FSA Panel Maps Japan’s Transition Path

The panel says the FSA should introduce a code of conduct for ESG data providers and develop an information platform for ESG-related bonds.

An expert panel set up by Japan’s Financial Services Agency (FSA) has published a report offering recommendations to promote sustainable finance in the country.

The Expert Panel on Sustainable Finance was established by the FSA in December 2020, and tasked with coming up with measures that can ensure financial institutions and capital markets channel investment into Japanese companies that support the transition to a carbon-neutral economy.

The panel was also tasked with promoting disclosures of climate-related information, and has since held eight meetings to discuss various measures to promote sustainable finance.

On Friday (18 June), the panel published a report offering its set of recommendations, based on the underlying principle that sustainable finance is an infrastructure that should be driven not only by private initiatives but by policy initiatives.

The panel says consideration of ESG factors is favourable to fulfill fiduciary duties, and that a wide range of approaches needs to be sought to raise awareness and accumulate business practices regarding impact finance.

“It is important to participate in international discussions on taxonomies for sustainable activities and promote transition finance (including the formulation of roadmaps for high emission industries,” it says.

Last month, the FSA released guidelines on climate transition finance, to help to promote financing for projects such as renewable energy and efforts to move hard-to-transition industries towards decarbonisation.

To enhance corporate disclosures, the panel says broad discussion needs to be held on appropriate sustainability disclosures to ensure constructive dialogue with investors and financial institutions.

In addition, it recommends active participation in the process of developing sustainability reporting standards at the IFRS Foundation, and that the quality and quantity of climate-related disclosure should be enhanced based on the TCFD recommendations, following revisions to the Corporate Governance Code which took effect this month.

To ensure capital market functions promote sustainable finance, the panel says institutional investors should enhance ESG investments and engagement with investees, and that asset managers should carefully explain the characteristics of an ESG-related investment trust at its establishment and distribution, and be accountable for these ESG aspects on an ongoing basis, under monitoring by the FSA.

The FSA is encouraged to promote discussions on issues of ESG rating and data providers, including a code of conduct for such firms. A platform for practical information on ESG-related bonds should be developed, along with a mechanism that provides objective certification of the eligibility of such bonds.

Financial institutions need to support the transition of the real economy, integrating sustainability opportunities and risks into their business strategies and risk management, the panel says. Financial institutions are also expected to accumulate know-how, improve skills, and develop analytical tools – in order to support borrowers and investees in their climate transition efforts.

“Developing a ‘green international financial center’ can contribute to more loans and investment towards sustainable societies in Asia and rest of the world,” the panel says.

The FSA should continue to discuss with financial institutions the effective use of scenario analysis and encourage them to develop a risk management system for climate change. Supervisory guidance on climate transition support and risk management should also be developed.

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