ESG round-up: Japan excludes ammonia, gas in debut transition bond

The latest developments in sustainable finance: Morningstar publishes expert report following anti-Israel claims; UK mulls further action on mandatory vote reporting for AMs.

The Japanese government will issue the first tranche of its inaugural ¥1.6 trillion ($11 billion; €10 billion) transition bond next week, according to the Climate Bonds Initiative (CBI). Proceeds from the deal, which will be the first ever transition-focused sovereign debt offering, will fund Japan’s national Green Transformation programme. Funding for gas-fired power or outfitting coal plants for ammonia co-firing has been ruled out following investor concerns that reliance on untested technologies could extend the use of fossil fuels. Analysis by Fitch noted that hybrid vehicles are also eligible for proceeds despite a move by green taxonomies to zero-emission EVs, as well as the absence of a carbon-intensity threshold for hydrogen use. The bond was verified by the Japan Credit Rating Agency under CBI’s climate bond standard. It is the first of a planned $133 billion series of Japanese transition bonds over the next decade.

Experts retained by Morningstar to provide actionable recommendations to “address concerns of anti-Israel bias in Sustainalytics’ research and product” have published a report detailing their suggestions. The experts were appointed in September by Morningstar following the publication of the results of an investigation by law firm White & Case into claims of anti-Israel activities at its ESG data and ratings subsidiary. A Morningstar spokesperson told Responsible Investor that the firm will work with analysts and clients to implement the experts’ recommendations “swiftly – before the end of this year”.

The UK government said it will “carefully consider” the need for further action on mandatory vote reporting for UK asset managers. Speaking in a debate in the House of Lords on an amendment which would require the Financial Conduct Authority (FCA) to introduce rules on the topic, government minister Lord Offord said the government planned to wait for the final output of the FCA’s Vote Reporting Group before deciding its next steps. Baroness Wheatcroft, an independent member and the sponsor of the amendment, said she was “cheered” by what she called an “unusually conciliatory reply” and withdrew it in response. The amendment had been backed by former pensions minister Ros Altmann, voting fintech Tumelo and the Association of Member Nominated Trustees.

The Institute of International Finance (IIF) reported a slowdown in 2023 for ESG-labelled debt in its quarterly market report. The universe grew by some 25 percent last year, reaching a volume of $6 trillion, which was a “substantial deceleration” from the 60 percent average growth recorded in the two previous years prior. This is at odds with the rapid increase in global climate spending reported by BloombergNEF, said IIF, and “suggests that a greater proportion of capital investment in clean energy may have been sourced from corporate balance sheets and conventional debt markets”.

The Asia Investor Group on Climate Change conducted a closed-door roundtable with regulators and other stakeholders in Japan on the “technical and commercial viability” of leveraging hydrogen in its transformation plan, according to the annual report of the regional shareholder group. It is also conducting research in Japan on how clean energy deployment will affect employment in the fossil fuel sector. Separate roundtables were held in Malaysia and Indonesia on renewable energy targets, coal decommissioning plans and other issues.

The Investor Group on Climate Change (IGCC) published its annual report, assessing progress on its 2022-25 strategy through workstreams on investor practice, corporate engagement and policy and advocacy. IGCC also said it will continue to focus this year on physical risk and resilience and Just Transition, two priority themes that were integrated in 2023.

Nearly 400 companies reported last year on climate change, forests and water security in line with the Corporate Disclosure Project’s (CDP) highest benchmark. Disclosure grew by 24 percent in 2023, but there was a greater need for reporting with “high quality and comprehensive” data, according to CDP. The non-profit scored 21,000 companies from A-D based on information reported through its climate change, deforestation and water security questionnaires. Only 10 companies were awarded an A across all three thematic questionnaires.

France’s environmental body Ademe published a report outlining four pillars for a robust biodiversity approach for complying with Article 29 of the French energy and climate law. The guidance has been produced following evidence that stakeholders need further support in designing their biodiversity strategy and implementing it. The suggestions address developing a strategy in line with international objectives; implementing it through commitment, exclusion and financing; identifying impacts and dependencies of portfolio companies; and considering biodiversity risk.