(Bloomberg) -- Scrutiny of environmental progress at Japanese businesses is rising as assessment dates loom for sustainability-linked bonds that have been issued by many companies. 

Fuyo General Lease Co. is one such firm. The auto and airline leasing company will measure its progress in meeting targets on its sustainability bonds at the end of July, and if it misses a key metric it may have to pay a higher coupon. Another issuer, GLP J-Reit, has a performance target coming up in December. 

Focus on existing issuers’ targets is important because more borrowers, including NEC Corp. and Aeon Co., are seeking to sell sustainability-linked bonds in coming weeks, with the pipeline building ahead of any monetary policy tightening by the Bank of Japan. That stands in contrast to the market for such debt globally, where issuance has dwindled.

Sustainability-linked bond sales in Japan have already hit a record ¥275 billion ($1.7 billion) for the year so far, according to Bloomberg-compiled data. That’s while global issuance of debt of this kind has fallen about 41% to $18.6 billion, in part because of skepticism that targets were not being ambitious enough and penalties too insignificant.

“Most Japanese sustainability-linked bond issuers have yet to assess their targets as the market is still nascent,” said Yasunobu Katsuki, director of the sustainability promotion department at Mizuho Securities Co. “But when more deals get assessed and if markets see that companies have achieved their goals easily, it’s possible that a similar debate will emerge in Japan and they may question if their targets were ambitious enough in the first place.”

Sustainability-linked bonds allow issuers to raise funds from the credit market by setting specific goals. If borrowers miss the target, they can either pay higher coupons or donate parts of the raised funds to environmental non-profit organizations, a structure that has resonated with Japanese environment, social and governance fund managers.  

Fuyo General said it’s aiming for more than 50% of the group’s electricity will be sourced with reusable energy by July 31 as one of its sustainable goals. If it fails, it will have to pay an extra 0.1% coupon on the 0.38% sustainability-linked bond that it sold in December 2020.

“We thought the goal was ambitious because we didn’t think it would be possible at that time to procure reusable energy in abundance in Japan,” said Takashi Mizutani, general manager of an office at Fuyo General that leads decarbonization efforts and develops sustainable fundraising methods. “We also considered that it would be a good tool for us to commit ourselves to sustainability and to show progress,” Mizutani said. 

GLP J-Reit has set a goal to aim to certify more than 80% of its portfolio with green building certifications by 2024. Another six issuers including Takamatsu Construction Group Co., Orient Corp. and TDK Corp. will be assessed in 2025, according to Bloomberg-compiled data.

©2024 Bloomberg L.P.