Japan’s Financial Services Agency (FSA) is considering making climate risk disclosure mandatory for listed companies on the Prime segment of the Tokyo Stock Exchange in April 2022, as well as widening their scope to include all other listed companies in 2023.
The FSA has held a number of meetings to ask for market feedback on the issue, and sources have told International Financial Law Review that mandatory climate risk disclosure are in the works.
“While the climate risk disclosures are still technically under consideration, they are likely to happen,” said Ema Shingai, associate at Brunswick Group. “They are in line with the general trend towards strengthening corporate governance.”
During his address at the COP26 climate summit, prime minister Fumio Kishida reaffirmed Japan’s goal to be carbon neutral by 2050 and reduce greenhouse gas emissions by 46% by 2030, when compared with 2013 levels. “I hope to show to the international community Japan’s strong determination to achieve carbon neutrality by 2050 and realise zero emissions across Asia,” said Kishida.
Mobilising the efforts of businesses will be an important part of building momentum for further climate actions, and introducing mandatory climate disclosures will bring Japan in line with international best practices. “Investors have been clear in their demands for mandatory, standardised and decision-useful disclosures about ESG [environmental, social and governance] risks and impacts, especially in relation to climate change,” said Daniel Wiseman, head of Asia-Pacific policy at UN PRI. “Many other markets are moving ahead with detailed ESG reporting requirements and it will be important for Japan to ensure that a robust ESG disclosure framework is in place that is sensitive to global best practice.”
The FSA has been focused on climate and corporate governance issues since 2014 when the Japan Stewardship Code was introduced, which was followed by the Corporate Governance Code in 2015.
The 2021 revision to the Corporate Governance Code requires Japanese companies to further promote sustainability issues, including climate change. While the code is only voluntary and companies adhere to it on a “comply or explain” basis, it requires companies listed on the Prime segment to meet the requirements set out in the code. Climate risk disclosure requirements further extend obligations to bring Japan in line with Taskforce for Climate-related Financial Disclosure (TCFD) reporting and climate scenario analyses.
“The purpose of the proposal is for Japanese companies to consider sustainability issues as an agenda item, more material sustainability issues should be a board item that companies should deal with in a proactive manner and not merely treat as an inevitable topic to discuss with institutional investors,” said Shingai.
Japanese boards will need to be prepared to deal with sustainability issues beyond climate change. “Management teams should be assessing material sustainability risks and ensuring that the management of such risks is clearly articulated in their communication to shareholders and other stakeholders,” said Shingai.
She continued: “Japan’s corporate governance codes have been revised numerous times to keep the country in line with international trends, including on environmental sustainability issues.”
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Many Japanese companies are already reporting in line with the TCFD and conduct climate scenario analyses, which are typically published in their sustainability reports or website. “Should disclosure on climate risks and opportunities become mandatory, particularly through the annual securities report, also called yuho, the reporting will bear more significance and companies will have the responsibility to ensure accurate reporting as yuho is a legal document,” said Sachi Suzuki, associate director of engagement at Federated Hermes.
“This may well be seen as additional burdens to company management but it is an important step forward as part of the global effort to meet the Paris Agreement goal of keeping the global temperature rise to within 1.5 degrees Celsius above pre-industrial levels.”
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Tough road ahead for corporates
The biggest challenge for Japanese companies will be getting company boards to come to a consensus on climate change policies. “ESG items are often not part of normal board discussions but this will have to change if the disclosure of climate related risks and opportunities will be mandated,” said Shingai.
Furthermore, companies will need to ensure they have systems in place to collect the necessary data, have enough expertise to set measurable targets, and the ability to articulate both climate change strategies and how company value for shareholders will be enhanced over the longer term.
“Some businesses may struggle to put together a comprehensive climate risk disclosure due to a lack of resources and clear guidance,” said Shingai.
“While Japan has many TCFD corporate supporters, actual disclosures on climate risks have been voluntary and the granularity of disclosures vary,” said a source involved with ESG advisory work in Japan. “If the disclosure is going to be mandated without clear guidance, some companies may not have the experience and expertise in disclosing these metrics in a way that is meaningful to investors.”
In addition, for some industries, it would be difficult and potentially more costly to measure tangible impacts.
Companies that are in the Prime segment should be ready to meet the climate risk disclosure requirements by the end of this fiscal year given that most requirements are included in the updated corporate governance code.
“Given that other companies would follow suit, it is a good opportunity for Prime listed companies to set examples on how to disclose and communicate the content to investors,” said Shingai. “This will highlight those Japanese companies that really understand how to manage exposures to environmental and social risks as well as opportunities. Those companies that do this well should expect a premium to be paid as the transparency assists with investor valuation models.”
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