Sovereign SLB: an option for Japan's transition

13 minute read

Japan is preparing a sizeable financing package to support the green transformation of its economy, using “use-of-proceeds” (GX) transition bonds as a way of raising the necessary capital to finance specific capital expenditures.

The proposed framework designates proceeds for investment in specific untested technologies like ammonia co-firing and hydrogen. In this piece, we analyse the transition bond framework, and look at why a sustainability-linked bond (SLB), where proceeds are unrestricted and coupons payments linked to transition outcomes, could be an attractive option.

This would offer would offer three key benefits: it would create more flexibility for the climate transition, it would focus on outcomes rather than investment decisions, and also could allow access to a larger population of international investors.

Sovereign SLBs are an attractive tool to support public efforts to decarbonise the national economy in Japan. As the instrument focuses on outcomes, rather than direct capital spending, it is a more flexible instrument to focus on achieving the improvements, and will give more options for the carbon transition rather than relying on untested technologies.