Japan Exchange Group backs out of ESG bond criteria development, focuses on data and carbon trading

The exchange is working on an information platform for Japanese ESG-related bonds.

The Japan Exchange Group (JPX) will not be involved in developing a domestic framework for green and other ESG-labelled bonds after determining that it is not well placed to row in on the subject.

JPX owns and operates the Tokyo Stock Exchange (TSE), the Osaka Exchange – which focuses on derivatives – and the Tokyo Commodity Exchange.

While the volume of domestic Japanese debt issued in green bond and other ESG-related formats has steadily increased since 2014 – the Climate Bonds Initiative ranks Japan ninth globally based on cumulative green bond issuance – most deals are unlisted.

Last year, JPX was appointed by Japan’s Financial Services Authority to a regulatory working group tasked with considering the need for a Japanese-focused certification framework for ESG-labelled bonds that would include a set of “preferred standards for ‘green’ or ‘transition’”, and an external review system enforcing these standards.

JPX, which added a green and social bond platform to its Tokyo Pro-Bond Market in 2018, contributed to the working group’s discussions as recently as February.

“We do have a few green and social bonds listed on the exchange but the vast majority of ESG bonds in Japan are actually unlisted. As a result, the exchange’s role in setting requirements for these bonds is not as clear cut as it may be in other countries,” JPX sustainability manager Anna Hill tells RI.

“Our working group decided that eligibility requirements are not a topic the exchange should decide or implement on its own. It also decided that the ESG bond market here is at such an early stage that what we need to do is form a consensus within the market as it grows and figure out what details investors are looking for before putting in place any requirements.”

Further development of the certification framework has now been added to the remit of a separate FSA working group developing a “code of conduct” for ESG data providers to improve data governance, transparency and comparability.

JPX will instead lead the development of an “information platform” for ESG bonds, which will house details of aligned standards, second-party opinions and other sustainability-related information. The investor resource will be the first of its kind in Japan.

In the near term, JPX is eyeing an entry into the lucrative ESG data market, following in the footsteps of global peer the London Stock Exchange Group, which has emerged as a key supplier of ESG data after a series of high-profile acquisitions.

This year, the Japanese group set up a new subsidiary called JPX Market Innovation and Research, which has taken over all its data services. “The idea is that in the future the new unit will be in charge of expanding our data and other digital-related business, and one of the things they are looking into is ESG data,” says Hill.

JPX is assessing demand for ESG data among investors and stakeholders before announcing its next move.

Separately, longstanding plans by JPX to set up a carbon market received a boost after the Japanese trade ministry (METI) backed the creation of such a market as part of plans to develop a national carbon pricing system.

“In the medium term, we are looking to set up a carbon trading market, which METI has included in its GX League concept published earlier this year,” says Hill. “This is something we had been considering already but it’s going to be a lot easier to push it forward in partnership with the government – although it’s still in the early stages.”

Focus on ESG disclosures

With regard to JPX’s own listing rules, Hill says the ongoing priority will be encouraging improved sustainability reporting through guide handbooks and other resources available via the group’s in-house ESG Knowledge Hub. There are no plans to introduce mandatory requirements in the immediate future.

“It is usually the big companies which start moving on sustainability issues as they face foreign investors’ pressure. So our focus tends to be the smaller companies who don’t get that pressure from foreign investors and don’t see the need to work on sustainability issues – to which we say, improving your performance in this area can make you more attractive to investment,” Hill says.

“Overall, we believe that encouraging more disclosure will encourage increased ESG investments into the Japanese market and improve the value of the companies listed on our exchange, which will then benefit our bottom line in the long run. So investing in sustainability is not a short-term play for us.”

According to Hill, enforcing a one-size-fits-all prescriptive approach to disclosure is unsuited to Japan’s economy, which is reliant on smaller businesses, in addition to global conglomerates. SMEs make up more than 99% of total number of companies in Japan and employ some 70% of its workforce, according to government statistics.

“If you look back at some of the previous Corporate Governance Code reforms we introduced, such as the principle on independent directors in 2015, we went from having hardly any in the market to the present where almost every company has at least one or two. This was applied on comply-or-explain basis, which shows that it can be a very effective tool here, even though it’s not technically mandatory.”

Internal assessments by JPX show that the bulk of Corporate Governance Code provisions have a compliance rate of more than 90 percent, Hill adds.

While JPX is monitoring the ongoing development of global sustainability reporting rules by the International Sustainability Standards Board, the implementation of the rules domestically will be overseen by the newly-formed Sustainability Standards Board of Japan.

Hiromi Yamaji, president and CEO of the Tokyo Stock Exchange, will be giving a keynote at RI Japan in Tokyo later this month. Register for the event here.