International commentary on sustainability-related disclosure in Japan is mixed. The country is rated for its high number of TCFD supporters and relatively high rates and quality of climate-related disclosure, while it is seen as slower to progress on some other aspects of ESG. So what is the real situation? Japan Exchange Group (JPX), as the parent company of Tokyo Stock Exchange, has a rare front-seat view from in between investors and listed companies.
Although there is a strong tradition of CSR in Japan, focus on ESG from the perspective of corporate value was kick-started by ex-Prime Minister Abe's structural economic reforms, which included the introduction of a Stewardship Code in 2014 and Corporate Governance Code in 2015. Since then, there has been a great deal of progress on governance topics, such as the employment of independent directors, increasing English disclosure, and eliminating cross-shareholdings. This focus then began widening to the rest of ESG when the Government Pension Investment Fund (GPIF), the world's largest pension fund, became a PRI signatory in 2015, before adopting three ESG indices in 2017 and beginning to pressure its contracted asset owners to take ESG issues into account in their voting and engagement decisions. Since then, ESG investment has taken a strong foothold among Japanese asset owners and asset managers. Regulators and the government have also been influential in encouraging ESG investment, through the provision of guidance documents for companies and investors, as well as the inclusion of ESG issues in the two Codes. In April this year, proposals for a new update to the Corporate Governance Code were published which would introduce a TCFD disclosure requirement (comply-or-explain) for the biggest companies.
JPX has been working to encourage the spread of ESG investment in Japan for a number of years, having become a member of the Sustainable Stock Exchanges Initiative in December 2017. From the beginning this has involved both activities aimed at investors, for example the provision of ESG-related products (indices, ETFs, green and social bonds, infrastructure funds), and those aimed at listed companies, such as the provision of ESG disclosure-themed seminars. These seminars, held in conjunction with related organisations such as SASB, PRI and the Japan Financial Services Agency (FSA), have been attended by a wide range of listed companies from 1st Section-listed international giants to JASDAQ-listed start-ups. Interest in climate-related disclosures, especially TCFD, has skyrocketed in recent months in response to the strengthened investor focus on climate change and the Corporate Governance Code proposals.
This appetite for information, however, has until recently struggled to translate into quality disclosure on a wide scale. Although there are a number of companies which have very advanced disclosure, this has been generally limited to large international companies. The main reasons for this include confusion over the various disclosure frameworks, a lack of information in Japanese (including about these frameworks), and a lack of resources, especially among smaller companies.
To tackle some of these issues, in March 2020 JPX published its Practical Handbook for ESG Disclosure, which brings together issues that listed companies face when starting ESG activities and disclosure, and splits them into four steps that companies can use as needed depending on their current situation: 1. ESG issues and ESG investment, 2. Connecting ESG issues to strategy, 3. Oversight and implementation, and 4. Information disclosure and engagement. The Handbook also introduces the main existing ESG disclosure standards and frameworks, including TCFD, SASB, GRI, IIRC, and the Japanese government's Guidance for Collaborative Value Creation.
To build on the contents of the Handbook, in November 2020 JPX launched the JPX ESG Knowledge Hub (in Japanese only), a platform where listed companies can find in-depth, hands-on and up-to-date information and guidance on ESG disclosure provided by a variety of related parties including institutional investors, regulators, the Japanese government, and other listed companies. Contents include the "Practical Seminars for ESG Disclosure" online seminar series, where expert speakers from around the industry take a deeper look into the issues set out in the Handbook, along with examples of disclosure from Japanese companies, introductions to the main disclosure frameworks and main ESG ratings agencies, and information from institutional investors on how they use ESG information.
Although the Handbook and Knowledge Hub are aimed primarily at listed companies, one of their main aims is to encourage more constructive dialogue with investors. Investors are encouraged to use the Handbook as a base for their engagement activities with Japanese companies, and the Knowledge Hub provides a space for institutional investors to explain how they use ESG information and what kind of disclosure they need.
Looking forward, JPX has carried out a survey of Knowledge Hub users on what kind of content they would find most useful, and plans to enhance the Hub based on those opinions. Given the recent interest in TCFD, JPX is also planning a survey of Japanese companies' TCFD-based disclosure to gain a better understanding of what is needed to improve. With these resources, as well as the many other guidance documents and resources being provided by the Japanese government and other related organisations, Japanese companies are now able to access the information and guidance that they need to start and improve their ESG disclosure, and it is expected that the level of disclosure as well as the range of companies carrying out disclosure will increase at a growing rate from now on.
Japan Exchange Group is delighted to be Partner of RI Japan 2021, and will be taking part in the panel on ESG best practices and effective communication on May 21.