It has been reported that the Japanese Financial Services Agency (“JFSA”) is considering introducing mandatory ESG disclosures, in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). This development is consistent with other policy developments within the regulatory landscape in Japan to prioritise disclosure around ESG factors. In March 2020, the JFSA published a revised version of its Stewardship Code to require the disclosure of ESG factors on the basis of a “comply or explain” approach. In addition, the Tokyo Stock Exchange’s Corporate Governance Code was amended in June 2021 to encourage companies to develop policy and disclosure initiatives regarding sustainability based on the TCFD.

Yosuke Unami, Managing Associate at Linklaters Tokyo, notes:

TCFD-aligned disclosures will be familiar to many Japanese entities, and particularly those with global operations. Many Japanese companies have already been making disclosures on a voluntary basis – a mandatory regime may help to bring consistency to these disclosures.

TCFD reporting is centred around four pillars: 

(i) governance regarding climate risk and opportunities; 

(ii) business model and strategy, and how this might change (scenario analysis being encouraged but not required); 

(iii) risk management of climate risks, including principal risks and opportunities, with a focus on transition, physical and regulatory risk and how these are managed; and 

(iv) metrics and targets used to assess and manage climate risks and opportunities.

The new mandatory disclosure regime is expected to be enforced from April 2022, initially impacting companies listed on the JFSA’s prime blue chip market, but then expanding to cover all companies that submit annual securities reports. This will likely increase the volume and level of detail in the disclosures provided in relation to ESG factors, but brings with it potential challenges, including to guard against potential claims of greenwashing. 

The key concerns for JFSA-regulated entities are likely to include:

  • dependency on external information for reporting, and data gaps;
  • increasing scrutiny from clients / investors, shareholders, regulators, NGOs, and other stakeholders;
  • need to develop new systems, due diligence and contractual obligations;
  • litigation risk (although some protection through governance, verification, assurance); and
  • disclaimers and safe harbours.

Additional guidance from TCFD

The TCFD has also just released additional guidance regarding disclosures of climate-related metrics and targets and key information for transition plans. This is likely to assist entities when relying on third party information for reporting and data gaps. In particular, this guidance lists the criteria entities should consider to ensure that the identified metrics meet the TCFD’s fundamental principles for effective disclosure.

ESG landscape in Japan

Viewed against the backdrop of the ESG landscape in Japan, it is clear that the JFSA is continuing to review and assess the guidance available to market participants to increase the accuracy, reliability and transparency relating to both disclosures and certification of ESG products. 

By way of example, the JFSA is finalising draft guidelines for the issuance of social bonds with a view to driving private sector capital into social projects. The guidelines are designed to be consistent with the International Capital Market Association (ICMA) Social Bond Principles, tailored to the characteristics of Japan. The guidelines are also focused on ensuring the credibility of the social benefits of social bonds while reducing the cost to and administrative burden on issuers. 

The JFSA is also planning to establish a new framework to verify the eligibility of ESG-related funds that will look to align with international standards, with a view to guarding against potential greenwashing.