Innovative Financing Efforts for Sustainability by Development Bank of Japan (DBJ)

1. Innovative Financing Efforts for Sustainabilityby Development Bank of Japan (DBJ) Atsuhito Kurozumi (atkuroz@dbj-us.org) Development Bank of Japan 36th Meeting of the General Assembly of the ALIDE Havana, Cuba 25-26 May, 2006 This material is distributed on behalf of the Development Bank of Japan (DBJ), Tokyo, Japan. DBJ programs are based on a Japanese governmental financial policy whose principal purpose is to encourage Japanese Economy and Industry. This material is intended to provide general information to promote that objective, not to solicit clients for loans or other financing programs.

2. DBJ and its Mission DBJ: Policy-based financial institution owned by the Japanese government Mission: to revitalize the economy and to promote sustainable development mainly through long-term financing Three Focused Areas: (1) Environmental Conservation and Sustainable Societies (2) Community Development (3) Creation of New Technology and Industries

3. Outline 1. Trends in DBJ’s Efforts for Sustainability 2. New Program 1: Loans for Environmentally Conscious Management 3. New Program 2: Coestablishment of Japan Carbon Finance Ltd [Appendix] Some details on the two programs

4. Outline 1. Trends in DBJ’s Efforts for Sustainability 2. New Program 1: Loans for Environmentally Conscious Management 3. New Program 2: Coestablishment of Japan Carbon Finance Ltd [Appendix] Some details on the two programs

5. Trends in DBJ’ Efforts for Sustainability 1960-1980’s: “End of Pipe” Solution Loans for Anti-Pollution Investment (water pollution control, smoke and soot control, waste disposal, noise reduction, energy saving etc.) 1980’s-: Process Improvement Loans for Reduce-Reuse-Recycle, Life Cycle Assessment, ISO14001, Renewable Energy, etc 2000’s-: Promoting Environmental Management and CSR Loans for Environmentally Conscious Management (the World’s First Loans using Environmental Ratings) Mitigating Climate Change Establishment of Japan Carbon Finance Ltd to promote CDM/JI

6. Example 1: Eco Cement (Recycling) • Key equipment of Eco Town plan of Chiba prefecture (finalized in 2001) • Production of cement based on ash (90,000 t annually) from metropolitan waste Source: Eco-cement homepage.

7. Example 2: Wind Power Plant (Renewable Energy) Eco Power (Yamagata Prefecture) 3,200kw Eurus Energy Tomamae (Hokkaido) 20,000kw Source: Annual Report of the Development Bank of Japan.

8. Outline 1. Trends in DBJ’s Efforts for Sustainability 2. New Program 1: Loans for Environmentally Conscious Management 3. New Program 2: Coestablishment of Japan Carbon Finance Ltd [Appendix] Some details on the two programs

9. Loans for Promoting Environmentally Conscious Management Loans for environmentally conscious activities by companies whose management is environmentally conscious → using 2-step environmental rating 　　① Qualitative Evaluation（Governance,Environment Management System, Partnership, Disclosure, etc） 　　② Quantitative Evaluation （Environmentally Efficient: CO2, Waste, etc） Monitoring companies’ activities after loans

10. Loans for promoting environmentally conscious management Guarantee on privately placed bonds Loan Firms proved to have highly go-ahead attitude toward environment-friendly activity <A>Policy interest rate III Monitoring, duty of disclosure Companies Environmental screening Application Firms proved to have go-ahead attitude toward environment-friendly activity <B>Policy interest rate II Firms proved to have sufficiently positive attitude toward environment-friendly activity <C>Policy interest rate I (unqualified)

11. Outline of Screening Evaluation (Details) Evaluation Items and Criteria ① General management (41 items, 80 points) 　② Business activities (27 items, 64 points) 　③ Environmental performance (58 items, 106 points) ※ A total of 126 evaluation items for 250 points have been set up. Applicants achieving120 points or more are accepted. Successful applicants are further classified into three ranks (A, B & C) for different interest rates. (Features) (1) Screening items and criteria are mostly made public. (2) Screening is based on the “Guidelines for Environmental Performance Indicators” by the Ministry of the Environment. (3) Special consideration is given to SMEs. (4) Special items have been set up for different types of manufacturing and non-manufacturing industries. (5) Additional items are available to give special points for excellent business activities.

12. A. Corporate governance B. Compliance Items for general management C. Risk management Common/additional D. Partnership E. Employees F. Disclosure of information G. Equipment Investment Items for business activities H. Development of products and services Common/additional I. Environment-friendly considerations in supply chain J. Recycling of used products K. Measures against global warming L. Measures for effective use of resources Items for environmental performance Common/additional M. Measures for water resources N. Management of chemical substances O. Other measures for environmental loads Outline of Evaluation Items Example for Manufacturing Industry (processing/assembly)

13. The Current Status of the Loan and Benefits to Borrowers • Loan Provision:32 companies, $ 370 million boosting $ 1.9 billion investment (as of March ‘05) • Benefits to clients and society: • Low interest rates improve • a. the financial competitiveness of the company • b. the status of the environmental section within each company. • Help raise reputation among consumers and investors. • Help raise awareness among • a. employees (especially in SMEs whose in-house education may not sufficient). • b. general public

14. Outline 1. Trends in DBJ’s Efforts for Sustainability 2. New Program 1: Loans for Environmentally Conscious Management 3. New Program 2: Coestablishment of Japan Carbon Finance Ltd [Appendix] Some details on the two programs

15. Japan Carbon Finance Ltd. (JCF) Main BusinessObjective: To Purchase Carbon Credits (CERs and ERUs） issued until 2012 from CDM/JI Projects with Assistance to Development of CDM/JI Projects Committed Fund Amount: Approx. US$ 140 million from fund pool called “Japan GHG Reduction Fund (JGRF)” Establishment: December, 2004 Location: Tokyo, Japan

16. Fund Providers: Two Policy-based lenders (Governmental Banks) & 31 Major Japanese Private Enterprises

17. Services (1) Financial Assistance for Project Development: • PDD Preparation • Validation • Initial Verification (2) Purchase of Carbon Credits (CERs, ERUs, AAUs): JCF commits purchase of carbon credits under ERPA (Emission Reduction Purchase Agreement) (at a fixed price). * Payment on Delivery in principle * Purchase Price: to be decided on project-by-project basis

18. Benefits for Projects (1) To getAdditional Cash Flow: • Improvement of Project Viability･with additional Cash Inflow by selling CERs in US$ ･Cash Inflow depends on Type of Project • Securing Stable Profitabilityby getting commitment for purchase of CERs (2) To getAssistance in Development: • Saving Development Costs(PDD, Validation, Initial Verification etc.) • Getting Assistance and Orientationfor development of CDM projects (3)To have possibility to get Financing from JBIC: A) Export Loan B) Overseas Investment Loan C) Untied Loan D) ODA Loan, etc.

19. Project Participants do not have to suffer from unpredictable financial risks in future. Assistance in Development Even in the case of shortage of Carbon Credits in spite of best endeavors by Project Participants: Project Participants are NOT required: • to make up for the shortage (with Credits from other projects or sellers); and • to pay any penalty to JCF. unless the delivery failure is caused by their willful misconduct.(e.g. Sale of Carbon Credits to some third party)

20. Key Criteria at Screening of PINs/PDDs • Fulfillment of Kyoto Rules: • Additionality, Methodologyetc. • Environmental & Social Safeguard Requirements • Project Feasibility • Purchase Conditions • Price:to be decided on a project-by-project basis at a fair & reasonable price • Volume:More than 50,000t-CO2e/year is preferable. • Delivery Schedule:Early commissioning project is preferable.

21. Key Criteria at Screening of PINs/PDDs

22. Benefits to Project Participants (including development banks who have eligible projects) JCF helps improve the project cash flow. JCFassists development of CDM Projects. JCF bears development costs, for not only PDD preparation and Validation but also Initial Verification. JCFtakes delivery risks. JCF will not require any penalty or replacement of CERs in principle. Contacting JCF in the early stages is highly recommended. (Send PINs!)

23. Thank you Atkuroz@dbj-us.org