What Are Green Bonds? - Bonds With Proceeds Earmarked for Environmental Projects
Green bonds are debt instruments whose proceeds are restricted to environmental projects such as renewable energy, energy efficiency, clean transportation, and sustainable water resource management. The climate awareness bond issued by the European Investment Bank (EIB) in 2007 is generally cited as the first example, and issuance has since spread worldwide. In Japan, the Ministry of the Environment published its Green Bond Guidelines in 2017 (most recently in the 2024 edition), and according to the ministry's tally, yen-denominated green bond issuance in Japan passed 1 trillion yen a year in 2020 and came to approximately 2.3 trillion yen in 2023. Green bond yields are generally comparable to conventional bonds with equivalent credit ratings, though increasing demand has led to some issuances at slightly lower yields (the "greenium").
Green bond issuers span government agencies, local governments, financial institutions, and corporations. In Japan, local governments are among the issuers as well, and the Tokyo Metropolitan Government has issued green bonds over multiple years. The combination of terms that reflect the issuer's creditworthiness and environmental contribution makes green bonds attractive to ESG-conscious investors.
Greenwashing Risk - Identifying Superficial Environmental Claims
As the green bond market expands, concerns have grown about greenwashing - bonds labeled "green" despite having minimal actual environmental impact. The Green Bond Principles (GBP) established by the International Capital Market Association (ICMA) require transparency from issuers across four pillars: use of proceeds, project evaluation and selection process, management of proceeds, and reporting. However, these principles are not legally binding. As an investor, it is important to verify whether the issuer has obtained a Second Party Opinion (SPO) from an independent third party, whether it holds Climate Bonds Initiative (CBI) certification, and whether post-issuance impact reports are disclosed.
The EU adopted the European Green Bond Standard (EU GBS) regulation in November 2023, legally clarifying the definition and disclosure requirements for green bonds. Under this standard, proceeds must in principle be allocated in full in line with the EU Taxonomy requirements, with an exception of up to 15% limited to cases such as economic activities for which technical screening criteria are not yet in place. As similar regulations are developed in other countries, greenwashing risk is expected to diminish.
How Individual Investors Can Access Green Bonds - Using Mutual Funds and ETFs
Green bonds are often issued in large denominations aimed at institutional investors, so the individual issues retail investors can buy directly are limited. Mutual funds and ETFs that invest mainly in green bonds are therefore the practical access point for individual investors. These funds invest in multiple green bonds, so default risk is not concentrated in a single issuer. Considering currency risk, a practical approach is to center your allocation on yen-denominated funds and to check whether foreign-currency funds are hedged. Because the products available and their terms change over time, confirm the current lineup through your brokerage's product list and the asset manager's disclosures.
Green bonds are one option for investors who want bond exposure while keeping environmental contribution in mind. Yields and price movements still depend on the issuer's creditworthiness and interest rate levels, so review the risks the same way you would for a conventional bond before adding them.
Next Actions for Getting Started with Green Bond Investing
If you are considering green bond investments, start by searching for green bond-related mutual funds and ETFs through your brokerage account and compare management fees, track records, and holdings. Reallocating 10% to 20% of your bond portfolio to green bond funds is one approach. If the holdings sit in the same rating band, the character of your bond allocation need not change much, though actual price movements depend on the bonds held.
For more active involvement, check for retail green bond offerings from the Tokyo Metropolitan Government or government agencies. These issuers are often relatively high in credit quality, making them approachable as an introduction to bond investing. Bonds do not guarantee your principal, however, and the amount you receive varies with the issuer's credit condition and the interest rate level when you sell. Reading the impact reports published by green bond issuers lets you see exactly which environmental projects your investment is supporting.