Special Report: ESG/SDG Platform
SDGs (Sustainable Development Goals) and ESG (Environmental, Social and Governance) have become increasingly important to decision making in both the corporate and public sectors, as well as to investment and financing decisions by financial institutions and institutional investors. The United Nations has set a 2030 target for SDGs, and it is anticipated that this will not be a transitory boom, as evidenced by a clear commitment of key global institutional investors to ESG investment. Therefore mid- to long-term efforts are expected.
We provide legal advice to support these future-oriented actions of our clients, including companies, investors and local governments.
Topic 1: SDG Bonds
- Support for feasibility studies, disclosure documents and interim and post-redemption reports
Green bonds generally refer to bonds issued to finance projects that are expected to improve the environment. Through the issuance of green bonds, both corporate and government issuers such as companies and local governments seek to attract domestic and overseas investors to support socially oriented goals.
In order to issue a bond that will be considered a green bond, certain criteria must be met, and there may be procedures that would not typically exist in normal bond issue, such as obtaining an opinion from external valuation agencies. In addition, it is necessary to regularly report the status of allocation of funding and the calculation of environmental improvement effects not only at the time of issuance but also after issuance.
There has also been a sharp increase in cases of issuance by non-public sector issuers of social bonds, which use the proceeds to resolve social problems, and sustainability bonds, which have both green and social characteristics.
We have built up a wealth of experience in providing assistance to domestic and overseas corporations, financial institutions, and J-REITs in the issuance of SDG Bonds. We are able to provide practical advice to clients considering issuing SDG Bonds.
Topic 2: ESG/SDG Finance
- Support for feasibility studies, structuring, documentation and contract management
There has been grown in the area of SDG/ESG finance through debt instruments such as green loans, which finance green projects, and sustainability-linked loans, which link corporate loans to more sophisticated sustainability management of borrowers. Updated guidelines for green loans and sustainability-linked loans published by the Ministry of the Environment reflect globally accepted principles, such as the Green Bond Principles, Green Loan Principles and Sustainability Linked Loan Principles, and these guidelines will enhance further development in ESG finance in Japan.
Debt financing in the form of loans enables more flexible structuring and documentation of terms reflecting discussions between lenders and borrowers, and innovative ideas can be accomplished. Small and medium-sized projects can also be easily structured, and there are examples of local companies and financial institutions working together to revitalize regions and resolve ESG issues unique to the region.
In ESG finance through green loans, strict management of the use and application of funds is required, and therefore a project finance framework may be used. There are also cases in which project finance for green projects is repackaged using securitization techniques and sold to investors as separate financial instruments.
Leveraging our extensive experience in a variety of financing transactions, we have built up a wealth of experience in the structuring and documentation of SDG/ESG finance, and we are able to provide advice tailored to the needs of the projects from the perspective of financial institutions and fundraisers.
- ESG finance through Islamic finance
Sharia rules (Islamic law) that underlie Islamic finance are highly compatible with non-financial indicators which ESG investments and financings take into account. Bank Negara Malaysia (the Central Bank of Malaysia) also promotes the financing method that combines Islamic finance and ESG investment/finance under the initiative of “Value-based Intermediation Financing and Investment Impact Assessment Framework”.
Companies that operate in Islamic countries, such as those involved in the halal business, have had a need to procure funds through Islamic finance. In the future, it is expected that these companies will broadly demonstrate their commitment to achieving ESG targets by utilizing Islamic-ESG finance scheme.
Leveraging our extensive experience in both ESG finance and Islamic finance, we endeavor to deepen the understanding of international guidelines and principles in this area and their practical application to individual transactions. By assisting our clients to achieve their objectives, we will continue our contribution to the further expansion of ESG finance globally.
Topic 3: ESG/SDG and Disclosure
- Support for preparation of disclosure documents such as integrated reports and annual securities reports
In June 2017, the TCFD (Task Force on Climate-related Financial Disclosure) released its final report, which was triggered by the indication that climate change could harm the stability of the financial system. This report recommended a framework for disclosing climate-related information for investors.
In Japan, the TCFD Consortium has been established to discuss measures to effectively disclose corporate information and ensure that it can be used to make appropriate investment decisions by financial institutions. While companies are required to proactively disclose information for purposes of investors' investment decisions, careful consideration must be given to disclosure of climate-related information in light of the fact that it is not easy to forecast the future precisely.
Our firm is one of a few law firms that are members of the TCFD Consortium in order to express our support for the TCFD Recommendations and support appropriate disclosures that connect companies and investors.
Topic 4: Real Estate and Infrastructure Financing and ESG/SDG
- Feasibility Studies, Structuring, Preparation and Review of Disclosure Documents and Contracts, Monitoring
ESG/SDG is also a key element in the context of real estate/infrastructure financing transactions.
J-REITs have been proactively disclosing environmental (green) certifications and evaluations of portfolio properties provided by professional environmental assessment organizations. Such certifications and evaluations include, inter alia, DBJ Green Building certification, CASBEE and BELLS. In addition, J-REITs and listed infrastructure funds are increasingly obtaining GRESB valuations, and are also disclosing them.
There has been a significant increase in the number of issuances of green bonds by J-REITs over the past few years. When issuing green bonds, green evaluations have been obtained from ESG evaluation organizations and rating agencies for the finance frameworks and the bonds, and these have been disclosed the in relevant disclosure documents.
Further, there have been recent examples of listed infrastructure funds issuing green equity. In terms of borrowings by J-REITs, there are many published cases of green loans, social loans, and sustainability loans. From a slightly different viewpoint, there are contracts called green leases, which real estate leases with provisions concerning energy saving and improvement of the environment. It is anticipated that these will become mainstream in the real estate/infrastructure finance market in the future, whether for listed or unlisted (private) funds.
We rely on our extensive expertise in real estate/infrastructure financing transactions related to ESG/SDG to assist clients with preparation and review of disclosure documents and contracts.
Topic 5: Impact Investment Funds
- Structure advice, contract drafting and review, regulatory advice, and operational advice
There is a growing trend in Japan to establish impact investment funds, which intend to generate social and environmental impacts through financial investment. These funds aim to address various social issues, such as poverty, family issues, and the environment while achieving positive investment returns.
Some impact investment funds are established as investment trusts and others are established in the form of partnerships, such as investment limited partnerships. It is anticipated that various structures will be utilized for impact investment funds in the future.
We have built up a wealth of experience in investment fund projects and are able to provide valuable advice in all phases, from project launch to operation, including fund structuring, vehicle selection, documentation of contracts, and advice on relevant laws and regulations such as the Financial Instruments and Exchange Act of Japan.
Topic 6: ESG and Shareholders Relations
- Dialogue with ESG shareholders, and responses to ESG-relevant shareholder proposals and other shareholder activism
As ESG investment has grown, ESG has become an important theme in dialogue with investment destinations by investors. In the U.S. and Europe, ESG-based shareholder activism has become prevalent, and the activists are gradually expanding from so-called NGO/NPO stockholders to investment funds.
Amid these global trends, shareholder activism that incorporates ESG factors is emerging in Japan as well, and the content of this trend is gradually expanding from "Governance" issues to "Environment" and "Social" Issues. The issues related to Covid-19 did not stop this trend, but have led to the intensification of shareholder proposal activities centering on "Social" issues.
We have a proven track record of supporting relations with shareholders including activist funds, providing advice for the enhancement of corporate value over the mid- to long- term with an understanding of the motivations and objectives behind the recent rise in ESG investments.
Topic 7: Business and Human Rights
- Support for the establishment of human rights policies, due diligence, and crisis management
For Japanese companies, the need to human rights issues is becoming increasingly important.
The Covid-19 pandemic in 2020 revealed that the human rights of socially vulnerable people are easily violated. In addition, 2020 was a year of further increasing attention to ESG investments. In October 2020, the Japanese government formulated and announced the National Action Plan on Business and Human Rights (NAP).
In recent years, legislation in this area has been accelerating, particularly in countries in Europe and the U.S., such as the United Kingdom's Modern Slavery Act 2015, the Australian Modern Slavery Act 2018, and the Dutch Child Labor Due Diligence Act. Not only NGOs and NPOs but also investors and financial institutions are becoming increasingly serious about human rights issues.
In response to these developments, Japanese corporations have increased their attention to "business and human rights," and in the future they are expected to make even greater progress in this area.
We draw on our experience in assisting clients with establishing human rights policies and rules, as well as the maintenance of various contracts that are conscious of human rights. In addition, we support the implementation of human rights due diligence for supply chains and group companies, as well as surveys and announcements in the event of actual human rights issues, dialogue and collaboration with stakeholders, and the formulation of measures to prevent recurrence of issues.
News and Publications related to this Feature
- January 15, 2021: MHM advised on financing for a biotech venture company utilizing a value securitization scheme
- January 5, 2021: MHM advised on the innovative Islamic-ESG finance scheme
- Hideaki Umetsu, Aki Tanaka "Corporate Legal Affairs: Latest Trends in 'Business and Human Rights' - Japan’s National Action Plan (NAP) and Global Legislative Developments" (Accounting & Auditing Journal Vol.33 No.4)
- Sho Imanaka "ESG and Commercial Law (3): ESG and M&A" (Commercial Law Review No.2258)
- Hideaki Umetsu "Human Rights Perspectives in M&A Due Diligence" (Business Houmu Vol.21 No.5)
- Suguru Miyata "ESG and Commercial Law (2): ESG and Disclosure" (Commercial Law Review No.2257)
- Ryo Chikasawa "ESG and Commercial Law (1): ESG and Measures Relating to Shareholders" (Commercial Law Review No.2255)
- Hideaki Umetsu "Corporate Legal Affairs Frontier: Latest Trends in the Shifting Foundations of "Business and Human Rights"" (Monthly Audit & Supervisory Board Member No.718)
- 【Co-Author】 Masanori Sato, Minoru Sawaguchi, Gaku Ishiwata, Katsumasa Suzuki, Yusuke Ishii, Takeshi Komatsu, Yo Uraoka, Masakazu Masujima, Atsushi Okada, Takane Hori, Taichi Arai "Changing Rules - Business Laws as a Strategic Weapon" (Nikkei Business Publications, Inc, 2020)
- Katsuyuki Tainaka "Outline of and Key Points for Issuance of Social Bonds" (Junkan Keirijouhou No.1595)
- Yusuke Suehiro "Practical Issues of ESG Finance" (The Finance, September 23, 2020)
- Katsuyuki Tainaka "Rapid Expansion of Green Bonds Markets" (The Finance, July 9, 2018)
- Katsuyuki Tainaka "Outlines and Key Considerations of Green Bonds" (Junkan Keirijouhou No.1516)
- Ryo Chikasawa "ESG & Activism" (Accounting & Auditing Journal Vol.32 No.3)
*Please note: Information is current as of the time of disclosure.