Environmental, social and governance (ESG) regulations have become increasingly important in the world of finance and investment in recent years. These regulations have also been gaining momentum in Japan with the government and the financial industry taking steps to promote sustainability and social responsibility.
Japan has been introducing several regulations and initiatives aimed at addressing environmental issues, improving social welfare and enhancing corporate governance. This article summarises the ESG regulations in the country.
Under the Act on Promotion of Global Warming Countermeasures, companies that emit more than a certain amount of greenhouse gases (specified emitters) are required to calculate and report their greenhouse gas emissions each fiscal year to the minister in charge of the business, as mentioned in article 26 of the act.
The specified emitters are required to report direct and indirect emissions, which is similar to requirements under scope 1 and scope 2 of the Greenhouse Gas Protocol. Article 29 of the act explains that the reported information is compiled and published through the Ministry of the Environment and the Ministry of Economy, Trade and Industry, and covers emissions from companies and all of their business facilities. Companies that fail to report, or make a false report, are subject to a fine (articles 75 and 73).
A specified emitter may submit a request to abstain from publishing one of its business facilities’ emissions information when it considers that there is a risk that its rights, competitive position or other legitimate interests could be harmed by such publication (article 27).
Furthermore, article 25 of the Act on Rationalising Energy Use requires companies that have factories and use a certain amount of energy (specified business) to prepare medium and long-term plans for achieving the targets for rationalising the use of energy and shifting to non-fossil energy. Article 16 of the act also requires a specific business to submit periodic reports on the use of such energy to the ministry in charge of the business. When the ministry finds the efforts of a specified business are significantly insufficient, the ministry may give the specified business advice or instructions. If the specified business fails to follow the instructions, the ministry may publicise the finding (articles 17 and 18).
The government may require manufacturers of automobiles, home appliances, building materials, etc., to achieve energy consumption efficiency targets for their products, and may make recommendations if efficiency improvements are insufficient (articles 149 and 150).
The environmental value of renewable energy is being traded as a certificate, Japan has three types of certificates: J-credit (derived from renewable energy); green electricity certificates; and non-fossil certificates. These certificates are used in corporate power purchase agreements and in various reporting systems including Renewable Energy 100, the Carbon Disclosure Project and the above-mentioned statutory reporting system. Also, a new emissions trading system was launched in the Japan-led initiative Green Transformation League in April 2023.
Article 14 of the Waste Disposal and Public Cleansing Act requires companies licensed by the prefectural governor to collect, transport or dispose of waste material on a regular basis. Companies could be criminally liable if they conduct such operations without a licence (article 25). When companies dispose of the waste they generate, they must either dispose of it by themselves or outsource the disposal to a licensed contractor (article 12).
A penalty applies if companies outsource waste management works to an unlicensed contractor (article 26). Article 12 of the act also sets out detailed treatment and outsourcing standards for waste disposal, as well as how the flow of waste material up to final disposal is to be managed through the manifest system.
Under the Act on the Promotion of Effective Utilisation of Resources, 10 industries and 69 items that require the making of special reduce, reuse, recycle (3R) efforts are designated, and specific details are given on 3R measures that business operators should voluntarily work on at the product manufacturing, designing or labelling stages.
In addition, other recycling laws – such as the Act on the Promotion of Sorted Collection and Recycling of Containers and Packaging, the Act on Recycling of Specified Home Appliances, the Act on Promotion of Recycling of Small Waste Electrical and Electronic Equipment, the Act on Recycling of End-of-Life Automobiles, the Act on Recycling of Construction Materials and the Act on Promotion of Recycling and Related Activities for Treatment of Cyclical Food Resources – are applied according to the nature of individual items.
Regarding business and human rights issues, the Japanese government formulated its own national action plan in relation to business and human rights in October 2020, in accordance with the UN Guiding Principles on Business and Human Rights. In Japan, there is no legislation to date on business and human rights, or human rights due diligence. However, it was reported in April this year that the Japanese government, holding the G7 Summit presidency, will begin its internal consideration regarding the enactment of a law on human rights due diligence. Since the discussion is at an early stage, the details of what the legislation will entail are not yet known.
The Japanese government has issued the Guidelines on Respecting Human Rights in Responsible Supply Chains in September 2022, based on the result of a survey on the status of human rights efforts in the supply chains of Japanese companies, which was released in November 2021. These guidelines were established to serve as a reference for Japanese companies to implement human rights due diligence in their supply chains.
Furthermore, in April this year, the government published the Reference Material on Practical Approaches for Business Enterprises to Respect Human Rights in Responsible Supply Chains to provide detailed explanations and case studies on the formulation of human rights policies, and the identification and assessment of negative impacts on human rights, which are the first step for companies that implement initiatives in accordance with the guidelines.
When conducting business activities, a company needs to consider the various rights of its stakeholders, including employees, suppliers, customers and members of the local community. Traditionally, Japanese companies have focused on protecting the rights of their employees. However, companies nowadays also need to consider the rights of their own employees and also the employees of companies in their supply chain.
In Japan, the Labor Standards Act is the law governing employment and labour relations. The Labor Standards Act establishes rules regarding working conditions for workers and regulates them so that, among others, problems of child labour and forced labour do not arise.
There are also movements in Japan related to the rights of minorities. A new bill to eliminate discrimination against sexual minorities passed during the latest session of the parliament. The bill aims to eliminate discrimination by improving the understanding of LGBT people and promoting the understanding of the LGBT community to the public.
GOVERNANCE AND DISCLOSURE
The Tokyo Stock Exchange has established the Corporate Governance Code (CG Code), which sets out the main principles that contribute to effective corporate governance. In the CG Code, listed companies are required to explain their efforts and activities related to the principles of the code, which include the appropriate responses to sustainability issues, disclosure of their initiatives on sustainability (particularly for companies listed on the prime market) and disclosure based on the Task Force on Climate-Related Financial Disclosures or other equivalent frameworks.
In addition, the Cabinet Office Order on Disclosure of Corporate Affairs was enacted on 31 January and mandates those companies required to submit the securities registration statement or annual securities report to also disclose information on human capital and diversity, including that related to the gender wage gap, the ratio of women in management positions and the ratio of men taking childcare leave in case the companies disclose these indices under other laws, starting from this year.