, and establishing standards forzero-emission technologies for biomass, hydrogen, ammonia, carbon capture, utilization andstorage (CCS) and so forth, while utilizing the region’s credit markets.” 12
The reference to technologies including ammonia and CCS, together with the outright mention of
credit markets, indicate a desire by the Japanese government to use the transition bond label inforthcoming financings.
It is becoming clear to the bond market that ammonia co-firing will indeed play a central role. In
Table 1, we highlight transition-labelled bond deals that have come in the Japanese Yen market todate. 2022 has brought a batch of deals where ammonia co-firing is included in the use-ofproceeds. Given purportedly successful results of recent trials on the technology,13 this is not sosurprising; one would expect a ramping up of finance to start running the technology at scale.14
Table 1. Issuance of transition bonds in Japan. Source: AFII, Bloomberg.
IssuerGovernment of Japan
Kyushu Electric Power Co.
Kyushu Electric Power Co.
Jera Co. Inc
Japan Airlines Co. Ltd.
Nippon Yusen Kaisha
Nippon Yusen Kaisha
Idemitsu Kosan Co. ltd.
Idemitsu Kosan Co. ltd.
JFE Holdings
JFE Holdings
Osaka Gas

Issuance
TBD
May-22
May-22
May-22Mar-22
Jul-21
Jul-21
Jul-22
Jul-22Jun-22Jun-22TBD

Size
JP20trn
JPY30bn
JPY25bn
JPY12bn
JPY10bn
JPY10bn
JPY10bn
JPY10bn
JPY10bn
JPY25bn
JPY5bn
JPY10bn

CouponTBD
0.35%
0.644%
0.42%
0.70%
0.26%
0.38%
0.48%
0.88%
TBD
TBD
TBD

Maturity
TBD
5 years
10 years
5 years
5 years
5 years
7 years
5 years
10 years
5 years
10 years
TBD

Ammonia co-firing
TBD
Ammonia co-firing
Ammonia co-firing
Ammonia co-firing
No
Ammonia for vessels
Ammonia for vessels
Ammonia co-firing
Ammonia co-firing
No
No
Natural Gas co-firing

ISINs
TBD
JP324640AN50
JP324640BN59
JP338672AN51
JP370520AN33
JP375300AM70
JP375300BM79
JP314250AN78
JP314250BN77
TBD
TBD
TBD

Another perspective on the ammonia co-firing debate comes from GPIF, Japan’s Government
Pension Fund, which is one of the key investors in the domestic Yen market.15 GPIF holds 26% of its
total portfolio in Japanese domestic bonds. As the ESG reporting of GPIF is very extensive,16
making use of abundant independent data to measure the GHG footprint of the four categories of
its holdings across two axes, domestic/foreign and equity/bonds, GPIF gives considerable weightto the technologies expected to contribute to the reduction of GHG emissions by 2030 and 2050.
In GPIF’s ranking of expected contributing technologies to carbon reduction, hydrogen/ammonia
power generation does features among the ‘top 10’, see Figure 1. However, among the top 10, it is
the technology with lowest expected implementation rate and total GHG reduction potential in
2050 (and a de minimis reduction expected in 2030). Of course, these rates do not appear out of a

“Clean Energy Strategy to Achieve Carbon Neutrality by 2050”, The Government of Japan, 23 Jun 2022.
“Success” here refers to the capacity to actually burn ammonia together with coal; to our knowledge, thesetrials have not proven a full value-chain carbon reduction capacity.
14“JERA, IHI move up demonstration of co-firing ammonia at coal power plant”, Reuters, 31 May 2022.
15
According to Bloomberg, GPIF holds around 7.6% of the outstanding bonds of MHI, including its green bonddiscussed below.
16“ESG Report 2020”, Government Pension Investment Fund, 30 Sep 2022.
12
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vacuum: we would expect investor demand and engagement to be persistent to drive
implementation rates to the expected numbers.
Figure 1. Top ten technology fields expected to contribute to GHG reduction by 2025 (in GPIF’s portfolio). Source: GPIF.

The MHI transition bond deal
Mitsubishi Heavy Industries (MHI, corporate ticker: MITHI) is a multinational Japanese corporation,
part of the Mitsubishi Group, and involved in aerospace, defence, energy, ship building and power
generation. MHI is a regular issuer of corporate bonds in the Japanese markets and has ten bonds
outstanding with maturities ranging from 2022 to 2031. It is rated at BBB+ by S&P and AA- by theJapan Credit Rating Agency (JCRA). It has no USD-denominated bonds outstanding currently,
although its parent company, Mitsubishi Corporation, has issued several USD-denominated bonds,
including the $500m 3.375% Jul-2024 bond (XS1086900898). MHI is a constituent of the current
iTraxx Japan index (ticker: ITXAJ537, 40 members; MHI CDS trades under corporate ticker MITHI).
In Sep 2021, MITHI issued a JPY15bn 5-year 0.09% green bond to finance new or existing projects in
the renewable energy or clean energy sectors, with a second party opinion provided by
Sustainalytics. That bond as well as the earlier issued MITHI 0.14 11/25 (JP390000ALB7) appear in
Figure 2 to price as a few basis points inside the grey curve. This is a potential indicator to theissuer of lower cost-of-capital being achieved through labelled bond issuance. Looking at the
recently issued MITHI 0.31 09/27 transition-labelled bonds, this indeed seems to be the case, withthe bond pricing almost flat (at z+11.3) to the shorter green bonds and significantly inside thealmost identical grey MITH 0.33 08/27 (at z+20.5).
In the context of the national strategy’s application for individual corporates, Mitsubishi Heavy
Industries has set a 50% reduction of its Scope 1 and 2 emissions,17 relative to 2014, and a 50%
reduction of its Scope 3 emissions (customer Scope 1 and 2 emissions), relative to 2019, by 2030,
plus a Net Zero target for Scope 1, 2 and 3 by 2040. It plans an investment of JPY180bn by 2023 togrow decarbonization projects.
Refer to “What are Scope 1, 2 and 3 Emissions?”, Persefoni, 13 Jun 2022, for a brief overview of Scope 1, 2
and 3 emissions. AFII discusses the central role of Scope 3 for carbon intensive firms in “SLB bond radar: Eni(potentially) coming to market”, AFII, 19 Jul 2022.
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Figure 2. MITHI bond curve and CDS. Source: AFII, Refinitiv, Bloomberg. Pricing as of 1 Sep 2022.
MITHI 5y CDS on-the-run

200

iTraxx Japan generic 5y

Spread (bps)

150

100

50

0
Aug-17Aug-18Aug-19Aug-20Aug-21

MHI’s transition framework has received a second party opinion from DNV Japan (Figure 3), which
has also provided a similar service to several of the other Japanese issuers of “transition” bonds.
MHI will rely on ammonia co-firing in its coal thermal plants to achieve a substantial reduction ingreenhouse gas emissions.18
To be clear, MHI has set a 2030 target of a 50% cut in its Scope 3 emissions “across MHI’s value
chain” to achieve ‘net zero’ by 2040.19 Digging into the details however, we find that when defining
Scope 3 emissions, MHI states: “These targets include the reduction in emissions attributed to ourcustomers’ use of our products and services.”
This is not, from our perspective, aligned with the definition of Scope 3 emissions. According to the
GHG Protocol: “Scope 3 emissions are all indirect emissions (not included in Scope 2) that occur inthe value chain of the reporting company, including both upstream and downstream emissions.”20
MHI seems to avoid accounting for the upstream GHG emissions of its ammonia co-firing upgrades.
This is in line with an earlier transition bond from JERA, that includes ammonia co-firing in its useof-proceeds (see Table 1, and the comments from the Climate Bonds Initiative: “the production ofammonia and hydrogen both require high levels of energy and release CO2, all while there is nocommitment from JERA to only use green ammonia or hydrogen.”)As highlighted above, the questions to be raised around ammonia co-firing relate to how it isproduced. Green ammonia is expensive to produce and subject to high levels of competition fromother buyers: ship operators, the agricultural sector, et cetera. If upstream emissions are notaccounted for in terms of use-of-proceeds or GHG accounting, then the choice between green or
grey ammonia may become a simple cost basis one. Everything else equal, this makes it more
likely that MHI will choose to use fossil fuels-based ammonia as the company potentially would be
able to do so without reneging on its ‘net zero’ target.

“JERA and MHI Start a Demonstration Project to Develop Technology to Increase the Ammonia Co-firing Rateat Coal-fired Boilers”, MHI website, 7 Jan 2022. “MHI Commences Feasibility Studies on Use of Ammonia forPower Generation in Indonesia”, MHI website, 7 Jun 2022.
19“Mission net zero: MHI sets bold targets to achieve carbon neutrality by 2040”, MHI website, 29 Oct 2021.
20“Greenhouse gas protocol: FAQ”, GHG protocol website, undated.
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Could it be that the above discrepancy on upstream Scope 3 emissions is based on a simple
oversight? We find that unlikely, given the similarity with the JERA case. But to give the benefit of a
doubt to MHI’s transition bond, we note that coal thermal power is referred to as “steam power” in
the English version of the SPO but as “coal-fired power” in the Japanese-language version(highlighted in the figure). If such mistakes appear on simple terminology, perhaps missing on the
upstream Scope 3 measurement is not so surprising.21
Figure 3. MHI use-of-proceeds for green and transition bonds, English and Japanese language versions. Inconsistencies in“Steam power” (English version) and “Coal-fired power” (Japanese version) highlighted. Google translation at the bottom.
Source: DNV second opinion, Google translate. Accessed 2 Sep 2022.

Conclusion: An unsuitable example of ‘transition’
MHI’s transition bond framework that relies too heavily on ammonia co-firing development that
does not, in our view, deliver a good balance between potential decarbonization benefits versus
risks of fossil fuel lock-ins.
MHI is promoted as an example to follow in Japan under a national transition strategy that still
relies on fossil fuels. Its decarbonization strategy remains ‘best in class’, under Japan’s
decarbonization plans. 22 This is setting the wrong precedent in Japan and for other Asian nations
that will find it more acceptable to continue relying on fossil fuel assets. MHI is also a member ofseveral ESG indices, making it more likely that its securities will be owned by a large number ofpassive investors, including in offshore markets:

Dow Jones Sustainability Index (equity)
MSCI Japan ESG Select Leaders Index (equity)

An alternative explanation would be that there is extreme attention to detail, such that the ’translation’would cater to English-speaking/international investors’ general dislike of coal-fired power. The avoidanceof such terminology in English-language material could then, hypothetically, be intended for attracting moreinvestors.
22
For example, the Ministry of Economy, Trade and Industry (METI), states “MHI is a company with Japanese
cutting edge technology, and without their decarbonization technologies for plant/energy, decarbonizationof other sectors will be more challenging. Thus, projects and initiatives of MHI are of extreme importance.”“Transition Finance: Case Study 11: Mitsubishi Heavy Industries, Ltd.”, METI, undated.
21

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


S&P/JPX Carbon Efficient Index (equity)
Sompo Asset Management Sustainability Index (equity)

In addition, MHI has been selected as one of the model examples for the Climate Transition
Finance Model (METI). It will serve as a beacon for Japanese industry on its pathway towards
decarbonization. Yet, MHI is underperforming Japan’s national average in terms of the share of
renewable energy generation: while more than 20% of Japan’s total annual electricity demand
was covered by renewable energy in 2021, it accounts for only 6.3% of MHI’s total energy
consumption, as of 2020.
On other metrics, while MHI’s CO2 emissions are expected to halve by 2030, the company has seen
its N2O and SFC emissions jump multiple fold, as a result of the conversion towards othersupposedly “transition” technologies, and despite a 20% reduction in the amount of electricity
generated between 2017 and 2020.
Figure 4. MHI GHG Scope 1 emissions data. Source: MHI ESG data.

In summary, we recommend investors take an inquisitive stance toward any transition bonds
involving structures such as the one put forward by MHI:First, ammonia co-firing’s potential with arguably uncertain carbon reduction effects should beweighted versus the lock-in effects on coal-fired power plants.
Second, there should be transparency and accountability in Scope 3 accounting, in line withinternational definitions to ensure the credibility of the issuer’s net zero commitments.
Third, altering translations in various languages of bond related documents in ways that could beconstrued as an attempt to appease (international) investors, reduces the credibility of the bondissuance and those parties backing it.
Last, Japanese funding and industrial engagement in the region has global ramifications and it
would be desirable to see it adhering to the highest standards in the context of transition.

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IMPORTANT DISCLAIMER:
This report is for information and educational purposes only. The Anthropocene Fixed Income
Institute (‘AFII’) does not provide tax, legal, investment or accounting advice. This report is notintended to provide, and should not be relied on for, tax, legal, investment or accounting advice.
Nothing in this report is intended as investment advice, as an offer or solicitation of an offer to buy
or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund.
AFII is not responsible for any investment decision made by you. You are responsible for your own
investment research and investment decisions. This report is not meant as a general guide toinvesting, nor as a source of any specific investment recommendation. Unless attributed to others,
any opinions expressed are our current opinions only. Certain information presented may have been
provided by third parties. AFII believes that such third-party information is reliable, and has checked
public records to verify it wherever possible, but does not guarantee its accuracy, timeliness orcompleteness; and it is subject to change without notice.

The Anthropocene Fixed Income Institute is a non-profit organization “to monitor, advocate for andinfluence the impact of the fixed income and bond markets in the age of human induced climatechange.” For more information about the Institute, please visit wwww.anthropocenefii.org or follow
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