"TOWARD A SUSTAINABLE JAPAN - CORPORATIONS AT WORK" ARTICLE SERIES Article No. 14
The Development Bank of Japan is an integrated policy financial institution, established in 1999 and wholly owned by the Japanese government. Banks can be categorized into private and government-affiliated institutions, and the DBJ is of the latter category. It holds the mandate of "enriching the lives of the people" and therefore has been investing in projects that have significant policy implications. The bank also provides knowledge and information support. In fiscal 2003, the bank employed 1,370 staff, and extended project loans amounting to 15.7 trillion yen (about U.S.$151 billion) out of its total assets of 16.3 trillion yen (about U.S.$157 billion).
The DBJ provides long term loans and investment to projects that are important as policy tools in the area of community, environment and technology, but cannot be adequately financed by private financial institutions because of concerns about profitability and risk. Projects that make use of renewable energy and spread new technologies such as fuel cells are viable only when they are backed by sufficient financial resources. The DBJ's stance is that financial institutions should take on the role of providing the necessary financial resources to allow such projects to go ahead, and can play an important role in efforts to solve environmental issues.
The DBJ is increasingly focusing on loans and investments in environment-related areas. It has supported corporate measures for the environment by instituting financing systems in response to progress in the government's environmental policy, ever since the days the former Japan Development Bank (one of the DBJ's parent institutions) made loans to prevent pollution in fiscal 1960. Such loans amount to 3 trillion yen (about U.S.$28.8 billion) in the past 40 years. They had a pump-priming effect, attracting co-financing by private financial institutions, and these loans all add up to about 10 trillion yen (about U.S.$96.2 billion) for environmental measures.
Proactive Approaches, Case 1: A Loan System that Uses Environmental Ratings
In addition to supporting environmental projects directly through loans, in April 2004 the DBJ launched a system to support eco-friendly corporate management, using a ranking system that uses environmental criteria when evaluating loan requests.
Loan screening under this new system consists of three categories: (1) overall management, (2) project-related factors, and (3) environmental performance. There are 127 questions to be answered (250 points maximum), with balance between consideration of qualitative factors and quantitative performance data. For projects winning loan approval, there are three interest rate levels, depending on the points scored under the evaluation.
The system was created to encourage further environmental management efforts by companies receiving financing. Conventional loans and investment systems, for instance, would target funds at specific capital investments in a particular process of a manufacturing firm, or alternatively, would provide loans for a concrete project. The new system, however, does not address individual processes and projects, but aims to improve fund-raising conditions of companies that are making proactive efforts, by making overall evaluations of the structure, organization, and actual performance of the company.
For the evaluation of environmental activities under this system, a slightly different approach from conventional environmental ratings is employed. The conventional systems have been geared towards manufacturing industries, in which environmental burdens are relatively well identified. They are often criticized for not adequately reflecting the realities of other material or service industries. To address this issue, the new rating system sets up different contents and evaluation criteria suited to each line of business. Manufacturing industries are classified into processing/assembly and material industries. Non-manufacturing industries are also classified into several different types of businesses.
As of early June 2004, about 80 companies had applied for the rating system during the two months since the system was launched. Although the companies are mostly large in scale, about 20 percent of them are small- or medium-sized enterprises, from different locations and industries. Takeo Obata, Director of the Policy Planning Department and Head of the Environmentally Sustainable Development Group, is in charge of managing this system. According to Mr. Obata, its purpose is not just to recognize the best companies (i.e., the "top runners"), but also to help environmentally conscious companies gain financial benefits and recognition regardless of their size or line of business. He strongly urges environmentally conscious companies to apply under the system.
Mr. Obata hopes to promote this system to gain consumer recognition and believes that the following three points are the key for it to gain momentum and maximize the policy effects.
1. Justification and objectivity of the evaluation: For this system to gain public trust, the companies that are highly rated under this system need to achieve a high level of performance in the areas of economy, environment, and society. It will be essential to objectively evaluate based on the know-how the company has accumulated on long-term loans.
2. Equality among businesses: Evaluation criteria may be different among businesses but the utmost consideration is necessary to maintain the same criteria among different sectors.
3. Improving efficiency of evaluation: Evaluations sometimes require considerable time, due to the fact that companies that do not publish environmental reports also participate in this rating system. Even when environmental reports are available, about 30 to 40 out of the 127 questions need to be asked directly to the companies. It is, therefore, essential to establish an efficient evaluation process that does not create too much of a burden on the participating businesses.
Proactive Approaches, Case 2: Establishing a Carbon Fund Using the CDM
In order to encourage efforts to help Japan achieve the reduction targets for greenhouse gas (GHG) emissions under the Kyoto Protocol, which many hope will soon take effect, the DBJ has also created the "Japan Carbon Fund," a lending system to promote environmental investments designed to acquire "emission credits" through the "Kyoto Mechanisms."
This scheme takes advantage of the Clean Development Mechanism (CDM), which is designed for industrialized countries to implement projects such as the reduction of GHG emissions in developing countries, and to distribute the resultant credits among project participants. In this scheme, the Fund is first capitalized by the DBJ and other Japanese companies. The gathered capital is then provided for the implementation of projects aiming to reduce GHG emissions, such as the installation of renewable energy supply systems and energy-saving facilities, or the repair of gas pipelines. The Fund acquires the emissions credits earned by the project reducing GHG emissions, and then distributes them to the investing companies.
Already some companies have been independently implementing CDM projects directly in developing countries. But this new scheme makes it easier for companies to join in providing funds because the DBJ manages it to be open to multiple companies. Moreover, by spreading the risks of a project, it also enables them to provide capital to projects in small countries where it is usually difficult for individual companies to do so. The Fund is now soliciting investors and it is expected to start operations in autumn 2004
Takao Aiba, Deputy Director of Policy Planning Department, Environmentally Sustainable Development Group, who was involved in designing the scheme, pointed out that "2004 is the year when the Japanese government is to review its Guideline of Measures to Prevent Global Warming, it's official policy on global warming. Japan will review its achievements toward the emissions reduction targets agreed to under the Kyoto Protocol, a six percent reduction in Japan's GHG emissions from 1990 levels by the period 2008 to 2012. Momentum is now growing for Japanese private companies, which were reluctant to take action before the government established its policies, to participate in the fund by taking advantage of the Kyoto Mechanisms, including the CDM and Joint Implementation (JI). Eight out of 17 companies that have joined the World Bank's Carbon Fund are Japanese, and they have played an active role so far. With the Japan Carbon Fund now in place, Japan is ready to do some things by itself. It's time for Japan to realize that it is playing a leading role for developing countries to help mitigate global warming."
The DBJ's mission is "aiming at the achievement of a sustainable society through its investments, knowledge and information," and its challenge will continue into the future.