1 . How is “ESG” in your jurisdiction defined in a corporate/commercial context, and what are its major elements?
ESG is not defined under laws such as the Companies Act. Corporate Governance Codes (codes incorporated into the rules of stock exchanges that apply to listed companies) only stipulate specific matters related to ESG and do not define ESG itself. Furthermore, there is no specific definition in the commercial context.
There is no clear indication of which aspects of ESG are particularly emphasized in Japan. Traditionally, corporate governance has been actively discussed from the perspective of preventing corporate scandals. At the time of the establishment of the Corporate Governance Code in 2015, “G” was also a central issue.
Since then, with the global trend toward stronger environmental initiatives and emphasis on human capital, there has been a growing interest in “E” (such as climate change) and “S” (such as diversity in Japan).
2 . What, if any, are the major laws/regulations in your jurisdiction specifically related to ESG?
There are no laws or ordinances in Japan that can be referred to as ESG-related laws or ordinances that correspond to, for example, the EU’s Sustainable Finance Disclosure Regulation, the UK FSA’s regulations implementing Task Force on Climate-Related Financial Disclosures (TCFD), France's Vigilance Law or Germany’s Supply Chain Due Diligence Act. Currently, discussions on the inclusion of sustainability disclosures in securities reports are being conducted by the working group of the Council of Financial Services Agency (FSA).
There are, however, regulations covering the individual elements of “E”, “S” and “G”, as discussed further below in Question 3.
3 . What other laws/regulations in your jurisdiction touch on ESG themes?
The Companies Act stipulates the basic matters relating to corporate governance. There have been a series of amendments regarding institutional design, directors’ responsibilities and disclosures to improve corporate governance. An amendment to the Companies Act in 2021 expanded the inclusion of director remuneration and outside directors in business reports.
Financial Instruments and Exchange Act
The Financial Instruments and Exchange Act stipulates the disclosure of securities reports and other information in accordance with the Cabinet Office Ordinance based on such Act, primarily in relation to listed companies. In addition to the disclosure of financial information, disclosure of governance is also stipulated. Recently, the amendment of the Cabinet Office Ordinance on the Disclosure of Corporate Affairs based on the Financial Instruments and Exchange Act in 2019 expanded the disclosure content of annual securities reports to include an overview of corporate governance, the status of directors and auditors, executive compensation amongst others.
Offense of Bribery of Foreign Public Officials (under the Unfair Competition Prevention Act)
This crime was established to prevent illegal benefits from being given to foreign public officials in international trade. Revised in May 2004, the crime, which had been limited to punishment of acts committed in Japan, was amended to make the offering or giving of bribes overseas by Japanese nationals also punishable. In addition, Guidelines for the Prevention of Bribery of Foreign Public Officials have been provided to assist companies in taking a voluntary and preventive approach.
When collaborations and agreements are made between companies for environmental measures, the issue is to what extent such collaborations and agreements should be regarded as illegal cartels from the viewpoint of the Antimonopoly Act. There may be a view that collaborations and agreements that are effective for environmental measures should not be illegal under the Antimonopoly Act. Japan’s Antimonopoly Act does not provide for sustainability to be taken into account in the context of cartels, as a general rule. However, guidelines for specific areas (e.g., recycling guidelines and guidelines for joint R&D) from this perspective are stipulated.
Labor-related laws (such as Labor Standards Act, Labor Contract Act, etc.)
Workers’ rights are protected by a series of labor-related laws. For example, the Labor Standards Act protects workers’ rights and stipulates labor standards that employers must comply with.
Act on Securing, Etc. of Equal Opportunity and Treatment between Men and Women in Employment (so-called Equal Employment Opportunity Act)
This law provides for the prohibition of gender-based discrimination in the field of employment.
Act on Promotion of Measures to Cope with Global Warming
The Act on Promotion of Measures to Cope with Global Warming, established in 1998, was amended in 2021 to specify the goal of achieving a decarbonized society by 2050. The law stipulates the measures to be taken by national and local governments to address climate change, as well as the obligations of citizens and businesses to make efforts to take measures controlling greenhouse gas emissions (e.g., the effort (1) to choose the equipment which contributes to the reduction of greenhouse gas emissions and to use the equipment in a manner that reduces greenhouse gas emissions as much as possible (for citizens, in their daily life; for businesses, in their business activities) and (2) to manufacture, import, sell or provide products or services that emit less greenhouse gases and to provide accurate and appropriate information on the greenhouse gas emissions associated with the use of such products (for businesses in their business activities)) and to cooperate with the measures taken by national and local governments. Companies that emit more than a certain amount of greenhouse gases are obliged to report emissions information, which is then compiled and published by the Minister of the Environment.
Climate Change Adaptation Act
The Climate Change Adaptation Act, effective 30 November, 2018, stipulates the formulation of climate change plans by the government and local governments, as well as the implementation of measures to collect and provide information on adaptation to climate change.
4 . What, if any, litigation or enforcement activity has your jurisdiction seen related to ESG?
At present, there are no specific legal procedures to prevent greenwashing. However, punishment for acts such as the making of false statements in a securities report, for example, may be imposed by general regulations. The FSA of Japan is currently considering revising its guidelines for supervision of financial instruments business operators to prevent greenwashing, but such guidelines have no legal enforceability (see Question 5 in relation to soft non-binding laws).
5 . What are the major non-law/regulatory drivers of ESG trends and developments in your jurisdiction?
Soft non-binding laws
Corporate Governance Code
The listing rules of the stock exchange stipulate that companies must comply with the Corporate Governance Code or explain why if they do not (“comply or explain”), and each listed company discloses this information in its corporate governance report. The Corporate Government Code requires listed companies to appropriately disclose their sustainability initiatives, including consideration of environmental issues, respect for human rights and the working environment for employees. In particular, companies listed on the Prime Market have been required to disclose their initiatives based on TCFD since April 2022.
Action Plan on “Business and Human Rights” (2020-2025)
This was formulated on October 16, 2020 at the related ministries and agencies liaison conference in the government.
It was formulated to ensure the steady performance of the “Guiding Principles on Business and Human Rights” endorsed in the resolutions relevant to the UN Human Rights Council in 2011. It is also regarded as one of the initiatives to realize the Sustainable Development Goals (SDGs).
Guidelines for Human Capital Visualization
Guidelines for human capital visibility (i.e. disclosure) were published on August 30, 2022, setting forth the methods and steps for visualization.
Basic guidelines for calculating greenhouse gas emissions throughout the supply chain
In March 2012, the Ministry of the Environment presented a concept for business entities to calculate emissions emanating from the supply chain.
Efforts to address the issue of greenwashing of ESG investment trusts
In May 2022, the FSA published the “Advanced Asset Management Progress Report 2022.” In the report, the FSA stated that, once an investment trust emphasizes “considering ESG elements” as features of the product or its investment policy, the asset management company for such investment trust should continuously strengthen their investment processes and approaches and provide clear explanations and disclosures in a consistent manner in line with the actual condition of the investment process so that customers can make investment decisions appropriately.
In addition, the “New Capitalism Follow-up” released by the Cabinet Secretariat in June 2022 stated that the FSA’s guidelines for supervision of asset management companies will be revised by the end of 2022 in order to improve the reliability of the ESG market.
While individual investors are involved in ESG on their own, general awareness of investing in ESG is growing. A survey conducted by Nomura Asset Management, one of major investment managers in Japan in 2020, showed that 52% of those who own stocks and mutual funds said they are interested in ESG investments.
In 2015, the GPIF, one of the world’s largest pension funds, signed the Principles for Responsible Investment (PRI), and many institutions in Japan followed their example (119 institutions have signed as of 10 October, 2022). Many institutional investors have accepted the Japanese Stewardship Code established in 2014, and many institutional investors have been making ESG investments in recent years because of the Code’s March 2020 revision, which requires considerations of sustainability. The code refers to the Stewardship responsibility as “the responsibility of qualified institutional investors to increase the medium and long-term investment returns of their clients and beneficiaries (including ultimate beneficiaries) by promoting the enhancement of corporate value and sustainable growth of the Japanese companies in which they invest through constructive "dialogue with a purpose" (engagement) based on a deep understanding of the companies and their business environment, as well as considerations of sustainability in accordance with the investment strategy.”
Listed companies in particular have been increasing their interest and investment in ESG in recent years. In response to the Corporate Governance Code, the company is working to address issues surrounding sustainability, including compliance with the TCFD, respect for human rights, consideration for the working environment and fair and appropriate treatment of employees.
As listed companies, which are relatively large companies, are responding to ESG, including in respect of their supply chains, small and medium-sized enterprises (SMEs) in those supply chains are also being asked to address ESG issues.
The Government has announced the promotion of ESG investment in various official documents. Various ministries and agencies are working on ESG in a cross-sectional manner. The scope of corporate information to be disclosed with regard to the status of corporate governance has been expanded by the revision of the Companies Act by the Ministry of Justice, as well as the revision of the Financial Instruments and Exchange Act by the FSA. The Ministry of the Environment is making efforts to improve the environment. As a member of NGFS (Network for Greening the Financial System), the FSA of Japan has been encouraging financial institutions to analyze climate-change scenarios. The Ministry of Health, Labor and Welfare is working on the rights of workers, women and persons with disabilities. The Ministry of Economy, Trade and Industry (METI) is promoting disclosure based on the TCFD framework.
National Contact Points (NCPs)
Organizations such as the OECD’s National Contact Points do not exist in Japan for ESG. The following ministries and agencies carry out their respective activities, as follows:
- the FSA (for ESG investment);
- the Ministry of the Environment (for the environment);
- the Ministry of Health, Labour and Welfare (for social, dealing with welfare of workers, women, persons with disabilities and children etc.); and
- the Ministry of Justice (for human rights, dealing with human rights consultation, relief procedures, human rights enlightenment activities etc.).
TCFD Consortium, a private-sector organization, was established in 2015 and is regarded as a forum for companies and financial institutions who endorse TCFD’s recommendations to work together to promote initiatives and discuss them.
6 . Are the laws, regulations and obligations highlighted in Question 2 primarily related to corporate disclosure?
The laws and regulations listed in Question 2 relate to disclosure of “G.” Some disclosures listed in Question 3 above focus on outcome and others focus on processes. For example, the Act on Promotion of Measures to Cope with Global Warming focuses on outcome in obliging certain companies to disclose their emissions.
ESG disclosures are made in the integrated reports issued by many listed companies, as well as in securities reports and business reports. They are usually reported annually.
Although there are no legally prescribed indicators to be used for ESG disclosure, the corporate governance codes require appropriate responses to sustainability issues. In particular, the TSE Prime Market requires disclosure based on the recommendations of TCFD from April 2022. According to a survey conducted by GPIF between January and March 2022 (more than 700 companies, or about one-third of the companies listed on the First Section of the Tokyo Stock Exchange, responded), the number of companies making TCFD disclosures increased to 249 from 139 in the previous year’s survey.
Consideration for double materiality in disclosures is not necessarily emphasized at the present time. Although the TCFD-based response requires disclosure of the financial impact of climate change, consideration of the company’s impact on the environment and society as a whole, while considered in the scenario analysis, does not yet appear to be sufficient.
7 . Which sectors are most impacted by ESG in your jurisdiction? How significant is ESG investment in your jurisdiction?
ESG investment is considered important in the private equity sector. For Universal Owners, the improvement of global environmental and social issues is of more concern than the performance of a particular company. In their private equity investments through investments in private equity funds, which are growing as alternative asset investments among Japanese major asset owners, many Universal Owners, like GPIF, appoint investment managers by taking into consideration their engagement with ESG and the integration of ESG considerations in their investment analyzes and decision-making processes.
Smaller investors try to differentiate themselves by focusing on specific asset classes. They may invest in companies with low ESG awareness and subsequently work to improve their ESG aspects to enhance their company’s value.
Hedge funds/asset managers
Hedge funds, which usually pursue short-term gains, seem to be incompatible with ESG investments, which pursue medium to long-term gains. However, UNPRI published a guide to ESG incorporation in hedge funds in May 2020, which showed that asset owners emphasizing ESG may have fund managers incorporate ESG factors into hedge fund strategies, and it is thought that there will be similar management among Japanese asset owners as well.
Efforts continue to promote ESG finance, i.e., investment and financing activities that emphasize a long-term perspective for corporate analysis and evaluation and take ESG information into account. One of the core components of ESG finance is financing for renewable energy issuance projects. Given Japan’s heavy reliance on coal-fired power generation as well as oil and Liquefied Natural Gas (LNG), the climate change risk of energy-related financing is not small for banks. Sustainability finance is becoming more and more important in promoting transitions in these industries.
Small and medium-sized enterprises (SMEs)
As discussed in Question 5 (Stakeholders: Companies), as listed companies are responding to ESG, including in respect to their supply chains, SMEs in those supply chains are also being asked to address ESG issues. ESG-conscious management is gradually growing among SMEs.
There are ESG-related issues, such as the heavy environmental burden in the production and transportation processes, the mass disposal of clothing due to the shortening of the lifecycle of clothing and human rights problems in manufacturing in foreign countries. As corporate brand image is very important in the fashion sector, interest in ESG is very high.
Restrictions on the movement of people caused by COVID-19 have hurt the travel industry, but as it continues to recover, it is increasingly important to ensure clients’ health and safety. As nature is an important tourism resource, it is also necessary to prevent environmental destruction caused by travel.
The automobile industry has a history of responding to environmental regulations, and in recent years, there has been a shift to electric vehicles. Some countries have declared a ban on the sale of internal combustion engine cars, but Japan has not reached that point. However, it is thought that the trend toward zero emissions will not change, and companies will be required to act.
In addition, automobile manufacturers are characterized by a supply chain that includes numerous component suppliers, and therefore, they need to take initiatives that include the supply chain.
TCFD designates an energy industry sector as one of the four sectors in non-financial sector that is strongly affected by climate change (p13 of “Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017)”), and the disclosure items for the energy industry companies are clarified in the Supplemental Guidance. Companies in the energy industry sector in Japan take into account these items when they prepare TCFD disclosures.
In Japan, the question of whether to restart nuclear power plants, which have largely ceased operation since the Great East Japan Earthquake in 2011, and the development of renewable energy are areas of interest, which are greatly influenced by ESG policies.
METI will formulate a process chart for electric power and gas as the industries with high carbon dioxide emissions by the end of 2022, which will describe the outlook for technological development and emission reduction rates for each industry and support financing for transitions.
Real estate industry
ESG investment is said to be lagging in the domestic real estate sector (in terms of sustainable investment measured by asset, real estate investment accounted for about 2.3% in 2020), and it is expected that further efforts will be made on themes such as the improvement of health and comfort, disaster prevention measures, contribution to local communities, improvement of energy conservation performance (improvement of performance of air conditioners, water conservation, etc.) and utilization of renewable energy. The number of real estate funds participating in GRESB, which is an independent organization providing validated ESG performance data and peer benchmarks for investors and managers, is increasing. GPIF joined GRESB in March 2020.
Interest in ESG is also high in the e-commerce sector. According to a survey in 2022, 30% of e-commerce companies consider ESG/the SDGs as an important issue. Efforts are being made to reduce carbon dioxide, such as using a delivery method that leaves packages at the recipient’s door in order to prevent the additional emissions caused by re-delivery.
In the Japanese game industry, ESG does not seem to be a major topic, but efforts to improve the work-life balance of game creators are spreading.
8 . What are the trends in your jurisdiction regarding ESG governance?
Although a Chief Sustainable Finance Officer at the FSA of Japan was appointed on 15 March, 2019, the appointment of a chief sustainable officer is not common in private companies. However, persons in charge of ESG and alignment with the SDGs are often appointed from among directors and executive officers.
There is a growing trend for companies to establish organizations to promote ESG, with 55 companies among the Nikkei JPX-400 having established internal committees for ESG in 2020. However, unlike in Europe and the U.S., where committees directly under the board of directors with the participation of outside directors are the norm, executive officers that report to the board of directors are common in Japan.
At present, discussions regarding ESG-related fiduciary obligations are not evolving in corporate law, trust law or pension law. It has been pointed out that in corporate pension funds, for example, ESG investment cannot always be actively implemented from the viewpoint of fiduciary responsibility, since it is not clear whether ESG investment will necessarily contribute to maximizing the interests of beneficiaries.
9 . To what extent are ESG ratings or ESG benchmarks relied upon in your jurisdiction?
ESG rating agencies
S&P, Moody’s and Fitch are all registered as credit rating agencies under the Financial Instruments and Exchange Act and are widely used by companies and investors. There are eight registered credit rating agencies, including S&P, Moody’s and Fitch (two Moody's, two S&Ps and Fitch).
The MSCI World SRI Index, Sustainalytics and ESG Benchmarks are all shown on the website of the Japan Exchange Group and are used by Japanese companies and investors.
10 . What is the role of the private markets versus public markets in driving ESG developments in your jurisdiction?
Privately held companies are sometimes asked to act for ESG by business partners who are listed companies, to represent and warrant that they and their subcontractors comply with international laws with regard to ESG matters such as human rights, embargoes, terrorism, the health and safety of employees and third parties, environmental protection, corruption and bribery, and even request to let them know the result of the assessment by Sedex and Ecovadis, which assess ESG matters such as business ethics, labor practices, securities and environment. In addition, ESG issues are being incorporated in the initiatives private companies are making with respect to the SDGs, particularly when voluntarily re-examining their business models. Such initiatives are often difficult to quantify.
Many listed companies are generally proactive in addressing ESG issues, however, developments remain in their early stages. Many listed companies currently prepare integrated reports that exhibit financial and non-financial information relating to ESG and describe the active approach to ESG within the business. Although many listed companies compile integrated reports (a private survey reported 641 companies prepared their integrated reports in 2021), some point out that the content does not show the quantitative impact of ESG information on financial information, or that disclosure materials other than integrated reports (such as medium-term business plans) do not include ESG information.
While ESG considerations are important for government-owned organizations, they do not materially differ from those for other companies.
The ESG agenda is promoted in Japan. In 2016, SDGs Promotion Headquarters, headed by the Prime Minister, was established, and a system was set up to take the lead in both domestic implementation and international cooperation. Ministries, Agencies and other relevant organizations are also making efforts to achieve SDGs. In Japan, it is generally recognized that ESG investment is one of the approaches to solving social issues and facilitates the achievement of SDGs. GPIF states that, since the solution of social issues creates business/investment opportunities, companies taking on SDGs would be able to ensure sustainable growth in their corporate value. Thus, ESG investment is targeted at a wide range of social issues, including SDGs (e.g. gender equality, affordable and clean energy, and climate action). In line with the international trends with regard to the conduct of the ESG evaluation/data provider, such as IOSCO’s 2021 report entitled “Environmental, Social and Governance (ESG) Ratings and Data Product Providers Final Report,” the FSA of Japan published, on 12 July, 2020, a draft “Code of Conduct for ESG Evaluation and Data Providers,” which summarizes the current status of ESG evaluation and data provision, and issues in view of future market development while also proposing specific actions expected to be taken by ESG evaluation/data providers. The Code is expected to be disseminated as soft non-binding law.
11 . What are the major challenges in terms of compliance for companies under ESG obligations?
There are no comprehensive ESG regulations in Japan, and standards for information disclosure regarding ESG have not been established. Individual companies’ initiatives will not fill the gap. It is difficult even for institutional investors to establish appropriate valuation methods for ESG investments. In addition, it is not clear whether ESG investment will necessarily contribute to maximizing the interests of beneficiaries. Therefore, in corporate pensions, for example, ESG investment cannot be actively implemented from the viewpoint of trustee liability (only five domestic corporate pension plans are signatories to the PRI). Furthermore, it is difficult to introduce “green investment” straight away in Japanese industry, a large proportion of which is said to be difficult to decarbonize. It may be more realistic to expect a gradual transition towards decarbonization, as companies begin to engage with low-carbon initiatives.
Although there are no standards for greenwashing, the FSA plans to establish guidelines for the supervision of asset management companies by the end of 2022.
12 . What information sources are most relevant for ESG considerations in your jurisdiction?
In Japan, international frameworks such as the TCFD, Global Reporting Initiative (GRI) and CDP have been introduced and applied to Japanese companies. While there are no major decision-making frameworks that are unique to Japan, some domestic guidance has been developed, such as the “Guidance on Climate Change Information Activities to Promote Green Investment” (providing a perspective on importing disclosure information based on TCFD recommendations). The Sustainability Standards Committee was established within the Financial Accounting Standards Foundation, a public interest incorporated foundation that develops Japanese accounting standards, but no domestic standards have yet been created.
The Japan stock exchange (JPX) has established a website called JPX ESG Knowledge Hub, on which it disseminates ESG information, such as ESG guidebooks, seminars and other activities for listed companies and institutional investors (the website is for the domestic market and in Japanese only, JPX has other webpages regarding ESG in English).
Established in 2015, TCFD Consortium is a forum for companies and financial institutions that endorse TCFD recommendations to work together to promote initiatives and discuss them.
13 . Has your jurisdiction developed a Taxonomy related to ESG?
14 . What does the future hold for ESG in your jurisdiction?
In Japan, in response to the growing international interest and debate on ESG, the government has been developing systems to enhance, and companies are working on, the furthering of ESG disclosure. Since domestic interest is very high, the response to ESG is expected to progress considerably in the short term. The government is also considering measures to deal with greenwashing.
In Japanese domestic industry, where the decarbonization of a large proportion of the industrial and energy sectors is considered difficult, such transition is likely to be focused for the time being, but will likely gradually move toward broader green investment. As long-term perspectives are indispensable for tackling decarbonization, it is expected that initiatives from an environmental perspective will be carried out over the long term. Furthermore, in the long run, the impact of corporate activities on the environment and society (double materiality) will also likely be increasingly taken into account.