Weak guardrails risk undermining BoJ’s climate lending scheme, warns thinktank

As transition finance gains momentum in Japan, a thinktank is urging its central bank to strengthen safeguards against greenwashing in its central bank’s flagship climate lending facility.

In a briefing published this week, UK-based Positive Money, which campaigns for monetary reform, warned that the Bank of Japan (BoJ) risks refinancing misaligned activities through its loan facility in the absence of strict regulatory and supervisory standards.

The facility, known as the Climate Response Financing Operations, was established in September 2021 to provide zero-interest, one-year loans to financial institutions that fund projects or companies tackling climate change.

Currently, participating financiers are given full autonomy to define what counts as credible climate financing, subject to disclosure of the criteria used.

This ability to self-determine what loans and investments qualify for financing is the “core problem” with the facility, said the briefing’s author Matthew Poggi, a visiting senior fellow at the Centre for Economic Transition Expertise in the London School of Economics and a part-time lecturer at Yokohama City University.

“That flexibility helped the facility grow, but it also creates inconsistent definitions and a risk that the BoJ is refinancing activities whose contribution to decarbonisation is weak or difficult to verify,” Poggi told Green Central Banking.

As of January, outstanding climate lending under this facility has reached 21.11tr Japanese yen (US$130.2bn) – an amount now large enough for the introduction of integrity requirements to influence standards across Japan’s financial system, said Poggi.

Clearer eligibility and explicit exclusions needed

For the BoJ to more effectively use its balance sheet to incentivise more credible climate financing, Positive Money called for the BoJ to update the eligibility framework of its lending facility.

One of the key recommendations is for a clearer list of eligible activities and minimum disclosure requirements. 

The central bank currently requires commercial banks to make disclosures based on frameworks developed by the Task Force for Climate-related Financial Disclosures or the Sustainability Standards Board of Japan. 

However, Poggi said that the next step is to require “finance supported by the facility to be reported under credible, auditable standards and classified according to transparent criteria.”

“For transition finance, it is not enough for an activity simply to carry a ‘transition’ label,” he said.

To avoid appearing to make policy choices, the criteria the BoJ adopts should also be anchored in existing government frameworks, such as Japan’s green transformation (GX) strategy and climate transition finance guidelines, said Poggi.

Furthermore, the thinktank urged the BoJ to introduce explicit exclusions and transition tests. In particular, Positive Money stated that financing for new unabated coal capacity, fossil fuel expansion or high-emission activities without credible decarbonisation pathways should be excluded. 

“In sectors where immediate substitution is difficult, eligibility should depend on a credible, time-bound transition plan aligned with a sector pathway, measurable emissions reductions, and safeguards against locking in high-carbon assets,” said Poggi.

To reward higher-quality transition finance while preserving monetary policy control, BoJ could also offer limited non-rate incentives, such as longer maturities or more favourable remunerations on banks’ reserves, for financing that meets stricter eligibility and transition tests, Poggi said.

“More broadly, the BoJ can help make transition finance more credible by standardising the information banks must provide when using the facility; using its monitoring and on-site examinations to assess whether banks are testing clients’ transition plans rather than simply accepting labels.”

Over time, climate-related risk can then be integrated into BoJ’s collateral framework through disclosure requirements, differentiated haircuts – reductions in the value assigned to riskier assets – and, where appropriate, limits on the volume of high-carbon assets that can be used as collateral, Poggi added.

Japan’s influential role in transition finance

Climate finance watchdogs have previously warned that Japan’s transition bond market – the world’s largest – has financed gas projects that barely cut emissions, risking the normalisation of weak labelling practices elsewhere in Asia.

“The question should not be whether a project is described as contributing to transition or energy security, but whether it produces material, verifiable emissions reductions and is consistent with Japan’s longer-term decarbonisation pathway,” stressed Poggi, who acknowledged concerns around gas financing, which is recognised as a transition fuel in Japan’s GX framework.

Given the outsized role Japan has played in promoting transition finance across Asia in recent years, guardrails introduced by BoJ will be influential in informing emerging transition standards in the region as well, noted Poggi.

“Stronger BoJ criteria would have a signalling effect beyond the facility itself,” he said. “Conversely, if BoJ-supported finance is seen as accommodating projects with limited emissions benefits, it risks legitimising weaker transition standards elsewhere in the region.”

Japan placed sixth out of the 13 countries assessed in Positive Money’s 2025 green central banking scorecard for Asia.

Positive Money’s briefing is also available in Japanese. 

 

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