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Japanese company directors on the hook for climate, says law initiative

Breaching their duties would leave company directors liable for damages

Company directors in Japan are legally required to provide adequate management of climate risks and seek out green business opportunities, according to a new report by the Commonwealth Climate and Law Initiative (CCLI).

The findings are based on an assessment of the legal duties of company directors as set out by the Companies Act of Japan, the articles of incorporation and the Civil Code, which charges directors to act in the best interest of a company or be held personally liable to shareholders or third parties for resulting damages.

In addition, directors of large Japanese public companies have a specific duty of care to develop adequate internal risk controls to ensure proper operations and to prevent potential losses at a company and its subsidiaries.

These requirements mean that “climate governance should be embedded in a board committee responsible for risk management or sustainability,” CCLI said, in line with the “overwhelming scientific and financial evidence of the material impacts of climate change on businesses”. Both the Japanese government and the Bank of Japan have acknowledged the materiality of climate change in recent years, with the former signing up to the Network for Greening the Financial System in 2019 and the introduction of scenario analysis for the financial sector last year.

The CCLI noted that since the law does not prescribe a specific approach to managing climate risks, directors continue to have “broad discretionary decision-making authority” in the area. Directors therefore only need to demonstrate that they have conducted a reasonable assessment of climate risks and acted on the findings to avoid breaching their duties.

The CCLI, which is based out of Oxford University in the UK, is a research project examining the legal basis for directors and trustees to take account of physical climate change risk under existing laws across Commonwealth countries and elsewhere. It has also assessed director duties under Australian, Canadian, South African and UK laws.

The latest report is authored by Yoshihiro Yamada, Vice Dean and Professor of Law at Ritsumeikan University; Janis Sarra, Professor of Law at the University of British Columbia and Principal Co-Investigator of the Canada Climate Law Initiative; and Masafumi Nakahigashi, Professor of Law and Vice President at Nagoya University.

It comes soon after the appointment of an expert advisory group by securities regulator the Financial Services Agency to steer Japan’s national sustainable finance strategy. The group is expected to issue a series of recommendations in Q3.