Japan Proposes New Guidelines on ESG Public Funds in Response to ‘Greenwashing’ Concerns

January 12, 2023

With a view toward promoting environmental, social, and governance (ESG) investments and building a more sustainable society, the Japan Financial Services Agency (FSA) has proposed new guidelines that define the scope of ESG Public Funds subject to the guidelines. The guidelines also address checkpoints for disclosures and management of ESG Public Funds when investment trust managers (ITMs) registered under the Financial Instruments and Exchange Act of Japan (FIEA) create funds as ESG Public Funds. This is the first time Japan has introduced guidelines for ITMs to properly disclose and manage ESG Public Funds in order to avoid “greenwashing.”


Under the proposed new guidelines, “ESG Public Funds” are defined as public investment trust funds [1] formed under the Investment Trusts and Investment Corporations Act of Japan (ITICA) that (1) use ESG factors as primary factors for the selection of investments and (2) hold themselves out as such in the “Purpose and Characteristic” section of their summary prospectus (kofu mokuromisho). While the proposed new guidelines are primarily addressed to ITMs that manage ESG Public Funds, the new guidelines are also applied to firms delegated by such ITMs.

The new guidelines take the form of an amendment to the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc. (FSA Guidelines). [2] The Japan government is soliciting public comments until January 27, 2023. [3]


No Misleading Labels

No public funds other than ESG Public Funds may contain the words “ESG,” “SDGs,” “Green,” “Decarbonization,” “Impact,” or “Sustainability” or the like in their names or nicknames in order to avoid misleading statements.


The Purpose and Characteristic section of the summary prospectus (kofu mokuromisho) should describe the following:

  • Specific ESG factors primarily used in selecting investments, such as overall ESG evaluation or social or environmental-specific issues
  • How such ESG factors are considered in the investment process, such as explaining standards or indices or methodology of evaluation
  • Limitations and risks of the investment process in relation to such ESG factors
  • Any ESG-related stewardship code policies of ITMs

If an ESG Public Fund seeks impact investments, then targets, evaluation of the performance, and method of achievement also need to be disclosed.


If an ESG Public Fund sets ESG-related targets regarding proportion of investments (on a market price basis) or an evaluation index, then the Purpose and Characteristic section should describe such targets. In case no such targets are set, the reason therefor needs to be disclosed.

Reference Benchmark

A description of how ESG factors are incorporated in the index designated as a reference benchmark should be included if a reference benchmark is used.

Ongoing Disclosures

The “Performance” section of the summary investment management report (kofu unyo hokokusho) of an ESG Public Fund should describe the following:

  • An actual investment proportion in investments selected primarily based on ESG factors (on a market price basis), if a target thereon is set
  • Performance results concerning the evaluation index compared against its target
  • Actions taken pursuant to the ESG-related stewardship code policies of the ITMs

The achievements concerning impact investments, if impact investments are sought, should also be included.


If an ITM delegates its investment authority on an ESG Public Fund to a delegated manager, the ITM needs to properly conduct due diligence on such delegated manager and the investment management status of ESG Public Fund, and disclose any concerning matters described under Strategies, Portfolios, Reference Benchmark, and Ongoing Disclosures above.


Organizational System

An ITM should have various resources, such as data and information technology infrastructure and human resources, as necessary and appropriate to implement and continuously monitor investment management in accordance with the investment strategies of ESG Public Funds. If investment management activities are delegated, the ITM should have an appropriate system for due diligence on the matters described under Strategies, Portfolios, Reference Benchmark, and Ongoing Disclosures above.

Use of ESG Evaluation and Data Providers [4]

An ITM should conduct due diligence, as necessary and appropriate, on the internal controls of such ESG evaluations and the data providers, objects, methodology, limitations, and purpose of ESG evaluations.


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[1] According to the FSA, the scope of the ESG Public Funds does not extend to investment corporations formed under the ITICA, such as J-REITs. 

[2] The FSA Guidelines are not law, but because the regulator takes the FSA Guidelines into account at its supervisory activities, the FSA Guidelines function as de facto regulations in practice.