Japan consults on adopting its sustainability disclosure standards modelled on the ISSB standards

On 29 March 2024, the Sustainability Standards Board of Japan (SSBJ) published exposure drafts of the sustainability disclosure standards to be applied in Japan (the Exposure Drafts). The SSBJ is seeking feedback from market participants and other interested organisations on the content of such sustainability disclosure requirements and the proposal to adopt mandatory sustainability disclosure standards for Japan (see SSBJ’s press release). 

The Exposure Drafts incorporate all the requirements in the sustainability disclosure standards published by the IFRS’ International Sustainability Standards Board (ISSB), with some additional jurisdiction-specific options the entity can choose to apply. 

The SBBJ is soliciting the views from market participants, in particular, as to the need for such jurisdiction specific options. The consultation period started on 29 March 2024 and will end on 31 July 2024. 

Background 

In June 2023, the ISSB published the final versions of the first two global sustainability disclosure standards – IFRS S1 on General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 on Climate-related Disclosure (see our previous blog post) (the ISSB Standards). 

The ISSB Standards are voluntary, but several countries, including the UK, Canada, Brazil, Pakistan, Nigeria and Australia have announced plans to adopt the ISSB Standards into their national regimes. In the Asia region, recent developments include:

• in February 2024, the Accounting and Corporate Regulatory Authority of Singapore and the Singapore Exchange Regulation provided details on mandatory climate reporting that will be implemented for all listed issuers and large non-listed companies in Singapore aligned with the ISSB Standards, following the public consultation held in 2023 (see our previous blog post);
• in February 2024, Malaysia’s Advisory Committee on Sustainability Reporting published a public consultation paper seeking market feedback from investors, rating agencies, interested organisations and companies on the approach and timing for adopting mandatory sustainability disclosure standards aligned with the ISSB Standards (see our previous blog post); and
• in April 2024, the Hong Kong Stock Exchange published its consultation conclusions on its proposals to essentially upgrade the current “comply or explain” requirement to a mandatory climate-related disclosure requirement for listed issuers in Hong Kong SAR and align with the ISSB Standards (such requirements to be implemented in phases starting from 1 January 2025) (see our previous blog posts here and here). 

Approach to sustainability reporting in Japan

For many years, Japan has been recognised as one of the countries with the largest number of companies and organisations declaring their support for sustainability disclosure. In June 2021, the Tokyo Stock Exchange implemented revisions to the Corporate Governance Code which required Prime Market-listed companies to report Task Force for Climate-related Financial Disclosures (TCFD) disclosures and address social matters in a “comply-or-explain” manner. 

In March 2023, new rules designed by the Financial Services Agency (FSA) were made effective, representing what might be called the first stage of mandatory sustainability disclosure rules in Japan. These rules mandated the creation of a new section for sustainability-related information in the statutory annual securities report. Under the rules, all listed companies in Japan should disclose sustainability-related information using the TCFD pillars (Strategy, Metrics and Targets, Governance and Risk Management).

The SSBJ was established in July 2022 to develop sustainability disclosure standards to be applied in Japan and to contribute to the development of international sustainability disclosure standards, following the establishment of the ISSB.

The Exposure Drafts were developed under the assumption that the sustainability disclosure standards issued by the SSBJ would eventually be required, under the Japanese securities laws and regulations, to be applied by companies listed on the Prime Market of the Tokyo Stock Exchange. Additionally, other companies may be required by laws and regulations or choose to voluntarily make sustainability disclosures in accordance with such standards. While mandatory effective dates have not been set, companies may choose to voluntarily apply the standards beginning in or around April 2025.

Key issues open for consultation

In developing high-quality and internationally consistent sustainability disclosure standards, the SSBJ concluded that it would be useful for market participants to align the Japanese standards with the ISSB Standards. Accordingly, the SSBJ decided to incorporate all the requirements in the IFRS S1 and S2 of the ISSB Standards. However, where it is determined that the information disclosed pursuant to the ISSB Standards is not meaningful, places undue burden on the reporting company or is incompatible with other relevant laws and regulations, or where consensus is not reached as to such determination, the relevant sections of such standards may be complied with on a voluntary basis. Moreover, the SSBJ may supplement the ISSB Standards with additional notes to enhance the compatibility with other laws and regulations in Japan.

Set out below is a summary of the key issues currently open for consultation: 

• Source of guidance – In identifying sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects, the ISSB Standards requires that reporting issuers “shall” refer to and consider the applicability of the SASB Standards and the industry-based guidance under IFRS S2. The SSBJ asks whether such reference and consideration should be mandatory or voluntary.
• Greenhouse gas (GHG) emissions – The SSBJ asks whether:
  • the Japanese standards should require disclosure of the gross GHG emissions that cover Scope 1, 2 and 3 GHG emissions pursuant to the ISSB Standards;  
  • reporting companies can leverage the data used to satisfy their reporting obligations under Japan’s Act on Promotion of Global Warming and Countermeasures; 
  • reporting companies should disclose certain market (contract)-based Scope 2 GHG emissions in addition to the IFRS location-based Scope 2 GHG emissions; and 
  • de minimis thresholds should be applied to the categories of Scope 3 GHG emissions reporting companies are required to disclose.
• Cross-industry metric – the SSBJ also asks whether the Japanese standards should require disclosure of certain items for cross-industry metrics, namely climate change-related transition risk, climate change-related physical risk and climate change-related opportunities; the amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities; and internal carbon prices as well as whether and how carbon price is applied in decision-making (and rationale if internal carbon price is not applied). 
• Transition relief – The SSBJ proposes to adopt the transition relief under IFRS S1 and S2 for the mandatory and voluntary disclosure requirements to provide more time for certain companies to implement the requirements.

What’s next?

The consultation is open for responses until 31 July 2024 and responses can be submitted here. While the Exposure Drafts are published in the Japanese language only, the SSBJ plans to issue a document describing the summary of differences between the Exposure Drafts and the ISSB’s Standards in the English language.