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Japanese firms should disclose sustainability efforts, says proposed governance code update

Govt-backed expert panel puts forward revisions to Japan’s Corporate Governance Code and Guidelines for Investor and Company Engagement

Japan’s Financial Services Agency (FSA) and the Tokyo Stock Exchange (TSE) are being asked to consider proposed revisions to the country’s corporate governance code that include requirements for companies to “appropriately disclose their initiatives on sustainability when disclosing their management strategies”. 

The recommendations have been made by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code – a group of representatives of the Japanese market set up in 2015, the year Japan’s ‘comply or explain’ corporate governance code was launched. Chaired by Professor Hideki Kanda, the group monitors and promotes the development of both the Code and Guidelines. The FSA and TSE act as its secretariat. 

Japan’s corporate governance code was last revised in 2018 – the same year its Guidelines for Investor and Company Engagement were launched. Now, the expert group has issued recommendations on how to update the governance code. 

One of those recommendations is that companies seeking to list on the TSE’s planned new market segmentation, the Prime Market, should “enhance the quality and quantity of disclosure based on the TCFD recommendations” or “an equivalent framework”. The TSE announced at the end of last year that it will create three new stock indices in April, to filter out smaller firms from its flagship Topix index. The Prime Market is expected to absorb most of the 2,200 firms listed on the main index when this happens. 

The new recommendations, which build upon a December statement from the group on good governance in the wake of the Covid-19 pandemic, centre on three main areas: 

Enhancing Board Independence

  • Increase in the number of independent directors from at least two to at least one-third of the board for Prime Market listed companies;
  • Establish a nomination committee and a remuneration committee;
  • Disclose a skill matrix of board members conforming to the company's business strategy; and
  • Appoint independent directors with managerial experiences at other companies

Promoting Diversity

  • Disclose a policy and voluntary measurable targets in respect of promoting diversity in senior management; and
  • Disclose human resource development policies ensuring diversity, including the status of implementation

Attention to Sustainability and ESG

  • Develop a basic policy and disclose initiatives on the company's sustainability; and
  • Enhance the quality and quantity of climate-related disclosure based on TCFD recommendations or equivalent international frameworks at Prime Market listed companies

The expert group states that it anticipates that the FSA and the TSE will take up its recommendations and revise both the Guidelines and Code “promptly”, although RI understands that the pair will first launch a public consultation.