Japan FSA Consults to Boost Social Bonds

Regulator aims to promote issuance of social bonds by private sector and prevent ‘social washing’.

Japan’s Financial Services Agency (FSA) has published draft guidelines for the issuance of social bonds, in a bid to promote such issuances by the private sector.

Social bonds limit the use of funds to social projects that contribute to solving social issues, a market that has expanded considerably in recent years. In Japan, the issuance of social bonds has increased, but the public sector has accounted for issuances.

Through its Social Bond Guidelines, the FSA is looking to promote the issuance of social bonds in the private sector to drive capital into social projects and ensure adequate financing is available to address social challenges.

“The Guidelines have been formulated with the hope that their use would facilitate a significant increase in the issuance of social bonds, thereby promoting the resolution of social issues in the future,” the guidelines say.

The guidelines highlight the importance of establishing and maintaining the credibility of the “social” characteristics of such bonds, similar to how it is necessary to prevent greenwashing in green bond issuances.

“It is immensely important to prevent bonds that lack the substantive characteristics of social bonds from being issued as social bonds,” the guidelines say, referencing the term ‘social washing’.

The guidelines are based on ICMA’s Social Bond Principles, as well as on discussions of an FSA working group on social bonds.

Specifically, the issuance of social bonds should address four core components: use of proceeds, process for project evaluation and selection, management of proceeds, and reporting.

Given that issuers, investors, and other market participants may have different perspectives regarding social issues, it is important to establish a mechanism in which issuers disclose information relevant to their social bonds in an easily understandable way, the guidelines say.

“By establishing this mechanism, market discipline can be exercised to avoid social washing while securing the diversity of issuers’ approaches.”

The Social Bond Guidelines are open for comment until 10 August.

The guidelines focus on the social characteristics of social bonds and do not cover their characteristics and risks as ordinary bonds, e.g. credit risks, price fluctuation risks, liquidity risks.

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