Development Bank of Japan: Stressing sustainable solutions

Hajime Watanabe, DBJ: making a meaningful contribution to society

Japan has become a leader in Asia’s move towards a more environmentally friendly financial system. The Development Bank of Japan (DBJ) has been at the forefront of that trend, stressing sustainable solutions with both its lending and its borrowing.

Environmental, social and governance (ESG) factors may not have been part of DBJ’s initial remit when it was established as Japan Development Bank in 1951, but as the bank shifted to a government-owned financial institution in 1999 and most recently became a joint stock corporation in October 2008, its role in Japanese society has changed.

It now combines a commitment to making an impact for good with a desire to make a profit.

“It is only in recent years that ESG has become a global trend, but we focused on the environment consistently in the past,” says Hajime Watanabe, chief executive of DBJ. “It fits well with our mission to contribute to the development and enhancement of Japanese society and the economy, but it also offers us good business opportunities while contributing to environmental issues facing Japan.”

Does a commitment to environmental lending not make it more difficult for DBJ to make a profit?

The bank is operating in a stagnant economy, with razor-thin interest rates and little sign – despite serious efforts by the government and the central bank – that things are going to change any time soon. It seems logical that adding yet another constraint is bad for business.

Watanabe rejects this notion. He argues that the shift towards green finance and a broader set of socially conscious segments of the market, will be widespread – and irreversible. This means the real risk to lending institutions is not moving too quickly into social financing, but moving too slowly.

“It’s important to make a meaningful contribution to society,” he says. “We don’t believe there is a sharp distinction between lending that helps society or helps the environment and lending that is profitable. There has been a sea change of attitudes to environmental financing. No organization can fight the current.”

Japan lags behind only China in terms of green-bond issuance among Asia-Pacific countries, according to the Climate Bond Initiative. DBJ takes credit for giving the country’s green-bond efforts momentum. It issued Japan’s first green bond in 2014, around three years before the country created its own green-bond guidelines.

DBJ has since sold three more green-labelled bonds in both dollars and euros, as well as three sustainability bonds, a broader term that allows funds to be used for a mix of environmental and social projects.

DBJ missed out on opening Japan’s sustainability bond market by a whisker, following Japan International Cooperation Agency’s inaugural sale by one month.

In 2001, DBJ was the first Japanese bank to sign the United Nations Environment Programme statement on the environment and sustainable development. DBJ set up its environmentally rated loan programme in 2004, screening a company’s level of environmental management, and sets financial conditions based on the results.

This has all made ESG a big part of DBJ’s portfolio. The bank had an outstanding loan book worth ¥12.9 trillion ($121 billion) at the end of March, around ¥1.07 trillion of which had a green or sustainability label. But ESG lending is not the only thing that has impressed Asiamoney.

DBJ has also started to move down the credit curve, taking structural subordination to boost its returns while at the same time making projects a lot more viable. It is doing this by taking mezzanine exposure in projects that it would historically lend to at the senior level. At the end of March, it had ¥470 billion of mezzanine loans on its book. Watanabe sees this as an exciting area for growth.

“We don’t always want to be taking the safest, most senior part of a loan,” he says, “so more recently we’ve been offering risk capital such as mezzanine financing and equity investments, which provide us with relatively higher returns under the very low interest rate environment.”

The difference in returns is clear: the bank can get about 3% from its mezzanine lending, compared with 1% at the senior level. Some of these mezzanine loans, but not all, are going to green projects.

DBJ was ahead of the pack when it came to green borrowing and lending. The rest of the world is now following suit – but it will not be easy to catch up with DBJ.