Japan is on the path to join the increasing number of countries that are adopting mandatory reporting standards based on those of the IFRS’ International Sustainability Standards Board (ISSB). The Sustainability Standards Board of Japan (“SSBJ”) approved three exposure drafts of reporting standards on March 21, 2024.
The three exposure drafts, which incorporate the requirements in the sustainability disclosure standards published by the ISSB, are:
- Universal Sustainability Disclosure Standard Exposure Draft “Application of the Sustainability Disclosure Standards”,
- Theme-based Sustainability Disclosure Standard Exposure Draft No. 1 “General Disclosures”, and
- Theme-based Sustainability Disclosure Standard Exposure Draft No. 2 “Climate-related Disclosures”
These three exposure drafts show the clout and momentum of the ISSB. The ISSB standards are voluntary, but several countries, notably including Canada, the UK, Brazil, Pakistan, Nigeria and Australia have announced plans to adopt them. Three Asian countries – Singapore, Malaysia and Hong Kong – are considering the adoption of standards based on the ISSB standards.
Japan a leader on sustainability
The actions of the SSBJ are another example of Japan’s ESG leadership. Japan has been in the forefront of sustainability disclosure.
- The Tokyo Stock Exchange requires Prime Market-listed companies to report Task Force for Climate-related Financial Disclosures (TCFD) disclosures and to discuss social factors as per a “comply-or-explain” disclosure regime.
- Government-mandated sustainability reporting began in March of 2023, the effective date of the rules of Japan’s Financial Services Agency (FSA). These rules mandated the creation of a new section for sustainability-related information in a company’s statutory annual securities report. Under the rules, all listed companies in Japan are obligated to should disclose sustainability-related information as per the TCFD.
- The SSBJ was established in July of 2022 to develop sustainability disclosure standards to be applied in Japan and to contribute to the development of international sustainability disclosure standards.
- It is generally expected that standards based on the exposure drafts will in due course be required for companies listed on the Tokyo stock Exchange Prime Market and perhaps by other companies.
- Mandatory effective dates have not been set, but companies may choose to apply the standards the Spring of 2025.
Implications for Companies:
- Companies with that are domiciled in Japan or that have a significant presence there, should consider responding to the invitation of the SSBJ for responses to the three drafts. The last date for acceptance of responses will be July 31, 2024
- While companies must keep their primary focus on the laws of the countries in which they are incorporated or headquartered, they are well-advised to monitor Value Chain Sustainability laws in other jurisdictions, because of potential direct and indirect extraterritorial effects on companies.
Key Takeaway: “The Expanding Universe of ESG” keeps expanding.