Japan

A. ESG Reporting

1. Are there legal or regulatory requirements for companies to make ESG disclosures in your jurisdiction?

Yes.

2. What are the key legislative and regulatory sources for ESG disclosure requirements and to whom do they apply?

The amended Cabinet Office Order on Disclosure of Corporate Affairs under the Financial Instruments and Exchange Act of Japan (Disclosure Order), which became effective in January 2023, sets out “sustainability” disclosure requirements to be reported in a securities registration statement filed by both Japanese and overseas companies that conduct an offering of securities in Japan, or an annual securities report filed by both Japanese and overseas companies that are obligated to make such a filing (i.e., companies which are listed in Japan or have filed a securities registration statement without listing in Japan before).

According to the Financial Services Agency of Japan (FSA), information related to the environment, society, employees, human rights, anti-corruption, anti-bribery, governance, cybersecurity and data security may be within the scope of “sustainability” mandatory disclosure.

The Corporate Governance Code by the Tokyo Stock Exchange (Corporate Governance Code) also sets out general sustainability disclosure requirements for all listed companies of the Tokyo Stock Exchange. In particular, companies listed on the Prime Market are expected to collect and analyse the necessary data on the impact of climate change-related risks and earning opportunities on their business activities and profits and enhance the quality and quantity of disclosure.

3. Are the requirements mandatory or do they apply on a comply-or-explain basis?

The Disclosure Order contains mandatory disclosures in relation to sustainability, including environmental, social and governance aspects.

ESG disclosures under the Corporate Governance Code are on a “comply-or-explain” basis.

4. Which aspects of ESG do the requirements focus upon?

In an annual securities report, all sustainability issues including environmental, social and governance aspects are covered.

In a corporate governance report, the focus is mostly on environmental aspects.

5. Are the disclosure requirements based on international standards? If so, which one(s)?

While the Disclosure Order does not specify any framework for the purpose of disclosure in an annual securities report, it stipulates that sustainability information needs to be described from the viewpoint of the four core elements of the TCFD recommendations: governance, strategy, risk management, and metrics and targets.

Environmental-related disclosures in a corporate governance report are expected to be in line with the TCFD recommendations or an equivalent framework.

6. How do the disclosure requirements approach materiality (e.g. single or double materiality)?

While neither the Disclosure Order nor the Corporate Governance Code clarifies that it adopts a single or double materiality approach, the Principles about Disclosure of Non-Financial Information issued by the FSA mentions that materiality shall be determined by each company taking into consideration various factors including the category of business, business environment and enterprise value of such company.

7. Are there requirements for the disclosure of GHG emissions? If so, please specify the scope (e.g. Scope 1, Scope 2 and/or Scope 3), to whom they apply and whether there are requirements on the measurement methodology.

It is not required that a company report its GHG emissions in the annual securities report or corporate governance report. However, a company that considers climate change to be one of its material risks must state metrics and targets for climate change in its annual securities report, which often includes information about GHG emissions of the company.

Separately, under the Act on Promotion of Global Warming Countermeasures of Japan, a company that (i) emits a certain amount of GHG within a year from all of its business facilities in Japan or (ii) transports a certain amount of freight within a year in Japan by itself or with the assistance of carriers, is required to calculate and disclose the amount of GHG emissions from the company’s business facilities in Japan (i.e., Scope 1 and 2) in its report to be filed with the relevant governmental authority in accordance with the instructions published by the Ministry of Environment of Japan. The reported data can be accessed by the public.

8. Are there requirements to obtain independent assurance of any ESG disclosures? If so, what is the scope of such requirements?

Not mandatory.

9. For companies not subject to mandatory or comply-or-explain ESG reporting, are voluntary ESG disclosures customary?

It is uncommon for a company not subject to the ESG disclosure obligation under the Disclosure Order or the Corporate Governance Code to voluntarily make substantial ESG disclosures.

10. Has your jurisdiction issued or adopted a taxonomy on sustainable activities? Is it mandatory and what is its scope of application?

No, and regulators have not indicated any plans to develop a local taxonomy.

11. Are there plans to adopt or incorporate the ISSB’s IFRS S1 and/or S2 standards? If so, please indicate the extent of alignment, to what extent the standards will be mandatory, to whom they will apply and the timeline.

Yes.

In March 2024, the Sustainability Standards Board of Japan (SSBJ) released exposure drafts for new standards:

(a) the universal sustainability disclosure standards (the Application of the Sustainability Disclosure Standards);

(b) the theme-based sustainability disclosure standards No. 1 (the General Disclosures); and

(c) the theme-based sustainability disclosure standards No. 2 (the Climate-related Disclosures).

The SSBJ decided to incorporate all requirements in IFRS S1 and S2 and to add that, when considered necessary, a reporting entity can choose to apply any jurisdiction-specific alternatives. If a company chooses not to apply any of the jurisdiction-specific alternatives, the disclosures will be in compliance with the ISSB Standards. On the other hand, if a company chooses to apply the jurisdiction-specific alternatives, the disclosures may or may not result in compliance with the ISSB Standards. However, it is intended that the companies preparing disclosures for these additional requirements would not be required to obtain additional information beyond the information obtained in the process of preparing disclosures in accordance with IFRS S1 and S2.

Once implemented, sustainability information disclosure in annual reports and other documents is expected to be legally required to be based on the SSBJ standards. The SSBJ’s exposure drafts do not prescribe the scope of companies that would be required to apply the sustainability disclosure standards issued by the SSBJ. However, the SSBJ developed such drafts following the direction indicated by the FSA that the scope of companies that would be required to apply the SSBJ standards should be those companies which centre their business on constructive dialogue with global investors. The SSBJ standards are therefore expected to apply to all or a portion of companies listed on the Prime Market of the Tokyo Stock Exchange.

The SSBJ’s new standards are expected to apply to annual securities reports for the fiscal year ending 31 March 2027 or later in stages according to market capitalisation of each reporting company. The finalised, new SSBJ standards are expected to be released in March 2025. Details such as scope of application and timing are currently under discussion and are expected to be confirmed in early 2025.

12. Other upcoming developments / direction of travel

In addition to the matters referred to above, the Sustainability Disclosure and Assurance Working Group in the Financial System Council of Japan began discussion about independent assurance and the safe harbor rule of ESG disclosures provided in an annual securities report of a company. The discussion will take a fair amount of time before reaching a conclusion.