Evolution of Sustainability and Corporate Governance Disclosure in Japan

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Introduction

On June 13, 2022, the Corporate Information Disclosure Task Force of the Financial System Board, an expert board established under the Financial Services Agency of Japan (the “Work group“), published its report (the “Report”) regarding the proposed reform of disclosure requirements for listed Japanese companies1 . In the report, the working group proposed (i) the strengthening of non-financial information, including information on sustainability and corporate governance, (ii) the revision of the quarterly disclosure system and (iii) the promotion publications in English and other matters. In the coming months, the task force will discuss in more detail the next detailed rules and regulations regarding corporate disclosure reform based on the framework formulated in the report. After the reform, it is planned that an annual securities report (“RSA“) or any other periodic report issued by a Japanese company listed under the Japanese Financial Instruments and Exchanges Act (the “FIEA”) should contain detailed information on sustainability and corporate governance.

II. Changes to Non-Financial Information – Sustainability and Corporate Governance Information

As seen in Europe, the United States and other countries, the Japanese government has also discussed the importance of non-financial disclosure by listed companies. As more and more domestic and foreign investors place more emphasis on non-financial information to make their investment decisions, the working group discussed ways to improve non-financial information in Japan to address to increased demand.

(1) Durability

Under the FIEA, every Japanese listed company is required to file and disclose an ASR within three months of the end of the financial year. The ASR includes, among other things, (i) an overview of the company’s business, results of operations and financial condition, including risk factors, management’s discussion and analysis, corporate governance and compensation directors, and (ii) audited financial statements. Although some companies disclose their corporate sustainability strategy or policy in the MD&A or other sections, there is no specific sustainability section in the current ASR format.

(i) Climate change

In light of the above views, in the report, the working group proposed to create a new section for disclosure of sustainability information. In this new section, “Governance” and “Risk Management” to deal with climate change will be disclosed by all companies. In addition, the “Strategy” and “Metrics and Targets” regarding climate change will be disclosed based on each company’s judgment of materiality. This new disclosure regime in the ASR regarding climate change should essentially follow the regime to be established by the International Sustainability Standards Board (ISSB) by the end of this year2.

(ii) Human capital and diversity

The working group also discussed how to improve disclosure of company strategy and policy on human capital and diversity. According to the report, “human resources development policies” and “working environment improvement policies” are expected to be added to the disclosure elements of the ASR. Regarding the disclosure of diversity in Japanese listed companies, “gender pay gap”, “ratio of women in management positions” and “ratio of male workers taking parental leave” will be added to the items. disclosure of the ASR.

(2) Corporate governance

Under the Japanese Corporate Governance Code, more and more Japanese listed companies have strengthened and improved the oversight functions of their board of directors by increasing the number and ratio of independent directors or by establishing a nomination and/or a remuneration committee. Japanese stock exchanges, including the Tokyo Stock Exchange, have encouraged listed companies to disclose such matters in a “corporate governance report”, a corporate governance disclosure document required by Japanese stock exchange rules. . In light of the growing demand for transparency in corporate governance, particularly with regard to the oversight function of the board of directors, the task force has proposed that this information be disclosed in the RSA as mandatory disclosure element. Based on the report, a new section will be created in the RSA for the disclosure of the activities of the Board of Directors, the Nominating Committee and the Remuneration Committee.

III. Review of quarterly disclosure system

Under Japan’s current disclosure regime, each listed Japanese company is subject to quarterly earnings announcement disclosure requirements (Shihanki kessan-tanshin) in accordance with the listing rules of Japanese stock exchanges, as well as disclosure requirements quarterly securities reports (Shihanki houkokusho). required by the FIEA. This overlapping of quarterly disclosure obligations has sometimes been criticized by some companies and market participants.

In the report, the task force announced that the disclosure requirements for quarterly securities reports for the first and third quarters under the FIEA will be removed and incorporated into the quarterly earnings release announcement (Shihanki kessan -tanshin) in accordance with the stock exchange listing rules. The working group will continue to discuss issues related to the integration of these quarterly disclosures, such as the content of the disclosure, combating misrepresentation, and review by audit firms.

IV. Promoting English Disclosures and Other Matters

In the report, the task force also mentioned the importance of English disclosure by Japanese companies to promote active investment by foreign investors. The report clearly states that companies listed on the Prime Market of the Tokyo Stock Exchange are expected to proactively disclose an English version of the ASR, in particular risk factors, management report, corporate governance and the status of shareholding sections. Based on the task force’s recommendation, the FSA is expected to publish a list of companies that disclose an English version of their ASR.

In addition, the Task Force highlighted the need for increased disclosure of material contracts entered into by a listed company that grant corporate governance control of the listed company to certain shareholders or restrict the transfer of shares. Based on the report, it is also expected that greater disclosure of the financial terms of loans and bonds will be included in the revision of the relevant order.

V. Conclusion

In the coming months in 2022, the task force will further discuss detailed rules and regulations regarding corporate disclosure reform based on the framework formulated in the report. Although the precise timing of the review is unclear, according to the Japanese government’s action plan, the review of the relevant ordinance is expected to be carried out by the end of this year, and the government aims to start the enhanced disclosure of non-financial information of the RSA for the financial year ending March 2023 at the earliest. Regarding the revision of the quarterly reporting system, this revision requiring the modification of the FIEA, it is expected that the Government will submit a draft law relating thereto during the next ordinary session of the Diet to be held in 2023.

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