Interest in environmental, social and governance (ESG) issues has grown globally, as countries, companies and investors have focused more on this area. The same trend has occurred in Japan.

Sustainability-linked derivatives (SLDs) are not yet a major product in the Japanese market, but they have emerged as one of the tools available to help firms meet their ESG objectives. As SLDs gain increasing attention around the world, and as some SLDs emerge in Japan, it is necessary for users to understand how these instruments fit into existing regulatory regimes.

This whitepaper analyzes two categories of SLDs in the context of the derivatives regulatory framework in Japan. Specifically, it considers:

• Whether SLDs would be classified as ‘over-the-counter (OTC) derivatives transactions’ or ‘OTC commodity derivatives transactions’, and how they are regulated; and
• Compliance issues for market participants to consider when executing SLDs.