ESG 2025 Comparisons

The Japanese government and businesses continue to show a high level of interest in ESG, with the government implementing a number of measures to promote ESG initiatives in which the public and private sectors can invest. This commitment is reflected in the Basic Policies for Economic and Fiscal Management and Reform 2025, released in June 2025, which emphasise collaborative efforts to emphasise social challenges and achieve sustainable economic growth. The policies underscore the need for strategic, long-term investments in areas such as:

• green projects;
• digital transformation;
• scientific and technological innovation;
• frontier exploration; and
• economic and energy security.

Key developments in ESG and sustainability laws and regulations in 2025 are as follows.

Amendment to the GX Promotion Act Mandating Participation in the Emissions Trading System

In May 2025, an amendment to the GX Promotion Act was enacted, requiring business operators that emit substantial amounts of carbon dioxide to participate in the emissions trading system. The rule applies to businesses whose average CO₂ emissions over the past three fiscal years exceed 100,000 tons, with the system scheduled to begin in fiscal year 2026.

At present, detailed guidelines regarding the government’s allocation of emission allowances are under discussion. Under the new rules, affected businesses must submit their emission targets and report their actual emissions, both of which must be verified by a registered verification body. Since both businesses and verification bodies will need time to establish the necessary systems, the government has indicated that only limited assurance will be required for the first three years; thereafter, the government will require full enforcement starting in fiscal year 2029.

Enactment of the Amendment to the Act on the Promotion of the Utilization of Sea Areas for Renewable Energy, Establishing Regulations for the Installation of Offshore Wind Power Facilities in EEZ

In June 2025, an amendment to the Act on the Promotion of the Utilization of Sea Areas for Renewable Energy was enacted, and it establishes new regulations for granting permits for the installation of offshore wind power facilities in the Exclusive Economic Zone (EEZ). Under the amended law, the government designates areas within the EEZ with favourable conditions, such as wind resources and seabed characteristics, and invites interested developers to submit project proposals. Installation is permitted only after consultations with power developers, shipping companies and fisheries, and if the project meets the established permit criteria.

In 2025, two new areas off Hokkaido – Matsumae and Hiyama – were designated as promotion zones for offshore wind, reflecting progress in project development. At the same time, as of the end of August 2025, the consortium led by Mitsubishi Corporation, selected in the first round of developers, announced its withdrawal from the project due to rising project costs. It highlights how material and construction cost increases are adversely affecting the business environment. The government is considering measures to improve the project environment, including for areas where bidding has already concluded. Future developments in this industry are expected to draw close attention from relevant stakeholders.

Since the Japanese government declared (in October 2020) its goal to achieve carbon neutrality with net-zero greenhouse gas emissions by 2050, the Japanese government’s efforts to tackle climate change have accelerated. This commitment has been supported by the enactment of various regulatory and supportive laws and policies designed to promote sustainability and reduce emissions.

Currently, discussions are underway to draft the seventh iteration of the Basic Energy Plan, which sets out the foundational framework for Japan’s energy policy, the GX2040 Vision, which includes industrial policies, and the Global Warming Countermeasures Plan as released in February 2025. With the emergence of AI expected to lead to a rapid increase in electricity demand, the government has indicated a policy of promoting renewable energy as a main power source and maximizing its deployment, while also utilising nuclear power to ensure stable supply and maintain energy self-sufficiency. In addition, the revised Plan for Global Warming Countermeasures sets ambitious targets towards achieving net zero by 2050, aiming to reduce greenhouse gas emissions by 60% by fiscal year 2035 and by 73% by fiscal year 2040 compared with 2013 levels. These targets have been reflected in Japan’s new Nationally Determined Contribution (NDC) submitted to the United Nations.

In the 2025 National Diet Session, the amended GX Promotion Act, which requires participation in the emissions trading system, and the amended Act on the Promotion of the Utilization of Sea Areas for Renewable Energy, which establishes regulations for granting permits for offshore wind power facilities in the Exclusive Economic Zone, were enacted. For more details, please refer to 1.1 General ESG Trends.

The Law on the Promotion of a Hydrogen Society and the CCS Business Act, both enacted in 2024, are being implemented sequentially, with eligible projects being selected and project formation progressing steadily.

On 1 November 2024, the Order for Enforcement of the Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators (commonly referred to as the “Freelance Act”) came into effect. As diverse work styles continue to evolve and freelancing becomes more prevalent, this law aims to establish an environment where individuals acting as sole proprietors can engage in stable business activities. It is intended to ensure fair transactions and improve working conditions for freelancers.

Under this law, clients (ie, the commissioning party) are required to do the following.

• Clarify transaction terms – Clearly specify details such as the scope of work, remuneration, payment deadlines, and deliverables in writing or through electronic means (eg, email or contract management systems).
• Set and comply with payment deadlines – Pay remuneration within 60 days after the delivery of the agreed deliverables in principle. Any delay in payment or unjustified reduction of fees may result in administrative guidance or corrective measures.

In addition, a new obligation has been introduced for clients to implement measures to prevent harassment against freelancers, including the establishment of consultation systems and the implementation of recurrence prevention measures.

In April 2025, the Tokyo Ordinance on the Prevention of Customer Harassment came into effect. This ordinance defines the responsibilities of businesses, customers and workers operating within Tokyo and characterises customer harassment (kasu-hara) as “serious acts of nuisance directed at workers in connection with their duties that harm their working environment”. Furthermore, on 4 June 2025, an amendment to the Act on Comprehensive Promotion of Labor Measures, Stabilization of Employment, and Enrichment of Workers’ Vocational Lives (commonly known as the “Comprehensive Labor Measures Promotion Act”) was enacted. The amendment imposes an obligation on employers to take employment management measures to protect workers from customer harassment, with implementation targeted for 2026.

Accordingly, companies are expected to address customer harassment not merely as a matter of “complaint handling” but as part of their broader duty to protect employees’ working environments and ensure occupational safety and health.

In addition, as the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD) and Corporate Sustainability Reporting Directive (CSRD) move towards implementation between 2026 and 2028, their extraterritorial application to Japanese companies is becoming increasingly likely. Japanese companies, particularly those with significant operations or sales within the EU, are therefore expected to establish governance and due diligence frameworks aligned with these directives and to enhance transparency in sustainability reporting in anticipation of the upcoming enforcement timelines.

Release of the Final Version of the SSBJ Standards

In June 2022, the Working Group on Corporate Disclosure of the Financial System Council proposed creating a dedicated section in securities reports to integrate sustainability information. Following this proposal, on 31 January 2023, the Cabinet Office Order on Disclosure of Corporate Information was amended to include sustainability-related disclosures. This amendment introduced a new section titled “Approach and Efforts on Sustainability” in securities reports, mandating the disclosure of sustainability information.

In response, the Sustainability Standards Board of Japan (SSBJ), established in July 2022, published in March 2025 the following three standards that conform to the IFRS Sustainability Disclosure Standards (ISSB Standards) issued by the International Sustainability Standards Board (ISSB):

(a) Application of Sustainability Disclosure Standards (the universal standard for sustainability disclosures);

(b) General Disclosure Standard (Thematic Disclosure Standard No 1); and

(c) Climate-Related Disclosure Standard (Thematic Disclosure Standard No 2).

The SSBJ Standards have also been confirmed by the ISSB as ensuring functional equivalence with the ISSB Standards.

Effective Date of SSBJ Standards

Regarding the scope of companies subject to disclosure under the SSBJ Standards, which is planned to cover all or certain companies listed on the Tokyo Stock Exchange Prime Market, the Financial Services Agency’s Working Group on the Disclosure and Assurance of Sustainability Information published an interim summary of key issues in July 2025. In this summary, the Working Group presented the following roadmap for the implementation timeline of the SSBJ Standards.

Among these, items (a) and (b) are to be finalised as stated below, while item (c) will continue to be reviewed based on domestic and international developments, with a conclusion targeted within this year.

(a) Companies with a market capitalisation of JPY3 trillion or more – fiscal year ending March 2027.

(b) Companies with a market capitalisation of JPY1 trillion to less than JPY3 trillion – fiscal year ending March 2028.

(c) Companies with a market capitalisation of JPY500 billion to less than JPY1 trillion – fiscal year ending March 2029.

In Japan, the Cabinet Office plays a key role in overseeing economic policies, including those related to ESG initiatives, and is responsible for setting the overall direction of such policies. For instance, the Cabinet Office established the GX Implementation Council, which, in July 2023, formulated the “strategy for Promoting a Carbon-Neutral Growth-Oriented Economic Structure” and facilitated the enactment of the GX Promotion Act. Furthermore, while the Cabinet Office provides overall co-ordination, the formulation and implementation of specific laws and policies based on government initiatives are carried out by individual ministries and agencies, according to their respective roles. Below are the main agencies involved.

Ministry of Economy, Trade and Industry (METI)

The METI is tasked with enhancing private-sector economic vitality, promoting industrial development, and ensuring a stable supply of mineral resources and energy. Together with its external agency, the Agency for Natural Resources and Energy, it oversees laws and policies related to renewable energy, hydrogen, and carbon capture and storage (CCS), among other areas.

Ministry of the Environment (MOE)

The MOE oversees matters related to the preservation of the global environment, pollution prevention, and the protection and management of natural environments.

Financial Services Agency (FSA)

The FSA is responsible for planning and drafting domestic financial systems, including matters related to sustainable finance. It handles regulations concerning ESG disclosures, legal frameworks for carbon credit trading, and other related areas.

The following industries are most expected to be impacted by legal regulations related to ESG initiatives.

• Impact of the legalisation of emissions trading – As mentioned earlier, the Japanese government plans to fully implement an emissions trading system by fiscal year 2026, requiring participation for large corporations regardless of industry. Companies required to participate in this trading system are likely to experience substantial operational and financial impacts as they adapt to the new requirements.
• Impact of revised sustainability disclosure standards – The Sustainability Standards Board of Japan (SSBJ) is scheduled to finalise its new sustainability disclosure standards by the end of March 2025. These standards will be introduced in stages, starting with companies listed on the Prime Market with a market capitalisation of JPY3 trillion or more, beginning with the fiscal year ending March 2026. Businesses across various industries subject to these new sustainability disclosure requirements will need to adapt, potentially incurring compliance costs and operational changes.

These upcoming regulatory changes highlight the need for industries to proactively prepare for the shift towards stricter ESG-related compliance measures.

In September 2025, Prime Minister Ishiba announced his resignation, prompting a leadership election within the Liberal Democratic Party. Ms Takaichi was elected as the party’s first female president and subsequently appointed Prime Minister. However, no significant changes are expected regarding the direction of ESG-related policies.

Regarding the impact of political movements and geopolitical factors from abroad, Japan, due to its limited land area and lack of natural resources, is highly susceptible to global conditions, particularly in areas such as fuel security and resource acquisition. Furthermore, many Japanese companies have operations in multiple countries, which means they are inevitably influenced by political developments in those regions.

Additionally, regulations that apply to companies outside the European Union (EU), such as the EU’s Corporate Sustainability Due Diligence Directive and the Carbon Border Adjustment Mechanism (CBAM), have also begun to affect companies based outside the EU but operating within its market. These regulations have a direct impact on Japanese companies, as they must comply with these international standards to maintain their market presence in the EU and other regions.

As noted in our discussion at 1.4 Governance Trends, in March 2025, the Sustainability Standards Board of Japan (SSBJ) published the finalised version of the SSBJ Standards. The Standards have also been confirmed by the ISSB as conforming to ISSB Standards. Regarding the disclosure of sustainability information in securities reports, a broad roadmap has been established, and it indicates that the application of the SSBJ Standards will cover all or certain companies listed on the Tokyo Stock Exchange Prime Market, with companies having a market capitalisation of JPY3 trillion or more scheduled to apply the Standards from the fiscal year ending March 2027.

While progress is being made in establishing a disclosure framework for sustainability information in securities reports, it is recognised that such information – often comprising qualitative, estimated and forward-looking elements – tends to be inherently more uncertain than financial information. This characteristic has raised concerns that companies may be reluctant to disclose such information due to potential liability for misstatements or other inaccuracies, highlighting the need for measures to address this issue.

Looking ahead, in order to enhance disclosure in securities reports and clarify the scope of liability for misstatements, and considering the unique characteristics of sustainability information, discussions are expected to advance on frameworks such as the introduction of safe harbour rules.

Corporate governance requirements in Japan differ significantly between listed and unlisted companies.

For listed companies, in addition to the Companies Act, more advanced governance is required under the Financial Instruments and Exchange Act, the securities listing regulations established by stock exchanges, and the Corporate Governance Code.

The Corporate Governance Code outlines principles for listed companies to:

• ensure shareholder rights;
• collaborate appropriately with stakeholders other than shareholders;
• secure proper information disclosure and transparency;
• fulfil board responsibilities; and
• engage in dialogue with shareholders.

The aim is for listed companies to maintain systems for transparent, fair and decisive decision-making, thereby achieving effective corporate governance.

Companies listed on the Prime Market are subject to stricter governance requirements than those on other markets. These include:

• the appointment of independent outside directors;
• the establishment of nomination and remuneration committees; and
• climate change disclosures based on frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD).

Additionally, as mentioned in 1.4 Governance Trends, companies listed on the Prime Market are expected to be sequentially required to disclose sustainability information in accordance with the SSBJ Standards, based on their market capitalisation.

Unlisted companies, on the other hand, must establish governance in accordance with the Companies Act but are not required to meet the high-level governance standards of listed companies, such as disclosure obligations or the appointment of independent directors.

The revised Corporate Governance Code (published in June 2021) requires companies to disclose their efforts related to sustainability. In response, there has been a growing trend among companies to incorporate ESG initiatives into executive compensation. This trend is expected to continue, as companies seek leadership incentives with sustainability goals. Consequently, it is anticipated that executives will play a key role in driving ESG initiatives.

Under Japanese corporate law, directors and executive officers, as agents of the company, are obliged to perform their duties with the care of a good manager (duty of due care, Companies Act Articles 330 and 402(3), and Civil Code Article 644). They are also required to comply with laws, the articles of incorporation, and shareholder resolutions in performing their duties (duty of loyalty, Companies Act Article 355 and Article 419(2)). However, at present, promoting ESG is not considered a statutory obligation for directors and executive officers.

Regarding the scope of their managerial discretion, the business judgment of directors and executive officers is generally not considered a breach of the duty of due care unless there is a grossly unreasonable element in the decision-making process or its substance. Therefore, whether or not directors and executive officers consider or actively promote ESG initiatives is largely left to their discretion. Consequently, the decision to pursue or not pursue ESG initiatives is not, in and of itself, considered a violation of their duty of due care or duty of loyalty.

That said, with regard to ESG factors, such as human rights, which are increasingly recognised as essential for companies to address on an international scale, a failure to address such issues – despite the absence of specific legal regulations – could potentially be construed as a violation of the duty of care or duty of loyalty.

In Japan, there are several systems to support social enterprises and not-for-profit organisations. These include the following:

• Certified Specified Non-Profit Corporations;
• Public Interest Incorporated Associations; and
• Public Interest Incorporated Foundations.

These organisational forms are utilised in areas such as environmental protection, education, and welfare services.

Organisations such as Specified Non-Profit Corporations, General Incorporated Associations, and General Incorporated Foundations that meet requirements for public interest activities can receive certification from the government to become Certified Specified Non-Profit Corporations or Public Interest Incorporated Associations and Foundations.

All these organisations are non-profit by nature, meaning they do not operate with a profit-distribution model seen in traditional corporations. Unlike for-profit businesses, these organisations do not issue shares, and any surplus funds generated from their activities cannot be distributed to members, directors or investors. Additionally, because they are non-profit, these organisations tend to be fragile and financially unstable, relying on donations and other funding sources for operations. The inability to distribute profits as financial returns makes it difficult for them to attract conventional investors who seek economic gains.

Unlike Benefit Corporations in the US, Japan does not have a legal framework that balances profit-making with public benefit. Therefore, some companies establish themselves as corporations while obtaining a B-Corp certification issued by private organisations, adopting business practices that prioritise profit reinvestment and a commitment to social impact. Recent policy discussions, including those led by the Cabinet Office and local governments, have also focused on expanding support for “social enterprises” through financial assistance, capacity-building programmes and impact measurement standards.

In the revised Japan Stewardship Code of 2020, “stewardship responsibility” is defined as the obligation of institutional investors to enhance the corporate value and sustainable growth of investee companies. This is achieved through constructive, “purposeful dialogue” based on a deep understanding of the investee companies, their business environments, and consideration of sustainability (including ESG factors and long-term sustainability) aligned with their investment strategies. The Code clarifies the importance of incorporating sustainability into the stewardship process to expand long-term investment returns for business operators and beneficiaries.

Additionally, some institutional investors have begun establishing and disclosing their sustainability investment policies – ie, statements outlining how asset owners and financial institutions incorporate sustainability considerations into their investment practices.

Furthermore, on 28 August 2024, the Cabinet Secretariat issued the Asset Owner Principles, emphasising the responsibility of asset owners to achieve their respective investment objectives and deliver appropriate investment outcomes to beneficiaries. These principles highlight the need for asset owners to make efforts that contribute to the sustainable growth of investee companies, including considerations related to sustainability.

Through the proactive efforts of investors, financial institutions and the government’s diverse initiatives, along with the influence of international trends, sustainable finance has made significant strides in Japan in recent years. Japan issued GX Transition Bonds 2024 onwards; in March 2025, the Sustainability Standards Board of Japan (SSBJ) published a domestic sustainability disclosure standard. These developments demonstrate steady progress in the country’s commitment to sustainable finance.

However, despite these advancements, several challenges remain. Key issues include:

• the need for further understanding and education on sustainable finance;
• talent development;
• the consistent implementation of GX policies at regional level; and
• strengthening collaboration with the international community.

Additionally, while climate change has traditionally been the central focus of both domestic and global discussions, attention is now expanding to other critical issues such as biodiversity and human capital.

In 2025, no major regulatory changes related to sustainable finance have been observed. However, the Fifth Report of the Expert Panel on Sustainable Finance, released in June, emphasises the need to continue promoting sustainable finance by leveraging the frameworks already established for practical implementation, while also enhancing opportunities to raise awareness and understanding among a broad range of investors, including individual investors.

In Japan, several guidelines and frameworks have been established to promote sustainable finance. These include the following:

• Green Bond Guidelines (Ministry of the Environment);
• Green Loan Guidelines (Ministry of the Environment);
• Sustainability-Linked Bond Guidelines (Ministry of the Environment); and
• Sustainability-Linked Loan Guidelines (Ministry of the Environment).

The Green Bond Guidelines and Green Loan Guidelines were revised in July 2025 to expand the green list set out in Appendix 1, Schedule 1.

In Japan, access to green bonds expanded rapidly following the Ministry of the Environment’s first green bond guidelines in 2017 establishing a framework of issuance, and the amount of green bonds issued by domestic entities in 2023 exceeded JPY3 trillion. In addition, the development of domestic guidelines for various types of sustainable finance, as shown in 3.2 Sustainable Finance Framework, has led to access to sustainable finance other than green bonds. As mentioned in 1.1 General ESG Trends, the GX Economic Transition Bond was also issued 2024 onwards as the world’s first state-sponsored transition bond.

In addition to these developments, Japan has set up several information and data platforms to support access to valuable resources related to sustainable finance. Some of the key platforms include the following.

ESG Bond Information Platform (Japan Exchange Group)

Launched in July 2022 by the Japan Exchange Group, this platform aims to create an environment where both issuers and investors in green-related investments can access useful information. It provides centralised access to detailed data on ESG bonds, including:

• Green Bonds;
• Social Bonds;
• Sustainability Bonds;
• Sustainability-Linked Bonds;
• Transition Bonds; and
• Transition-Linked Bonds.

The platform includes links to bond-related information, issuer details (including ESG strategies), evaluation data, and reporting information, making it a comprehensive resource for sustainable finance participants.

Green Finance Portal (Ministry of the Environment)

Managed by Japan’s Ministry of the Environment, this portal serves as a central hub for information on green finance, providing resources to support investment in environmentally sustainable projects and initiatives.

Financial Products Contributing to Sustainable Development Goals (Securities Dealers Association)

The Securities Dealers Association offers information on financial products designed to contribute to the SDGs. This platform highlights various investment options, such as SDG-linked bonds, and provides resources to help investors to make investments for their sustainability objectives.

The Japanese government currently views transition finance as a crucial tool for enabling sectors that are difficult to decarbonise – often referred to as “hard-to-abate” sectors – to achieve long-term decarbonisation to conform to their transition strategies. Given the technical challenges associated with decarbonisation, these sectors require specialised financial mechanisms to support their transformation. As such, the government is actively working to promote the development and adoption of transition finance, focusing on improving its accessibility and reliability.

Specifically, the government is engaged in a range of initiatives to support the growth of transition finance. These efforts include:

• development of basic guidelines;
• sector-specific technology roadmaps;
• support for model cases; and
• examination of finance-driven emissions.

Greenwashing

Amid the increasing number of domestic and international funds that highlight ESG in their names and investment strategies, concerns have been raised in Japan regarding whether their actual investment practices conform to these claims, commonly referred to as the issue of “greenwashing”. In response, FSA began conducting surveys of Japan asset management companies and investment trusts from November 2021. In May 2022, the FSA summarised its findings in the Progress Report on the Sophistication of Asset Management Operations 2022, under the section “Expectations for Asset Management Companies Handling ESG Investment Trusts”.

Based on this report, the FSA revised the comprehensive supervisory guidelines for financial instruments business operators in March 2023. These revisions define the scope of ESG investment trusts and establish specific criteria for verifying both the disclosure of ESG-related information for publicly offered investment trusts and the organisational frameworks of investment trust management companies.

For more information on ESG labels, please refer to 5.3 Regulation of ESG Labels.

Financed Emissions

International financial alliances, such as GFANZ, supported by major financial institutions, require member institutions to pursue ambitious net-zero targets, including the emissions of their investee companies referred to as financed emissions. Some financial institutions, however, are concerned that providing capital to hard-to-abate industries, where immediate decarbonisation is challenging, may temporarily increase their financed emissions. This concern could potentially lead institutions to refrain from investing in such sectors.

In response to this issue, METI, FSA and the Ministry of the Environment established a working group comprising globally active financial institutions. In October 2023, the group published its Approach to Addressing Challenges of Financed Emissions. This document clarifies the expected roles of financial institutions in achieving carbon neutrality and the characteristics of financed emissions. It also proposes solutions to ensure that financing for decarbonisation innovation and transitions in hard-to-abate industries is appropriately recognised and promoted. The proposed solutions are categorised into two areas:

• methods for calculating and disclosing financed emissions; and
• methods for disclosing indicators other than financed emissions.

Within the overall context of ESG, the trend of transitioning from soft law to hard law, while not as pronounced as in the EU, also appears to be gaining traction in Japan.

The field of Governance has traditionally been subject to regulation under hard laws, such as the Companies Act, the Financial Instruments and Exchange Act, and stock exchange rules. It is anticipated that governance will continue to see strengthened regulation through hard law in the future.

Environment has historically been partially regulated by hard laws related to environmental protection. In recent years, even areas previously governed primarily by soft law, such as climate change, have seen the introduction of hard law regulations, including the Act on Promotion of Global Warming Countermeasures and the Building Energy Efficiency Act. This trend is expected to continue.

With respect to Social, while labour issues have traditionally been regulated through hard laws, such as labour laws, the protection of self-employed individuals not recognised as workers, such as gig workers, has been inadequate. This situation has begun to change with the enactment of the Freelance Law, effective November 2024, which establishes the responsibilities of contractors towards self-employed individuals, bringing this area under hard law regulation. Although the regulation of the social aspect, including human rights, remains limited under hard law, it is expected that the transition from soft law to hard law in this area will continue in the future.

In Japan, companies are not legally obliged to conduct supply chain due diligence. However, it is not uncommon for Japanese companies engaged in global transactions to be requested by overseas business partners to conduct supply chain due diligence and provide confirmation. Additionally, some Japanese companies in specific industries manage their supply chains down to the end stages and are known to implement supply chain due diligence in certain cases.

Furthermore, Japan established the “Guidelines on Respecting Human Rights in Responsible Supply Chains” on 13 September 2022. While these guidelines are not legally binding, they call on all companies conducting business activities in Japan to carry out human rights due diligence for their supply chains. Furthermore, industry-specific guidelines, such as those for the textiles industry, are being developed. In industries where human rights violations are more likely to occur in the supply chain, the necessity of human rights due diligence is expected to gain greater recognition moving forward.

Moreover, the EU Corporate Sustainability Due Diligence Directive (CSDDD) is expected to have extraterritorial application to certain Japanese companies. For these companies, compliance with the directive will likely lead to the implementation of human rights due diligence in the future.

Japan’s guidelines are not legally binding, so their impact on companies’ supply chain selection remains unclear at this stage. However, there seems to be a growing consensus that engaging with business partners who pose human rights or environmental risks represents a potential liability for companies when selecting their supply chains. Therefore, it will be important to closely monitor developments in this area going forward.

In M&A transactions, there is growing interest from buyers in assessing whether the target company has any ESG-related issues. This has led to an increasing trend of conducting ESG due diligence, including incorporating ESG-related representations and warranties in SPAs, as well as addressing ESG-related deficiencies and establishing ESG frameworks during the post-merger integration (PMI) phase.

Currently, ESG regulations in Japan are relatively lenient towards unlisted companies, so ESG due diligence is not yet considered mandatory in M&A transactions. However, as ESG regulations are expected to become stricter through hard law and to expand to cover unlisted companies, addressing ESG considerations in acquisitions of unlisted companies is expected to become a standard practice in the future.

As referenced in 2.2 Differences Between Listed and Unlisted Entities, the Corporate Governance Code stipulates that listed companies should appropriately disclose their sustainability initiatives when presenting management strategies. This includes providing clear and specific information on investments in human capital and intellectual property, ensuring alignment with their management strategies and challenges.

In particular, companies listed on the Prime Market are expected to gather and analyse necessary data on the impact of climate change-related risks and opportunities on their business activities and earnings. They are also encouraged to enhance the quality and quantity of disclosures in line with internationally recognised frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) or equivalent standards.

As noted in 1.4 Governance Trends, in March 2025, the Sustainability Standards Board of Japan (SSBJ) published the finalised version of the SSBJ Standards. The Financial Services Agency (FSA) subsequently outlined a broad roadmap for the disclosure of sustainability information in securities reports, and it indicated that the SSBJ Standards will apply to all or certain companies listed on the Tokyo Stock Exchange Prime Market, with companies having a market capitalisation of JPY3 trillion or more expected to comply starting from the fiscal year ending March 2027.

In Japan, there are currently no regulations that legally require companies to publish transition plans or commit to specific targets. While companies listed on the Prime Market are encouraged under the Corporate Governance Code to enhance disclosures based on frameworks such as the TCFD, the disclosure of transition plans is not mandatory.

However, companies participating in the GX League are required to register data such as emission reduction targets. As of 2024, the GX League includes over 700 companies, collectively accounting for more than half of Japan’s GHG emissions. Consequently, the publication of transition plans and emission reduction targets is expected to gain momentum.

In the finalised SSBJ Standards published in March 2025, companies with climate-related transition plans are required to disclose the specific content of those plans, including the key assumptions used in their development. Companies listed on the Prime Market are expected to be sequentially required to disclose sustainability information in accordance with the SSBJ Standards, based on their market capitalisation. Going forward, companies subject to the requirements are expected to be required to disclose their climate-related transition plans.

Additionally, companies subject to the EU’s Corporate Sustainability Reporting Directive (CSRD) through its extraterritorial application will need to present transition plans in accordance with CSRD requirements.

The following restrictions and conditions apply to making sustainability claims and to ESG labels.

Act Against Unjustifiable Premiums and Misleading Representations

Promotional practices aimed at environmentally conscious consumers must be substantiated by reasonable evidence. Claims such as “sustainability”, “biodegradability”, “environmentally friendly” or “carbon neutral” made without adequate proof may violate the Act Against Unjustifiable Premiums and Misleading Representations. Such representations could be deemed misleading if they falsely suggest superior quality or environmental benefits.

Consumer Contract Act

Under the Consumer Contract Act, if a business provides false or exaggerated explanations about its environmental matters – such as “sustainability”, “biodegradability”, “environmentally friendly”, “carbon neutral” – that do not conform with the actual performance of the product or service, consumers who are misled may rescind their contracts based on such false representation.

Unfair Competition Prevention Act

Displaying claims such as “sustainability”, “biodegradability”, “environmentally friendly”, “carbon neutral” contrary to actual performance, which results in unfairly attracting customers from competitors and causing or potentially causing harm to other businesses’ commercial interests, may constitute an act of unfair competition subject to injunctions. If the act is deliberate or negligent, it may also be subject to claims for damages.

Energy Conservation Act and Building Energy Conservation Act

For certain products, such as home appliances, buildings, building materials and vehicles, laws mandate the use of energy efficiency labelling under the energy conservation labelling system. Misrepresentation of performance that violates government standards is subject to recommendations, orders, public disclosure and penalties.

In Japan, the following regulatory authorities oversee compliance with ESG disclosures:

• Financial Services Agency (FSA);
• Tokyo Stock Exchange (TSE); and
• Public Prosecutors Office.

Regulatory bodies responsible for supervising ESG marketing to protect consumers include the Consumer Affairs Agency, which administers the Act Against Unjustifiable Premiums and Misleading Representations, and the Japan Fair Trade Commission (JFTC), which enforces the Unfair Competition Prevention Act.

False Statements in Disclosures Under the Financial Instruments and Exchange Act

The Financial Instruments and Exchange Act mandates the disclosure of ESG-related initiatives in sections such as “Approach to and Initiatives for Sustainability” and “Employee Status” in securities reports. If these disclosures include “false statements on material matters” or “omissions of material facts that should be disclosed”, they may be deemed false statements, subjecting the company to penalties such as:

• fines;
• criminal sanctions;
• administrative measures; and
• civil liabilities.

If forward-looking statements disclosed in the securities report differ from actual outcomes, companies are not immediately held liable for false statements, provided they include reasonable and specific explanations deemed acceptable. This is expressly set out in the Guidelines for Corporate Disclosure.

Currently, the Financial Services Agency’s Working Group on the Disclosure and Assurance of Sustainability Information is discussing the introduction of safe harbour provisions. This is in response to concerns that because sustainability information is generally more uncertain than financial information, companies may be reluctant to disclose it proactively due to potential liability for misstatements or inaccuracies.

In particular, with respect to sustainability information on Scope 3 greenhouse gas (GHG) emissions – which often relies on data obtained from third parties outside the company’s control or on estimates – the Working Group has decided to prioritise the establishment of a safe harbour. In its interim summary of key issues (published in July 2025), the Working Group reached broad agreement that companies would not be held liable for misstatements in quantitative Scope 3 GHG emissions data if the following conditions are met:

• the company has conducted appropriate internal review of the suitability of the third-party data used (including the appropriateness of how the data was obtained) and the reasonableness of any estimates, and has provided explanations of these reviews; and
• the disclosed information falls within a range generally considered reasonable.

Additionally, some members of the Working Group have expressed the view that the scope of the safe harbour should be expanded more broadly to cover value chain information in general. Discussions on the details, including the content of the safe harbour, eligibility requirements, scope of application, and its effects, are expected to continue.

False Statements in Disclosures Under the Corporate Governance Code

Under the Corporate Governance Code, sanctions under the Tokyo Stock Exchange’s listing rules apply only if a company fails to submit the required disclosures or does not follow the “comply or explain” principle.

These sanctions include:

• designation as a security on alert;
• requests for improvement reports;
• public announcements; and
• fines for breach of listing agreements.

False statements, however, are not subject to these sanctions.

For disclosure items related to climate change, the Corporate Governance Code currently requires companies listed on the Prime Market to disclose such information as a de facto obligation. For companies not listed on the Prime Market, disclosure is only required if the company deems the information to be significant.

Even among listed companies, there are differences in company size and varying levels of readiness for sustainability disclosures. As a result, the scope of required sustainability disclosures is being expanded gradually. However, as noted in 1.4 Governance Trends, in March 2025, the Sustainability Standards Board of Japan (SSBJ) published the finalised SSBJ Standards. A broad roadmap has been established for the disclosure of sustainability information in securities reports, indicating that the Standards will apply to all or certain companies listed on the Tokyo Stock Exchange Prime Market, with companies having a market capitalisation of JPY3 trillion or more expected to comply starting from the fiscal year ending March 2027.

Looking ahead, companies are expected to need to secure the necessary personnel and develop appropriate information-gathering systems and data infrastructure in order to prepare disclosures that comply with the SSBJ Standards.

Japanese Legal System and ESG-Related Litigation

Unlike the United States, the Japanese legal system does not have mechanisms such as class action lawsuits, which allow a large group of plaintiffs to collectively bring a case against a company. Similarly, discovery procedures, which enable parties to obtain evidence from opposing parties during litigation, are not part of the Japanese legal system. Additionally, legal proceedings in Japan often take a long time, and complex cases like ESG-related lawsuits can take several years to reach a decision.

For plaintiffs, filing ESG-related lawsuits against companies poses significant challenges, including the financial burden of litigation and the difficulty of gathering evidence. Moreover, standing is required to bring a lawsuit, and this requirement can sometimes pose a hurdle for ESG-related claims where harm may be diffuse or collective (eg, environmental damage or corporate governance failures affecting society at large).

Thus, initiating ESG-related lawsuits against companies in Japan is not an easy task. However, such litigation can be pursued through the following methods.

Tort claims

If corporate activities have a negative impact on ESG factors, plaintiffs may file injunctions based on violations of personal or property rights or seek damages based on tort claims. For example, in Japan, there have been cases where residents living near planned thermal power plants have filed lawsuits against companies, seeking injunctions or damages based on tort law. Recently, in August 2024, 16 young people residing in Japan filed partial injunction lawsuits against ten of the country’s major thermal power companies, demanding that CO₂ emissions be reduced at least to the levels indicated by the IPCC. These cases, known in Japan as the “Youth Climate Lawsuits”, are currently under review.

Injunctions or damage claims by qualified consumer organisations

As noted, Japan does not have a class action system. However, qualified consumer organisations, certified by the government, can file lawsuits for injunctions or damages related to greenwashing. That said, there have been no known cases of this occurring to date. There is, however, a case where an NGO filed a complaint with an advertising self-regulation body, alleging that a specific company’s advertisement was an instance of greenwashing. The body declined to review the complaint, stating that the matter exceeded its capacity.

Shareholder derivative suits

It is possible for shareholders to file derivative lawsuits alleging a breach of directors’ duty of care in relation to the company’s ESG initiatives. However, it would appear that no such cases have been brought in Japan to date.

Domestic and international environmental NGOs are increasingly playing a significant role in ESG matters. In recent years, there has been a growing trend of NGOs becoming shareholders in Japanese companies and exercising shareholder rights, including the submission of shareholder proposals at general meetings. Notably, environmental NGOs both in Japan and abroad have submitted shareholder proposals to Japanese companies, urging them to strengthen measures against climate change.

Additionally, major proxy advisory firms have reportedly established policies requiring listed companies to improve gender diversity on their boards of directors. Furthermore, as noted in 6.1 Instruments for ESG Litigation, the Youth Climate Lawsuits are being supported by environmental NGOs in Japan.

In December 2022, the Consumer Affairs Agency ordered ten companies selling biodegradable plastics to take corrective action after requesting evidence to support their claims and determining that no reasonable basis was provided.

An earlier case occurred in 2008, when the Japan Fair Trade Commission issued corrective orders to eight major paper manufacturers for misleading representations regarding recycled paper content. This became a significant social issue, with the Paper Manufacturers Association and the presidents of five major companies holding a press conference to announce a contribution of JPY1 billion towards environmental conservation.

There appear to have been no cases in Japan where investors have brought claims alleging greenwashing.

As noted in 6.1 Instruments for ESG Litigation, there have been cases in which NGOs filed complaints with advertising self-regulatory bodies, claiming that certain companies’ advertisements constituted greenwashing. However, these bodies refused to review the complaints, stating that the matters were beyond their review authority, and no further examination has been conducted.

Japan is often described as having a culture that tends to avoid litigation, especially when compared to Western countries. There are few cases where citizens use lawsuits to assert their rights against the government or corporations on ESG issues. This may partly stem from systemic constraints, such as the absence of a class action system like in the US and the high costs individuals face when initiating lawsuits.

In addition, Japanese companies generally demonstrate a strong commitment to complying with legal frameworks and norms. Many Japanese companies demonstrate a high level of responsibility towards environmental and social issues, integrating these concerns into their business practices. For example, Japan has the highest number of companies signing the TCFD among all countries. This corporate culture likely contributes to the avoidance of lawsuits, as companies often take proactive measures to address issues early and mitigate litigation risks before disputes escalate.

On the other hand, Japan has a history of large-scale pollution lawsuits in the 1970s, driven by the severe environmental pollution issues of that era.

While ESG-related litigation remains limited in Japan today, the potential for an increase in such cases in the future continues to exist. This potential increase could be driven by:

• the introduction of mandatory legal ESG disclosures;
• growth in ESG investment; and
• the proliferation of ESG-related product labelling.

Additionally, as noted in 6.1 Instruments for ESG Litigation, the Youth Climate Lawsuits have now been ongoing for one year and, depending on their outcomes, similar lawsuits may be filed in the future.