FSA to replace the ‘comply or explain’ model to help tackle climate change and give investors more insight on leading companies.
Japanese companies could be compelled to make mandatory climate risk-related disclosures if new plans from the country’s financial regulator get the green light.
The Financial Services Agency’s (FSA) working group on corporate disclosures held its first meeting today (2 September) to discuss the mandatory reporting proposals as well as disclosure guidelines for sustainability and governance-related factors, such as human capital, diversity, board of directors’ activities and cross-shareholdings.
The new climate risk-related requirement, which would apply not only to listed companies, but also to unlisted companies such as those which submit securities filings for bond issuance, could take effect when companies file their securities reports for the fiscal year ending on 31 March 2022 at the earliest.
According to Moody’s Investors Service the proposed climate regulation will be “positive from an ESG perspective” because of its stronger enforceability than the ‘comply or explain’ approach of the corporate governance code in Japan which mainly targets large companies listed on the Tokyo Stock Exchange.
Increased climate reporting
It would also, Moody’s added, improve transparency and data availability around climate-related risks which would help investors and lenders assess individual companies’ exposure to these risks.
“The proposed regulations mark an important step in increasing corporate climate risk disclosures in Japan. If implemented, the stricter disclosure requirement will likely increase the volume and level of detail in companies’ climate risk reporting,” said Ryohei Nishio, a Moody’s Analyst.
However, Moody’s cautioned that “consistency and comparability” across companies could be a near-term hurdle, particularly as they may have different interpretations on how to disclose the information.
“These limitations may weigh on the usefulness of the disclosures in the immediate period after the new rule takes effect,” Moody’s warned.
Japan’s ESG drive
The FSA’s action follows the revision of Japan’s corporate governance code earlier this year. The governance code recommends that certain large-cap companies listed on the Tokyo Stock Exchange should disclose risks and opportunities from the impact of climate change based on a framework set by the TaskForce on Climate-related Financial Disclosures (TCFD).
The FSA, under its new Head Junichi Nakajima, is also planning to establish a new framework for the certification of ESG-related funds. As reported in Regulation Asia last month the FSA is set to step up the scrutiny of funds claiming to be environmentally friendly and be on the lookout for “greenwashing”.
Nakajima wants the new verification system to be equivalent to international standards, to ensure reliability and comparability of ESG data asset managers disclose.
According to S&P Global, the FSA is also set to unveil final voluntary process guidelines on locally sold social bonds this month.
Social bonds are issued by issuers such as private business corporations, financial institutions, or incorporated administrative agencies to raise funds for social projects. In Japan, the issuance of social bonds has increased in recent years but mainly from the public sector.
Through its Social Bond Guidelines, the FSA is looking to promote the issuance of social bonds in the private sector to drive capital into social projects and ensure adequate financing is available to address social challenges such as hiring more women leaders in listed companies and elderly care and prevent ‘social washing’.