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Results of the Fourth Market Functioning Survey concerning Climate Change - Progress in the Improvement of Market Functioning and Challenges for the Future -

July 16, 2025
Financial Markets Department
Bank of Japan

Executive Summary

To accelerate efforts in tackling climate change, it is crucial for financial markets to play a greater role in terms of financial intermediation by incorporating risks and opportunities arising from climate change into the pricing of financial instruments, such as stocks and bonds, and by providing a more favorable environment for the issuance of climate change-related ESG bonds (hereinafter "the ESG bonds"). Since 2022, the Bank of Japan has conducted the Market Functioning Survey concerning Climate Change to evaluate those developments and challenges in Japanese financial markets.

Respondents in the fourth survey viewed that climate-related risks and opportunities were priced into both the stock and corporate bond markets in Japan slightly more than the previous survey. To further incorporate these factors into market prices, the most frequently cited priority was "increasing issuers and/or investors that place a high value on climate-related risks and opportunities."

Regarding the current status of the ESG bond market, there was a slight shift in respondents' assessment of the economic advantages of issuing the ESG bonds. As the expansion of the investor base became limited, respondents' views on supply and demand conditions changed toward loosening. Their views on the advantages of issuance conditions for the ESG bonds over non-ESG bonds, such as the presence of a greenium, also became somewhat more cautious. The proportion of respondents selecting "gaining new investors and/or diversifying the investor base" as a reason for issuing the ESG bonds declined accordingly. As for the market outlook, both business corporates and investors appeared to remain willing to use the ESG bonds actively over a somewhat long term. However, business corporates seemed to be considering fundraising methods for climate change-related responses more flexibly, including options such as taking out loans or issuing non-ESG bonds. Under these circumstances, the most frequently cited challenge for expanding the ESG bond market was "increasing issuers and/or investors that place a high value on climate-related risks and opportunities."

Although there were slight changes in respondents' views on the economic aspects of the ESG bonds, companies maintained their overall stance on gaining understanding and securing necessary funds to address climate change. They have consistently placed greater importance on business strategy and reputation rather than economic benefits as primary reasons for issuing the ESG bonds, and this perspective continues to shape their approach. Transition finance is being increasingly utilized, particularly in high-emitting sectors, and many companies plan to use it going forward. Respondents also indicated that they would utilize transition plans, for example, as tools for fundraising.

The international situation surrounding climate finance has changed since last autumn, against the backdrop of the change in administration in the United States and intensified discussions over industrial competitiveness in Europe. In this survey, there appeared to be no clear indication that these developments had a direct and significant impact on the views of market participants in Japan. Some respondents noted that Japan's approach to climate finance had been well-balanced to date, and thus there had been little notable influence of these international developments on domestic efforts. At the same time, these developments seem to have sparked growing interest in climate change-related initiatives among respondents. Many respondents expressed views on climate finance and disclosure from various perspectives, including cost-effectiveness, underlying philosophy, and practical effectiveness. Looking ahead, how such developments will affect the views of market participants in Japan is a key point of interest. As climate-related disclosure legislation continues to advance, the role and positioning of the ESG bonds within corporate strategies may shift. It is therefore be important to closely monitor these trends when assessing the functioning of climate-related financial markets.

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Financial Markets Department, Bank of Japan
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Market Infrastructure Division
Financial Markets Department

E-mail : post.fmd37@boj.or.jp