The Japan Financial Services Agency has proposed a hard law amendment that will provide an additional environmental, social, and governance (ESG) information source for asset managers investing in Japanese listed companies, amid global developments in the ESG disclosure framework. Listed companies in Japan with a current fiscal year end of March 31, 2023, or later will need to prepare their annual public disclosure documents under the new regime.
The enabling regulations of the Financial Instruments Exchange Act of Japan (FIEA) are proposed to have a new section, “Sustainability Perspective and Measures,”[1] to introduce ESG-specific disclosures for public companies in Japan (Proposed Amendment). This section is designed to address a company’s sustainable development consistent with its management policies and strategies.
The Proposed Amendment will apply to the securities registration statement and annual securities report (Disclosure Documents), which are related to the fiscal year ending on and after March 31, 2023. As many Japanese listed companies end their fiscal year on March 31, it is expected that the annual securities reports published in June 2023 will be prepared in the new forms incorporating the Proposed Amendment.
The new forms of the Disclosure Documents will contain subsections of regarding governance, risk management, strategy, and index and target as components of the Sustainability Perspective and Measures.
Sustainability
According to the Financial Services Agency of Japan (JFSA), the environment, society, employee, human rights, anti-corruption, anti-bribery, governance, cybersecurity, and data security may be in scope for mandatory disclosure under the new Sustainability Perspective and Measures in view of various discussions globally held to date.[2]
Governance and Risk Management
“Governance” and “risk management” are mandatory disclosure items, in the view that all public companies must have a framework by which (1) sustainability issues are identified and (2) materiality based on business environment and influence on the companies’ corporate value are assessed.[3]
“Governance” means governance processes, controls, and procedures designed to monitor and manage risks and opportunities regarding sustainability. “Risk management” means processes designed to identify, assess, and manage risks and opportunities regarding sustainability.
Strategy and Index and Target
“Strategy” and “index and target” are not mandatory disclosure items, but if a company concludes that these items typically have materiality against the framework populated for “governance” and “risk management,” then disclosure will be necessary. If a company does not find materiality for these items, the company is still encouraged to disclose such conclusion and its basis.[4]
“Strategy” mean measures for sustainability risks and opportunities that may influence consolidated-basis management policies and strategies for the short term, mid-term, or long term. Human resources policies and work environment policies, including diversity policies, need to be stated as components of “strategy.”
“Index and target” means information to be used for the purpose of evaluating, managing, and monitoring consolidated-basis, long-term performance concerning sustainability risks and opportunities.
Typical items for consideration include (1) greenhouse gas (GHG) emissions for Scope 1 (direct emission) and Scope 2 (indirect emission); and (2) the proportion of women in management, rate of male employees who took paternity leave, and salary differences between male and female employees prepared on a consolidated basis.[5]
Furthermore, the JFSA expects to disclose the name of a global disclosure framework, such as the Task Force on Climate-related Financial Disclosures (TFCD)), when such framework is used to disclose the sustainability information.
ESG disclosures often contain forward-looking statements. The Proposed Amendment will be enforced along with new rules addressing liability issues arising out of forward-looking statements.
The general rule is that liabilities under the FIEA may arise if annual securities reports and securities registration statements contain false statements on material matters or do not include material matters or facts necessary to avoid misleading statements.
Under the proposed new rules regarding liability issues, if the Disclosure Documents contain (1) management’s understanding of forward-looking statements and reasonable explanations on relevant facts, assumptions, and reasonings of such understanding or (2)(a) the fact that the forward-looking statements were properly reviewed internally based on reasonable grounds and (b) relevant facts, assumptions, and reasonings therefore, even if the outcome is different from the forward-looking statements, the listed company would not be held liable solely due to the foregoing.
The Proposed Amendment requires further ESG-related disclosures to be included in the Disclosure Documents, including (1) the proportion of women in management, rate of male employees who took paternity leave, and salary differences between male and female employees publicly disclosed by requirements of law and (2) the activities of the board of directors, certain statutory committees, and governance-related voluntary committees, including the frequency of meetings/discussions, agendas, and attendance rates of each member.[6]
The JFSA indicates it will update sustainability-related disclosures depending on local and global trends in the future.[7]
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
[1] No. 30-2 for Form 2 and No. 10-2 for Form 3, in Japanese.
[2] Principles on Descriptive Disclosure (Principle).
[3] See Principle.
[4] See Principle.
[5] See Principle.
[6] No. 29 and 54 for Form 2 and referenced in Form 3.
[7] See Principle.