Financial Services Agency of Japan introduces number of ESG developments

The Financial Services Agency of Japan (“FSA”) has introduced a number of ESG developments in the past two months. Some of these developments are still in draft form, while others impose mandatory obligations as follows:

• Publication of the draft Amendments to the ESG disclosure rules under the Financial Instruments and Exchange Act of Japan on 7 November 2022 (see original press release in Japanese here, and an English summary here);
• Publication of the finalised Code of Conduct for ESG Evaluation and Data Providers on 15 December 2022; and
• Publication of the draft Amendments to the Comprehensive Supervisory Guidelines for Financial Instruments Business Operators, etc. regarding ESG Investment Trusts on 19 December 2022.

We set out further details on each of these below.

Amendments to the ESG disclosure rules

On 7 November 2022, the FSA published the draft amendments to the disclosure rules, including the Cabinet Office Ordinance on the Disclosure of Corporate Affairs, etc. (the “Ordinance”), applicable to the public companies. The amended Ordinance and other relevant regulations will introduce mandatory disclosure by public companies of ESG related information such as:

• the company’s attitude towards sustainability and related initiatives, including information about governance and risk management (and strategy, and index and target if the company considers these to be material); and
• information on human capital and diversity, including the company’s policies on human resource training, improvement of work environment and related index. If the company is required by relevant laws and regulations to publish information about the proportion of women in management, rate of male employees who took paternity leave, and pay gap between male and female employees, these are also to be disclosed in the annual securities report, etc.

Further to these new requirements, the Ordinance also seeks to clarify that, if a company provides (i) management’s understanding of forward-looking statements together with the underlying facts and assumptions, etc., and/or (ii) the forward looking statements that were discussed within the company together with the underlying facts and assumptions, etc, in their annual securities report or other disclosure documents, the company or the management would not be held liable solely if there is a later discrepancy between the forward looking statements and actual company performance.

In addition to the Ordinance, a high-level guidance was published in relation to the contents and presentation of ESG-related information. It is expected that the guidance will be updated from time to time, taking into account global and national trends on sustainability information disclosure regulations and practices.

The Proposed Amendment will apply to the securities registration statement and annual securities report, which are related to the fiscal year ending on and after 31 March 2023.

Code of Conduct for ESG Evaluation and Data Providers

On 15 December 2022, the FSA published the finalised Code of Conduct for ESG Evaluation and Data Providers (the “Code”).  The Code is based on the discussions of the Technical Committee for ESG Evaluation and Data Providers, etc. (established by the FSA in February 2022, the “Technical Committee”), on the current status of ESG evaluation and data, challenges faced by relevant parties in ensuring that ESG evaluation and data are appropriately provided and used, and future developments that are expected.

The Code is not a law or regulation that imposes legally enforceable requirements on ESG evaluation and data providers, but is designed to be a voluntary code on a “comply or explain” basis. The FSA calls for organisations to express their support for the Code via public announcement (and notify the FSA of its support), and the organisations supporting the Code will either comply with the principles and guidelines of the Code, or explain the reasons why they do not comply with a particular principle or guideline.

The Code will then assist institutional investors, such as asset owners and asset managers, who make investment decisions using ESG evaluations and data issued by providers, on the following issues and challenges identified by the Technical Committee:

• ensuring transparency and fairness between potentially differing evaluations and standards provided by ESG evaluation and data providers;
• addressing potential conflicts of interest, such as ESG evaluation and data providers providing consulting services to the company being evaluated; and
• ensuring the quality of evaluation.

Amended Supervisory Guidelines for ESG Investment Trusts

On 19 December 2022, the FSA published the draft amendments to “the Comprehensive Supervisory Guidelines for Financial Instruments Business Operators, etc.” (the “Amended Supervisory Guidelines”).

The amendment was proposed with the aim to tackle potential and actual greenwashing in relation to publicly offered funds (or investment trusts). The Amended Supervisory Guidelines were drafted based on “Seven Expectations for Asset Management Companies managing ESG Investment Trusts” (the “Seven Expectations”) set out in the “Progress Report on Enhancing Asset Management Business 2022” released in May 2022. The Seven Expectations were published in response to the result of a survey conducted by the FSA since November 2021. The survey collected information on 225 publicly offered funds managed by 37 asset managers in Japan.

Under the Amended Supervisory Guidelines, an asset manager managing publicly offered fund(s) will be required to:

• consider whether each publicly offered fund falls within the scope of an “ESG Fund” as defined in the Amended Supervisory Guidelines;
• ensure that a non-ESG Fund does not have “ESG”, “SDGs”, Green”, “Decarbonization”, “Impact”, “Sustainable” or any other ESG-related word in its name;
• ensure that nothing in the marketing documents of a non-ESG Fund misleads the investors to believe that the fund is an ESG Fund;
• in the marketing documents of an ESG Fund, include the disclosure of certain information about the ESG-related aspects of the fund as set out in the Amended Supervisory Guidelines;
• in the periodic reports of an ESG Fund, include the disclosure of certain information about ESG-related activities and sustainability performance of the fund as set out in the Amended Supervisory Guidelines;
• upon outsourcing of the investment management function to any third party manager, conduct appropriate due diligence, monitoring and disclosure;
• ensure that the asset manager has adequate resources to implement operations in line with the investment strategy of an ESG Fund and to monitor the implementation status on an ongoing basis;
• in relation to the use of ESG ratings and ESG data provided by the data vendors, perform appropriate due diligence on the data vendors, including the organisational structure of the vendors, methodology and other aspects as set out in the Amended Supervisory Guidelines.

Although the Amended Supervisory Guidelines are in line with what was anticipated, they leave room for different interpretations as to the definition of “ESG Fund” and what can be disclosed in non-ESG Fund marketing documents.

The public comment process is open for the draft Amended Supervisory Guidelines until 27 January 2023.