Tokyo’s First Social Bond

Published on05 AUG 2021

The article below is from our BRIEFINGS newsletter of 05 August 2021

In June, the Tokyo Metropolitan Government made history when it sold the first municipal social bond ever issued in Japan—and saw a record-high participation rate from international investors. We spoke with Satoru Kawahito and Hiroaki Kasai from Goldman Sachs’ public sector and infrastructure team in the Investment Banking Division to discuss the transaction and what it means for the future of public sector funding space in Japan.

This was a first-of-its-kind issuance in Japan. Can you give us some of the background to the transaction?

Satoru Kawahito: There has been a surge in social bond issuance over the past year or so, as the COVID-19 pandemic continues to highlight inequalities that require new solutions and the financing to implement them. In March, the Tokyo Metropolitan Government (TMG) updated its long-term vision, recognizing the profound impact the pandemic has had on the city. Centered on the two pillars of structural reform and sustainable recovery, the plan consists of 21 strategies designed to create a safe, attractive and enjoyable city where citizens have an equal chance to fulfill their potential.

Social bonds, where proceeds are earmarked specifically for projects with a measurable social benefit, were a natural choice to help fund these plans. TMG’s debut 30 billion yen five-year bond, which priced in June, will help fund schools for children with special needs, programs to support mothers returning to the workforce and a low-cost loan facility for small- and medium-sized enterprises impacted by the pandemic, among other projects.

What drove such strong demand?

Satoru Kawahito: Institutional interest in ESG investing has grown exponentially over the last few years. While environmental issues have been at the vanguard of socially responsible investing, the experience of the pandemic and its human toll has renewed focus on the social element of ESG and, in turn, fueled global investor appetite for social bonds.

Hiroaki Kasai: Last fall, we helped TMG tap into this demand by issuing a 60 billion yen five-year “COVID-19 response bond” to fund rescue financing for cash-strapped local businesses. Given the urgent need, TMG prioritized time-to-market and opted out of seeking an independent second opinion for the issue. Instead, we helped TMG explain its fundraising plans directly to investors through a series of online sessions. While the bond attracted significant demand and priced tightly, certain investors couldn’t participate in the offering since their mandates required accreditation for ESG investments. Since then, TMG has drawn up a social bond framework based on the International Capital Market Association’s (ICMA) Social Bond Principles. We helped TMG structure its debut social bond based on this framework and included a second opinion from an established local ratings agency, which made the offering accessible to a wider ESG investor community. As a result, the bond priced at the tightest level since March 2020 for a Japanese local government bond, with a yield of just 0.005%, or 75% lower than the earlier COVID-19 response bond.

The vast majority of Japanese local government yen debt is held domestically, yet this offering attracted one of the highest-ever participation rates from international investors for a Japanese municipal bond. Why was that?

Satoru Kawahito: Whether based in Japan or overseas, investors’ motivations are essentially the same: a commitment to ESG and a desire to contribute to pandemic relief. However, when you consider that the deal saw participation even from first-time investors in yen-denominated debt, we think a few other factors were also in play.

Hiroaki Kasai: First, the offering size, at 30 billion yen, made it easier for larger international ESG-focused investors to take part. To date, Japanese municipal ESG issues, particularly green bonds, have often been around 5 to 10 billion yen in size, making it difficult for larger investors to secure their minimum purchase size. Secondly, the rarity value and Tokyo’s brand were also important. While social bond issuance from Japan has risen from 35 billion yen in 2016 to 915 billion yen in 2020, issuance levels are still well behind the U.S. and Europe. As investors around the world hunt for yield, there is always an added degree of interest in debut issues–all the more so if they come from a high-quality issuer and with a credible ESG label. With an economy bigger than Turkey’s and annual bond issuance of around US$ 8 billion, Tokyo is a well-established issuer in the global capital markets with an excellent credit history. International investors who may have been interested in last year’s COVID-19 Response bond, but chose to stay on the sidelines then, were now able to take part in a fully accredited issue. Finally, Japan’s local-government bond market is second only to the U.S. in scale, with $57 billion of issuance in fiscal year 2018. Globally, Japanese local government non-yen debt has a loyal following in the international investor community, who are attracted by the country’s strong credit record, excess spreads over Japanese government bonds and robust investor protection regime. We were able to help TMG tap into this existing investor base too.

Will this debut issue prompt other local governments in Japan to consider social bonds?

Satoru Kawahito: While ESG bond issuance has been steadily growing in Japan, there have been some hurdles for would-be local government issuers. For example, some local governments have been skeptical about the need to issue dedicated social bonds, since so much of their activities can be classified as socially oriented. Others have struggled to identify projects large enough to warrant a bond, particularly due to legal constraints on how bond financing can be used. Some of this may reflect a tendency for what is known as “green-blushing” in the green bond market—essentially the opposite of green washing—which refers to issuers who underplay the significance of their environmental initiatives. The same may be true of local governments, who may be undervaluing the importance of the social support programs they run. This would be especially unfortunate, since Japan’s prefectures, cities and towns actually provide a greater proportion of social services than the national government.

Hiroaki Kasai: As the capital city, TMG has been a pioneer in the Japan municipal bond markets and we are hopeful that its debut social bond will provide a benchmark for other municipalities. The strong demand for the offering has made clear the potential benefits of pursuing third-party accreditation, in terms of investor base diversification and lower funding costs. There is now a template for other local governments when considering which of their projects may be eligible. And as Tokyo plans to sell another 30 billion yen of social bonds this year, we should see sustained investor interest in this new provenance of social debt. At the same time, as a growing number of municipalities are setting ESG and or SDGs related multi-year goals for their communities, they may begin exploring the possibility of sustainability linked-bonds, a new ICMA format which requires issuers to set sustainability objectives but do not limit the use of funds to individual projects.


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