Japan proposes mandatory climate risk disclosures

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The FSA will replace the ‘comply or explain’ model to help tackle climate change and give investors more information about leading companies.

Japanese companies could be forced into mandatory climate risk disclosure if new plans from the country’s financial regulator get the green light.

The Financial Services Agency (FSA) Task Force on Corporate Disclosures held its first meeting today (2 September) to discuss mandatory reporting proposals as well as disclosure guidelines for factors relating to sustainability and governance, such as human capital, diversity, board of directors’ activities and cross-shareholdings.

The new climate risk requirement, which would apply not only to listed companies but also to unlisted companies such as those submitting securities filings for the issuance of bonds, could take effect when companies file their securities reports for the fiscal year ending March 31, 2022 at the earliest.

According to Moody’s Investors Service, the proposed climate regulation will be “ESG positive” due to its greater applicability than the “comply or explain” approach of Japan’s corporate governance code, which primarily targets large companies listed on the Tokyo Stock Exchange.

Increased climate reporting

It would also, Moody’s added, improve the transparency and availability of data on climate-related risks, which would help investors and lenders assess each company’s exposure to those risks.

“The proposed regulations mark an important step in increasing corporate climate risk disclosure in Japan. If implemented, the stricter disclosure requirement will likely increase the volume and level of detail in corporate climate risk reporting,” said Moody’s analyst Ryohei Nishio.

However, Moody’s warned that “consistency and comparability” between companies could be a short-term roadblock, particularly as they may have different interpretations of how to disclose information.

“These limitations may weigh on the usefulness of disclosures in the immediate period after the new rule takes effect,” Moody’s warned.

Japan’s ESG dynamics

The FSA action follows the revision of Japan’s corporate governance code earlier this year. The governance code recommends that certain large-cap companies listed on the Tokyo Stock Exchange disclose risks and opportunities related to the impact of climate change based on a framework defined by the TaskForce on Climate-related Financial Disclosures (TCFD ).

The FSA, under its new chief Junichi Nakajima, also plans to establish a new framework for the certification of ESG-related funds. As reported in Regulation Asia last month, the FSA is set to step up scrutiny of funds claiming to be environmentally friendly and to be on the lookout for ‘greenwashing’.

Nakajima wants the new verification system to be equivalent to international standards, to ensure the reliability and comparability of the ESG data that asset managers disclose.

According to S&P Globalthe FSA is also expected to unveil final guidelines for the voluntary process on locally sold social bonds this month.

Social bonds are issued by issuers such as private commercial companies, financial institutions or incorporated administrative agencies to raise funds for social projects. In Japan, the issuance of social bonds has increased in recent years, but mainly from the public sector.

Through its Social Bond Guidelines, the FSA seeks to promote the issuance of social bonds in the private sector in order to inject capital into social projects and ensure that adequate funding is available for addressing social challenges such as hiring more women leaders in listed companies and care for the elderly and preventing ‘social washing’.

Read more articles like this on Regulation Asia’s sister publication, ESG investor.

The FSA will replace the ‘comply or explain’ model to help tackle climate change and give investors more information about leading companies.

Japanese companies could be forced into mandatory climate risk disclosure if new plans from the country’s financial regulator get the green light.

The Financial Services Agency (FSA) Task Force on Corporate Disclosures held its first meeting today (2 September) to discuss mandatory reporting proposals as well as disclosure guidelines for factors relating to sustainability and governance, such as human capital, diversity, board of directors’ activities and cross-shareholdings.

The new climate risk requirement, which would apply not only to listed companies but also to unlisted companies such as those submitting securities filings for the issuance of bonds, could take effect when companies file their securities reports for the fiscal year ending March 31, 2022 at the earliest.

According to Moody’s Investors Service, the proposed climate regulation will be “ESG positive” due to its greater applicability than the “comply or explain” approach of Japan’s corporate governance code, which primarily targets large companies listed on the Tokyo Stock Exchange.

Increased climate reporting

It would also, Moody’s added, improve the transparency and availability of data on climate-related risks, which would help investors and lenders assess each company’s exposure to those risks.

“The proposed regulations mark an important step in increasing corporate climate risk disclosure in Japan. If implemented, the stricter disclosure requirement will likely increase the volume and level of detail in corporate climate risk reporting,” said Moody’s analyst Ryohei Nishio.

However, Moody’s warned that “consistency and comparability” between companies could be a short-term roadblock, particularly as they may have different interpretations of how to disclose information.

“These limitations may weigh on the usefulness of disclosures in the immediate period after the new rule takes effect,” Moody’s warned.

Japan’s ESG dynamics

The FSA action follows the revision of Japan’s corporate governance code earlier this year. The governance code recommends that certain large-cap companies listed on the Tokyo Stock Exchange disclose risks and opportunities related to the impact of climate change based on a framework defined by the TaskForce on Climate-related Financial Disclosures (TCFD ).

The FSA, under its new chief Junichi Nakajima, also plans to establish a new framework for the certification of ESG-related funds. As reported in Regulation Asia last month, the FSA is set to step up scrutiny of funds claiming to be environmentally friendly and to be on the lookout for ‘greenwashing’.

Nakajima wants the new verification system to be equivalent to international standards, to ensure the reliability and comparability of the ESG data that asset managers disclose.

According to S&P Globalthe FSA is also expected to unveil final guidelines for the voluntary process on locally sold social bonds this month.

Social bonds are issued by issuers such as private commercial companies, financial institutions or incorporated administrative agencies to raise funds for social projects. In Japan, the issuance of social bonds has increased in recent years, but mainly from the public sector.

Through its Social Bond Guidelines, the FSA seeks to promote the issuance of social bonds in the private sector in order to inject capital into social projects and ensure that adequate funding is available for addressing social challenges such as hiring more women leaders in listed companies and care for the elderly and preventing ‘social washing’.

Read more articles like this on Regulation Asia’s sister publication, ESG investor.

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