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Investors clamoring for ESG debt help halve Tokyo funding costs

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The Tokyo Metropolitan Government slashed funding costs thanks to rampant global demand for the first social bond offered by a local government in Japan.

The coupon of 0.005% is half the going level for plain five-year municipal notes priced earlier this month. Applications for the five-year social bonds outstripped the ¥30 billion issue about 12 times, enabling the reduction in funding costs, according to Goldman Sachs Group Inc., one of the banks underwriting the deal.

“A yield of 0.01% is low enough, so major institutional investors at first voiced resistance to an even lower return,” said Satoru Kawahito, head of public sector and infrastructure banking at Goldman Sachs in Japan. Still, the investors decided to buy the bonds soon after the marketing began, he said. “We think there was an ESG premium in the deal.”

The so-called “greenium” — or green premium — underscores growing investor appetite for securities used to fund socially responsible investment. The money raised by the government of Tokyo will fund projects including support for women who dropped out of the job market to raise children to regain employment, helping children with disabilities and aid for small to midsized companies hurt by the pandemic.

The city’s last five-year bond sale, a green note that raised ¥10 billion, was priced at 0.02% on Oct. 16. Since then, yields on bonds including munis have slid in Japan.

Among other local governments, Shizuoka Prefecture, Kyoto Prefecture, the city of Sapporo and Miyagi Prefecture all priced plain five-year muni notes at 0.01% earlier this month.

“Demand for this social bond deal was more than what we got for our green bonds,” said Hiromi Yoshiura, director of the Tokyo government’s bond section. “We think that the purpose of the sales resonated well with investors.”

Foreign investors accounted for about ¥10 billion in orders, reflecting unusual global interest in a Japanese local-government issue and soaring demand for bonds that fund sustainable projects, Kawahito said. Local investors held 99% of yen municipal bonds as of December, according to Bank of Japan data.

Tokyo said earlier this month it’s planning more social bond sales in the future, possibly including dollar-denominated notes if projects require large funds.

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