Results of the Third Market Functioning Survey concerning Climate Change - Progress in the Improvement of Market Functioning and Challenges for the Future -

To accelerate efforts in tackling climate change, it is crucial for financial markets to play a greater role in terms of financial intermediation by incorporating risks and opportunities arising from climate change into the pricing of financial instruments, such as stocks and bonds, and by providing a more favorable environment for the issuance of climate change-related ESG bonds (hereinafter "the ESG bonds"). Since 2022, the Bank of Japan has conducted the Market Functioning Survey concerning Climate Change to evaluate the functioning of Japanese financial markets in relation to climate change and gain insights into challenges that need to be addressed for further improvement. In addition to the questions from the first survey, the third survey included new questions regarding the issuance conditions for the ESG bonds and respondents' stance on climate finance in general and transition finance in particular, in order to gain a more thorough understanding of the current situation and challenges. Similar to the findings of the second survey, respondents in the third survey viewed that climate-related risks and opportunities were priced into both the stock and corporate bond markets in Japan to a certain degree. At the same time, there was still perceived potential for further incorporation of these factors into the markets. To enhance the incorporation of climate-related risks and opportunities into market prices, many respondents raised issues regarding the availability of information and assessment methodologies for evaluating these factors, as well as the need for "increasing issuers and/or investors that place a high value on climate-related risks and opportunities," similar to the results of the second survey. Regarding the current status of the ESG bond market, a broadening base of both issuers and investors was observed, although the increase in issuers remained modest compared to that of investors. Concerning this point, many respondents cited a limited need to obtain external funds and a scarcity of projects suitable for issuing the ESG bonds. Moreover, while the majority of respondents believed that issuance conditions for the ESG bonds were better than those for non-ESG bonds, the difference in conditions does not appear to be acting as a strong incentive for issuing the ESG bonds. That being said, the ESG bond market has continuously expanded due to strategic need for businesses and investor relations. Concerning future prospects, the survey results also suggest that both issuers and investors intend to actively use the ESG bonds over a somewhat long term. Specifically, a majority of business corporates expected a significant increase in the demand for funds for climate change-related efforts, and a reasonable number of them, including those who had not yet issued the ESG bonds, were considering their use. Additionally, the majority of investors who were considering investing in corporate bonds indicated that they also planned to increase their investments in the ESG bonds. The third survey also inquired about respondents' stance on transition finance, which has been promoted by both the private and public sectors in Japan. While many respondents were undecided about their stance, a reasonable number of issuers, primarily in high-emitting sectors, indicated that they would utilize transition finance. Those respondents expressed the expectation that transition finance would not only serve as a means of raising sufficient funds but also help build understanding of the transition among their stakeholders. Regarding future challenges, respondents most often highlighted the need to facilitate international understanding of transition finance. The need to review the target setting or methodology for calculating financed emissions was also pointed out, particularly by investors. Meanwhile, many respondents also highlighted progress in information disclosure, including the formulation of domestic standards and initiatives to make disclosures mandatory. At the same time, respondents raised issues concerning their resources and organizational structure for disclosure. They also noted expectations for the flexible application of disclosure regulations, the development of third-party assurance frameworks, and further infrastructure development to enhance efficiency and comparability.