Sustainability Financing

Sustainability Financing
(Sustainability Share Subscription Rights and Sustainability Loan)

Daiki Axis voted at the August 21, 2020 Board of Directors’ meeting to issue second share subscription rights with third-party allotment and to conclude an agreement for a term loan with an executable term. Allotment of the share subscription rights to their subscriber, Morgan Stanley MUFG Securities Co., Ltd., was concluded on September 7, 2020.

The funds procured through this will be allocated to investments in plants/equipment and operating fees related to overseas expansion of water-related infrastructure business, which is part of our environmental equipment business, one of our principal business segments.

Overview of Sustainability Financing

Sustainability Share Subscription Rights

Sustainability Loan

Background of Financing

• Daiki Axis is procuring these funds in order to promote the expansion of overseas water-related infrastructure business (in China, Southeast Asia and India) as part of our environmental equipment business, which is one of our long-term growth strategies.
• Through the procurement of these funds, we aim to further the cause of environmental improvement and contribute to the realization of a sustainable society by promoting the effective utilization of water resources in the regions of Asia and Africa as well as the prevention and management of pollution.
• As of August 2020, our planned plant/equipment investments and operating expenses until FY 2024 have reached the ¥3 billion level. By allocating procured funds to part of our investment plan, we will accelerate our strategy for long-term growth.

Points Regarding Financing

ESG Certification

Funds procured as indicated here will be allocated to projects making environmental/social contributions conforming to components¹stipulated in the ESG investment-related standards and guidelines most widely recognized in the capital market.

A second-party opinion regarding the plan’s validity has been obtained from a third-party assessor, DNV GL BUSINESS ASSURANCE JAPAN K.K.²

1 With regard to share subscription rights’ eligibility for making environmental/social contributions, we referenced and adopted the four core components stipulated in the widely recognized standards and guidelines listed below – (1) use of procured funds, (2) project assessment and selection process, (3) management of procured funds, and (4) reporting – as criteria for the execution of domestic/international sustainability financing in bonds, loans, etc., taking into account the characteristic procedures for payment and exercise of share subscription rights.

2 A third-party assessor founded in 1864 and headquartered in Oslo, Norway. In ESG investment, an organization with an extensive track record providing second-party opinions domestically and internationally, globally active as a Ministry of the Environment-registered green bond issuance-supporting agent (External Review division) and a verifier with certification from the Climate Bonds Initiative, an international NGO encouraging large-scale investment aimed at promoting a low-carbon economy.

Backup Loan Establishment

Decisions to exercise share subscription rights reside with their holder, and the exercise price may also be subject to revision. For these reasons, we have concluded a loan contract with the objectives of avoiding delays in projects making use of funds and eliminating the possibility of falling short of the initially anticipated amount of procured funds.
In the case that funds are procured through the exercise of share subscription rights while the loan has a balance, the procured funds will be allocated to repayment of the balance.

Use of Proceeds

Funds procured as indicated here will be allocated to the three projects outlined below.
These are projects that have been assessed in a second-party opinion obtained from DNV GL BUSINESS ASSURANCE JAPAN K.K. as efforts that contribute to the following portion of the UN’s Sustainable Development Goals (SDGs):
Goal 6: Ensure availability and sustainable management of water and sanitation for all.
Target 6.1: By 2030, achieve universal and equitable access to safe and affordable drinking water for all.

Construction and Operation of Johkasou Production Facilities

In our environmental equipment business — one of Daiki Axis’ mainstays — we anticipate further expansion of the overseas market in the days ahead due to the rapid pace of urbanization and economic growth, primarily in developing countries. Furthermore, policy regarding contributions to developing countries by Japan is set forth in the Strategy for Promotion of Environmental Infrastructure announced by the Ministry of the Environment (Japan) on July 25, 2017. Particularly in areas where the rate of sewage system coverage is low, including Southeast Asia, South Asia and Africa, measures are needed to counter problems with water quality, water pollution and so on.

Taking into account the environmental improvement efforts put forth by various countries’ administrations, such as strengthening wastewater treatment water quality regulations and importing wastewater treatment technology, Daiki Axis plans to construct johkasou production facilities in Myanmar, Sri Lanka, Bangladesh and Kenya.

Wastewater Treatment Business (BOO and BOT³ Projects)

We are currently proceeding with considerations of BOO (Build-Own-Operate) and BOT (Build-Operate-Transfer) projects in India, Myanmar, Sri Lanka, Bangladesh and Kenya. In BOO and BOT projects, facilities for johkasou, etc. are installed by Daiki Axis, and the client bears usage fees (either fixed or in proportion to the volume of wastewater treated), while Daiki Axis maintains ownership. Accordingly, they are able to offer solutions to the issue of initial costs incurred with johkasou introduction. We aim to expand the future johkasou sales market by lowering cost-based hurdles to johkasou introduction and furthermore by increasing awareness of their effectiveness.

3

Drinking Water Business (Water Kiosk Projects)

In India, the central government of India’s Ministry of Jal Shakti (Department of Water Resources, River Development and Ganga Rejuvenation) formulated the Jal Jeevan Mission (“JJM” hereafter). JJM’s primary mission is to provide tap water connections to all households. Also, beyond this primary mission, JJM’s objectives include development of a reliable water supply system and technological water treatment interventions to achieve clean drinking water, as well as encouraging the various stakeholders to develop the capacity to resolve drinking water-related issues and to take part in assistance efforts.

In this project, Daiki Axis will establish and operate drinking water sales locations (Water Kiosks)^4.

In addition to general consumers in the area, the clientele for these kiosks will include nearby shops and stalls. The kiosks will provide drinking water with more reliability and safety than the conventional water supply facilities used by these shops.

4 Water Kiosks are locations set up in public spaces to provide drinking water sales. They use a membrane filter with advanced water treatment capabilities called a reverse osmosis (RO) filter, also used in johkasou tanks, to filter water from the water supply system and provide safe drinking water by eliminating impurities.

Project Assessment and Selection Process

With regard to whether projects selected for the allocation of funds procured through Sustainability Financing conformed with the eligibility criteria, our Finance Department selected candidates from among eligible projects that satisfied the requirements of the standards and prerequisites listed below. The Department prepared plans, and final decisions were then made by our CFO.

Management of Procured Funds

Management of procured funds will be performed by our Finance Department.

See below for details on the particular handling of funds procured through share subscription rights from among Sustainability Financing methods.

[Important] Particular Handling of Funds Procured through Share Subscription Rights

Decisions as to payment or nonpayment through the exercise of share subscription rights and the timing at which to exercise rights reside with the share subscription rights’ holder, and the exercise price may also be subject to revision or adjustment. Accordingly, the amount and timing of procurable funds is not fixed at present and may differ from the procured funds’ presently anticipated amount and expected timing of disbursement.

In the case that the presently anticipated amount of funds could not be procured or were insufficient in conjunction with the expected timing of disbursement, we plan to take into account the circumstances at the relevant time and allocate separately required funds from loans included in this Sustainability Financing or funds available on hand, or borrow from a financial institution to procure funds. Funds procured through exercise of the share subscription rights, for each purpose of use, will be allocated in order by the timing of their disbursement.

Reporting

For each of the three projects, the details outlined below will be reported on a yearly basis.

Allocation and Management of Procured Funds

Regarding the allocation and management of procured funds, we plan to make disclosure until more than half of the funds have been allocated.

When making disclosure, we plan to differentiate between funds procured through share subscription rights and those procured through loans.

1. Amount invested in each project to which procured funds have been allocated
2. Amount of unallocated funds among funds procured

Target Projects and Progress Status Reports

1. Information such as location, title, production item(s) and production capacity for eligible projects to which funds have been allocated (taking confidentiality into account)
2.  Progress status reports for eligible projects to which funds have been allocated
   (Ex. Status of project, such as expected time of completion, if project is under construction)

Results of Improvement for Environmental/Social Issues

1. Construction and Operation of Johkasou Production Facilities
   Number of johkasou units produced and shipped by production plants to which procured funds have been allocated, as well as the estimated volume of johkasou wastewater treatment capacity (km3/year)
   * Not including johkasou produced in conjunction with the following project listed below: 2. Wastewater Treatment Business (BOO and BOT Projects)
2. Wastewater Treatment Business (BOO and BOT Projects)
   Status of facilities to which procured funds have been allocated (Location of installation, designed processing capacity, status of project in operation, wastewater treatment volume [km3/year])
3. Drinking Water Business (Water Kiosk Projects)
   Status of facilities to which procured funds have been allocated
   (Location of installation, number of kiosks installed, status of project in operation, volume of drinking water supplied [km3/year])