ESG Disclosure is Driving Impact in Japan

Articles

The newly proposed International Financing Reporting Standards (IFRS) aligned ESG disclosure in Japan1 is the latest in a series of actions that will see Japanese companies facing mandatory standardised sustainability-related disclosure requirements.

By Rebecca Jinks, Director – ESG & Sustainability, Taronga Ventures

Stakeholder demand – from investors to customers – is fuelling ESG and sustainability disclosure globally. With governments increasingly regulating disclosure, corporates must improve their ESG disclosure practices to keep step. The Japanese market is no exception. In this article, we explore the current state and future outlook of ESG disclosure in Japan and how organisations can prepare to comply.

Key takeaways for Japan

  • Japanese authorities are mandating disclosure standards, implicating close to 4,000 companies
  • EU and US rules and standards, as well as the adoption of standards developed by the International Sustainability Standards Board, are impacting Japanese multinationals who must understand and comply with these
  • Organisations must monitor (and be prepared to respond to) developing disclosure requirements and standards including the level of interoperability and alignment between major initiatives across the globe

Current state of ESG disclosure in Japan

To date, Japan as a country has by count one of the largest number of organisations declaring support for the Task Force on Climate-related Financial Disclosures (TCFD). In June 2021, the Tokyo Stock Exchange (TSE) released revisions to the Corporate Governance Code2 which required listed organisations to report against TCFD and address social matters in a “comply-or-explain” manner.

In 2023, the Japanese government passed its Green Transformation (GX) policy3 which defines the country’s strategy to achieve net-zero carbon emissions by 2050. The purpose of the policy is to create a shift in the country’s industrial structure, which is currently heavily dependent on fossil fuels and create one powered by green energy. Over time, the GX policy will span five key initiatives, including:

  • A growth-oriented carbon pricing;
  • Integrated regulatory and assistance promotion measures;
  • New methods of financing;
  • An international development strategy that incorporates an Asia Zero Emissions Community; and
  • The development of a GX league comprised of members from corporate, government and academia.

In March 2023, new rules designed by the Financial Services Agency (FSA)4 were made effective representing what might be called the first stage of mandatory sustainability disclosure rules in Japan. These rules mandate the creation of a new section for sustainability-related information in the annual securities report. Under the rules, all listed companies in Japan will be required to disclose sustainability-related information using the TCFD pillars. However, these standards do not require third party assurance, as is the case in other jurisdictions.

Future of ESG disclosure in Japan

The subsequent stage of mandated sustainability disclosure (currently open for public consultation) in Japan are anticipated to come into effect by the first half of 2025. These will be over seen and designed by the recently established the Sustainability Standards Board of Japan (SSBJ)5. The SSBJ, has outlined its project plan for the Japanese sustainability disclosure standards. The plan results in final regulation drafts just being released. While mandatory effective dates have not been set, organisations may choose to voluntarily apply the standards to prepare for coming legislative disclosure requirements.

The standards will no doubt follow global best practices and be consistent with International Sustainability Standards Board (ISSB): IFRS S1 – General Sustainability-related Disclosures (S1) and IFRS S2 – Climate-related Disclosures (S2).

The disclosure rules drafted by the SSBJ are expected to apply to all listed companies in Japan including foreign companies listed on the Tokyo Stock Exchange.

Global mandates of ESG disclosure in Japan

Japanese companies with global operations are finding themselves subject to, or queried with regards to ESG and sustainability disclosure mandates which have been regulated outside of Japan.

The EU’s Corporate Sustainability Reporting Directive (CSRD) has been applied to many of Japan’s largest multinationals including (i) those listed on EU markets and (ii) those with large EU subsidiaries. From 2028, the CSRD will impact Japan with Japanese companies who generate more than €150 million of net revenue in the EU becoming subject to the directive and being required to disclose.

In the US, meanwhile, climate and sustainability disclosure rules proposed by the SEC6 are expected to have a more limited impact on the Japanese economy, impacting only Japanese companies listed on US exchanges. Under the SEC’s proposed climate disclosure rule, “The Enhancement and Standardization of Climate-Related disclosures for Investors”. Meaning, Foreign companies, including Japanese domiciled organisations, will not qualify for any additional phase-in relief or exemption from Scope 3 disclosures beyond the relief afforded to all registrants.

Overall, with Japanese authorities mandating and regulating ESG and climate risk related disclosures, Japan based organisations must prepare to comply. Paving a pathway to respond to these requirements7 will not only prepare organisations for the inevitable local disclosure transition, but also help them to begin to meet international requirements on the topic across markets such as Europe and the United States.

The evolving regulatory landscape will no doubt require organisations to monitor the level of interoperability and alignment between major ESG and climate risk disclosure practices across the globe. Taronga Advisory anticipate Japanese organisations will benefit substantially from alignment with global approaches and realise meaningful risk mitigation and market differentiation through greater transparency.

Taronga Advisory are pleased to support the Japanese property and infrastructure market in this transition and global best practice alignment, particularly with preparedness planning.



1 https://www.ssb-j.jp/en/exposure_drafts/y2024/2024-0329.html

2 https://www.gov-online.go.jp/eng/publicity/book/hlj/html/202111/202111_09_en.html#:~:text=The%20Corporate%20Governance%20Code%20and%20the%20Engagement%20Guidelines%20were%20revised,market%20restructuring%20in%20April%202022

3 https://grjapan.com/sites/default/files/content/articles/files/january_2024_gr_japan_update_on_gx_plans.pdf

4 https://www.fsa.go.jp/en/newsletter/weekly2024/578.html

5 https://www.ssb-j.jp/en/

6 https://www.sec.gov/securities-topics/climate-esg

7 https://climateactiontracker.org/countries/japan/policies-action/

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