What’s next for Japanese sustainability disclosure standards

Context

In May, G7 leaders agreed to take concrete steps to coordinate its approach to economic resilience and economic security, based on diversifying and deepening partnerships and de-risking. They also noted the importance of sustainability reporting and disclosure as key features of a policy response to growing sustainability-related risks.

In their communique, the Leaders wrote, “[w]e underline our commitment to consistent, comparable and reliable disclosure of information on sustainability including climate. We support the International Sustainability Standards Board (ISSB) finalizing the standards for general reporting on sustainability and for climate-related disclosures and working toward achieving globally interoperable sustainability disclosure frameworks.”

Support for globally consistent and comparable sustainability information from the highest levels of government follows key actions taken in recent years to develop sustainability disclosure rules and standards that serve the needs of investors and other stakeholders. Most notably, these efforts include the launch of the ISSB, the release of the European Commission’s Corporate Sustainability Reporting Directive (CSRD), and a climate disclosure proposal by the United States Securities and Exchange Commission (SEC).

Each of these efforts could have direct or indirect impacts on Japanese companies including those (i) listed on US exchanges, (ii) those with operations in Europe and (iii) as the ISSB standards are adopted by jurisdictions across the globe. In Japan, meanwhile, regulatory authorities are taking a multi-stage approach toward mandating sustainability disclosures for Japanese-listed companies. These efforts will impact nearly 4,000 public companies in Japan, including foreign companies listed in Japan.

The current state of sustainability and reporting disclosure in Japan

For many years, Japan has been recognized as one of the countries with the largest number of companies and organizations declaring their support for the Task Force on Climate-related Financial Disclosures (TCFD).

In June 2021, the Tokyo Stock Exchange, Inc. (TSE) implemented revisions to the Corporate Governance Code which required Prime Market-listed companies to report 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 annual securities report (i.e., the statutory report). Under the rules, all listed companies in Japan (approximately 4,000 including foreign companies listed in Japan) are required to disclose sustainability-related information using the TCFD pillars (Strategy, Metrics and Targets, Governance and Risk Management).

Importantly, the rules do not prescribe specific standards (e.g., TCFD) and do not require third-party assurance.

Global rules applicable to Japanese companies

Many Japanese companies with global operations will be subject to sustainability reporting rules developed outside of Japan, including, most notably, those developed by the EU and US.

The EU CSRD will apply to hundreds of large Japanese multinationals including (i) those listed on EU markets and (ii) those with large EU subsidiaries (measured by revenue, total assets and / or number of employees). Beginning in 2028, the greatest extraterritorial effects of the CSRD will be felt as large Japanese companies that generate more than €150 million of net revenue in the EU (or satisfy other criteria including at least one subsidiary within scope of the CSRD), will be subject to the directive.

In the US, meanwhile, climate disclosure rules proposed by the SEC are expected to have a more limited scope, impacting only Japanese companies listed on US exchanges (known as “foreign private issuers” or FPIs). Under the SEC’s proposed climate disclosure rule, “The Enhancement and Standardization of Climate-Related disclosures for Investors,” FPIs will not qualify for any additional phase-in relief or exemption from Scope 3 disclosures beyond the relief afforded to all registrants.

Closing

With disclosure requirements taking shape in multiple geographies, Japanese companies face challenges that require proactive planning and diligent policy and regulatory monitoring, even as the rules evolve.

Executives should be assessing to what extent their organizations are in scope, preparing relevant data, exploring digital enablement, and setting up audit-ready processes and controls (NB: While the SSBJ has not indicated whether external assurance will be mandatory, the US and EU rules and standards have an assurance requirement), potentially building on existing environmental sustainability initiatives. As financial and nonfinancial efforts overlap, finance and sustainability functions should be collaborating on how best to proceed. While sustainability governance will vary from one organization to another, cross-functional groups are essential to identify and address next steps — and to ultimately address climate- and sustainability-related risk and opportunity.