Sustainability-focused aviation finance association Impact* has published its Year in Review 2023 report, which provides a snapshot of its activities and features on a number of topics relevant to the decarbonisation of aviation. Among the featured topics, this year’s report explores ESG priorities in two major Japanese aviation finance institutions: Tokyo Century Corporation and MUFG Bank. This article is republished here in its entirety.
A view from Japan: How key players in Japanese aviation finance think of ESG
Japanese financial institutions have long been a geographical center of gravity for aviation, and their influence over the sector has only grown stronger over the past decade. Four of the ten largest aircraft leasing companies in the world are wholly or partially owned by Japanese firms, Japanese banks are one of the industry’s largest debt providers, and a vast number of aircraft operating leases involve Japanese investors via JOL and JOLCO structures.
To better understand the ESG pressures that major Japanese firms are experiencing, Impact reached out to Tokyo Century Corporation, a major financial firm with a strong foothold in asset leasing, and MUFG Bank, Japan’s largest bank and one of the world’s largest.
Starting signals for their ESG journey
Much like many financial institutions elsewhere, MUFG tells Impact that the bank’s decision to join the Net Zero Banking Alliance (NZBA) in June 2021 is one of the biggest events to have influenced ESG expectations for aviation finance. Under NZBA, MUFG is committed to measuring and transitioning its investment and financing portfolios along a pathway to net zero with targets for 2030 and 2050. MUFG subsequently joined Impact in 2022 which it credits for giving it “a better understanding of the challenges facing financiers in the aviation space,” MUFG’s Global Aviation Finance Office Head of Portfolio Management, Conor Murphy, shares.
Tokyo Century, which through its leasing operations is closer to the everyday operation of aircraft assets, sees ICAO’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) as perhaps the biggest event to drive ESG expectations for aviation. “The start of the CORSIA pilot phase in 2021 has accelerated and prioritized ESG in the whole of the aviation industry, including the aviation finance market in Japan,” Fumika Mikami, Manager for Airline Marketing & Portfolio Management at Tokyo Century’s Aviation Finance Division, tells Impact.
Japanese government policy initiatives
Government policy signals for the Japanese aviation industry have also reverberated through the financing community. Both MUFG and Tokyo Century point out that the Japanese Ministry of Economy, Trade and Industry (METI) has proposed a target to replace 10% of jet fuel consumption by Japanese airlines with SAF by 2030. The Japanese Government is also contemplating the provision of economic support in the form of grants for capital investment and feedstock supply as well as exemption on import tariffs (subject to budgetary approval by the Japanese National Diet).
In 2022, an organization called “Act for Sky” was established to promote the recognition of SAF and facilitate the creation and scale-up of a domestic SAF industry. Initially spearheaded by JAL, ANA, JGC and Revo International, Act for Sky now consists of 31 members including MUFG, which joined in July 2023. In 2022, METI and the Ministry of Land, Infrastructure, Transport and Tourism (MILT) also jointly established a “SAF Public-Private Council” to promote cooperation between domestic fuel suppliers and Japanese airlines to develop, manufacture, and build supply chains for domestically produced SAF that is internationally competitive.
The Japanese government has also been supportive of sustainable finance transactions through a financial support programme for green and sustainability linked bond/loan coordinated by the Ministry of the Environment (MOE), which has been accessed by – among other corporate borrowers – Japanese airlines.
Separately, METI in 2022 established the “Green Transformation (GX) League” forum for companies involved in the green transition endorsed by over 600 companies and participated by over 400, including Tokyo Century Group, which transited its position from “endorsement” to “participation” in April 2023 “in order to be more involved in it”, Mikami tells Impact.
Putting priorities into practice
Both Tokyo Century and MUFG have made the financing of efficiency-driven asset choices one of their main approaches to aviation’s sustainability challenge. This includes, in the case of Tokyo Century, unconditional purchase commitments of 121 new-tech aircraft by California-headquartered leasing subsidiary Aviation Capital Group (ACG) as of December 31, 2022. Beyond this shared action point, the two institutions have been taking other approaches tailored to their strengths.
In addition to setting Scope 1 and 2 net-zero emissions objectives by 2040, Mikami shares that Tokyo Century has been working on “circular economy” concepts and applying these through its value chain affiliated businesses. They include parts and service business operator (GA Telesis), engine leasing (Gateway Engine Leasing), airline Jetstar Japan (of which it owns a 16.7% [voting interest]), and ACG.
MUFG in the meantime is placing itself as a “thought leader” in the aviation sustainability space, offering in-house expertise to support the industry. Among its financing activities, MUFG is also “exploring” sustainability-linked financing solutions and carbon-offsetting measures, Murphy tells Impact.
The role of sustainable finance
Japanese financial institutions are recurringly involved in sustainable finance transactions in aviation, both as arrangers, structuring agents, and lenders. Murphy believes this trend is likely to continue. “It is highly likely that sustainability-linked structures will become an important option for Japanese financiers in the future. MUFG, for example, acted as Structuring Agent for a JPY 26.5 billion transition-linked financing for JAL in March 2023,” he explains.
Sustainability-linked transactions allow financial parties to monitor the performance of sustainability performance targets (SPTs) and determine incentives or penalties based on their attainment. In the case of MUFG’s JAL financing, the airline must maintain total greenhouse gas emissions in 2025 at 2019 levels and reduce total emissions to less than 90% of 2019 in 2030. “These targets set a clear commitment from JAL to work on decarbonizing its operations,” Murphy shares. Moreover, such financing options “evidence a commitment from Japanese corporates to take net-zero seriously and underpin the wider desire within Japan to transition to a low-carbon economy.”
Tokyo Century in August 2023 also executed a JOLCO transaction incorporating sustainability values into equity financing and a loan, for an Airbus A350-900 aircraft introduced by Air France, and Tokyo Century aims to “initiate and expand” its sustainability-linked product business “with new partners going forward.” At a group level, Tokyo Century has also procured a total of approximately JPY 450 billion (approximately $3 billion) through sustainable finance including green bonds, sustainability-linked loans, and positive Impact loans since 2018.
Japanese peers and expectations
Mikami notes that ESG topics have become “commonplace” at industry conferences in Japan in the past few years. “Especially, the number of conferences specialized in ESG started to increase around 2022 in Tokyo, which felt like a change,” Mikami notes that ESG disclosure amongst Japanese firms in the aviation finance sector has also increased, including TCFD-aligned reports. In the case of Tokyo Century’s aviation business, scenario analysis in line with TCFD was disclosed in April 2022. The embracing of sustainable finance has been a catalyst for cross-sector discussions on sustainability. Mikami notes that Tokyo Century’s recent A350 transaction “led to an increase in discussion opportunities, not only with existing relationships but also with new prospects.”
Beyond commercial aircraft lending and investment, both firms are starting to finance technologies and infrastructure to enable a transition to cleaner flight. In 2022, Tokyo Century subsidiary ACG entered into an agreement in principle with Volocopter (a Tokyo Century affiliate) to develop financing solutions that will assist with the sale of Volocopter’s family of eVTOL aircraft for up to $1 billion.
In July 2023, ACG announced its investment in the United Airlines Ventures Sustainable Flight Fund, which supports start-ups focused on decarbonizing air travel through SAF research, technology, and production. The lessor is also communicating with OEMs and industry bodies “to understand new technologies, SAF, and infrastructure development and to explore ways of encouraging the scale-up of SAF usage across the ACG fleet.”
Meanwhile, MUFG, as an arranger, closed the first green loan in Japan for a SAF manufacturing facility to REVO International in May 2023. “Domestic SAF is indispensable to achieving decarbonization in aviation, and its use is expected to expand significantly in the coming years. The JPY 2.2 billion term loan was used to develop manufacturing facilities for bio-diesel fuel (C-FUEL) and bio-jet fuel (SAF) from waste cooking oil,” Murphy explains.
Fumika Mikami joined Tokyo Century in 2015 and currently serves as the Manager of Aviation Finance Division with responsibility for portfolio management. She is the main spokesperson for all ESG matters related to aviation at Tokyo Century. Prior to joining Tokyo Century, Fumika was an aircraft engineer by training with ANA and serves as one of the two technical managers within Tokyo Century.
Conor Murphy is Head of Portfolio Management at MUFG’s Global Aviation Finance Office. He is the head of EMEA’s aviation portfolio management team with over a decade and a half of experience in asset finance in transportation and infrastructure. Conor is also an active contributor to Impact, of which MUFG is a member.
* Ishka is a founding member of Impact on Sustainable Aviation and Ishka Senior Analyst and Sustainability Lead Eduardo Mariz was a contributor to Impact’s Year in Review report, including the drafting of ‘The View from Japan’ article featured in it. For more information on Impact (Initiative to Measure and Promote Aviation’s Carbon-free Transition e. V.), please visit: impact-on-sustainable-aviation.org
