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 2024, released in June 2024, which emphasises collaborative efforts to emphasise social challenges and achieve sustainable economic growth. The policy underscores 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.

In line with this government policy, the country’s GX Economic Transition Bonds were issued in 2024, and the GX Promotion Agency began its work to encourage private investment.

Regarding sustainability disclosures, in response to the IFRS S1 and IFRS S2 sustainability disclosure standards issued by the International Sustainability Standards Board (ISSB) in December 2023, the Sustainability Standards Board Japan (SSBJ) has published a draft of the domestic sustainability disclosure standard.

Issuance of GX Economic Transition Bonds

GX Economic Transition Bonds are government bonds issued under the GX Promotion Act to enable the State to take long-term, multi-year measures to promote investment in GX (Green Transformation). The first offering of GX Economic Transition Bonds, totalling JPY799.5 billion, took place in February 2024 and gained global attention as the world’s first national transition bond issuance. The Japanese government planned to issue GX Economic Transition Bonds worth up to JPY20 trillion starting from FY2023, and in 2024, five issues were completed as part of this objective. A new issue of around JPY350 billion is scheduled in January 2025, and subsequent issues will be made successively within the amount approved by the Diet.

Establishment and commencement of operations of the GX Promotion Agency

The GX Promotion Agency is an organisation responsible for financial support, such as providing guarantees, collection of fossil fuel levies, etc, and operation of emissions trading schemes in order to realise GX investments, in accordance with the GX Promotion Act. Financial support, such as guarantees, is important as a mechanism to encourage private investment in areas where the private sector is unable to take on risk. Specific beneficiaries of financial support from the GX Promotion Agency have not yet been determined. However, there is an anticipation that such support, once allocated, will play an important role in accelerating private sector investment.

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. A draft of this updated plan is expected by December 2024, with a final Cabinet decision set for February 2025. In conjunction with the Basic Energy Plan, the GX2040 Vision, which includes industrial policies, and the Global Warming Countermeasures Plan are also being formulated. With the emergence of AI expected to lead to a rapid increase in electricity demand, the focus of attention is on what proportion of renewable energy and nuclear power will be targeted in the energy mix, which indicates the proportion of each power source in future power generation.

In the 2024 ordinary session of the Diet, important legislation was passed on hydrogen and CCS projects, which are attracting attention as contributing to the reduction of greenhouse gas emissions.

The Law on the Promotion of a Hydrogen Society

The Law on the Promotion of a Hydrogen Society aims to facilitate a smooth transition to a decarbonised growth-oriented economic structure by providing support measures for operators who have been approved for a plan, in order to promote the supply and use of low-carbon hydrogen and other forms of hydrogen as quickly as possible. The law is centred around two main components: the plan certification system, and the support system for certified operators (price differential support and support for the development of bases). Businesses that produce, import and supply low-carbon hydrogen in Japan and businesses that use low-carbon hydrogen can receive subsidies for the price difference from existing fuels, such as coal and natural gas, as well as for the development of hydrogen supply centres, by preparing a low-carbon hydrogen supply business plan and obtaining certification under the Hydrogen Society Promotion Act. The Agency for Natural Resources and Energy aims to adopt the first project eligible for support within FY2024.

The CCS Business Act

The CCS Business Act is a legal framework governing Carbon Capture and Storage projects. It establishes a system of regulations and permits to ensure the safe and effective implementation of CCS activities, including exploratory drilling, carbon-storage operations, and pipeline transportation for CO2.

Under the Act, METI plays a central role by designating specific areas as target zones based on the presence of suitable geological storage formations. Once these areas are identified, the government conducts a tender process to select entities qualified to carry out storage operations and exploratory drilling.

Additionally, the formalisation of an emissions trading system is among the legislative measures expected to be proposed as early as next year. The Cabinet Office has announced a plan to implement the emissions trading system by FY2026, and has established a working group to develop its detailed design and framework.

Since FY2023, Japan has been operating a pilot emissions trading system allowing companies committed to achieving carbon neutrality to participate voluntarily. The Japanese government has announced plans to introduce mandatory participation for large corporations starting in FY2026. Furthermore, a certification system for each company’s emission reduction targets is expected to be established as part of the broader implementation.

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 are now required to:

• clearly specify transaction terms in writing or through other means; and
• set payment deadlines and ensure payments are made within those deadlines.

Additionally, with the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD) and Corporate Sustainability Reporting Directive (CSRD) now in place, there is a possibility that these regulations will have extraterritorial application to Japanese companies. Consequently, Japanese companies will need to prepare for compliance as the implementation timelines approach.

Background

In June 2021, the revised Corporate Governance Code emphasised the need for companies to appropriately disclose their efforts on sustainability. Specifically, companies listed on the Prime Market are expected to enhance both the quality and quantity of their disclosures on climate change, based on frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) or equivalent international 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 draft SSBJ standards aligned with the IFRS Sustainability Disclosure Standards, specifically IFRS S1 (“General Requirements for Disclosure of Sustainability-Related Financial Information”) and IFRS S2 (“Climate-related Disclosures”).

Overview of SSBJ Standards

The ISSB Standards are structured into two components:

• IFRS S1 (“General Requirements for Disclosure of Sustainability-Related Financial Information”); and
• IFRS S2 (“Climate-Related Disclosures”).

In contrast, the SSBJ Standards are designed for clarity, and are divided into three components:

• Universal Standard (Applicable Standard) corresponds to IFRS S1, and sets fundamental requirements for preparing sustainability-related financial disclosures;
• Topic-Specific Standard 1 (General Disclosure Standard) defines core content to be disclosed concerning sustainability-related risks and opportunities; and
• Topic-Specific Standard 2 (Climate-related Disclosure Standard) corresponds to IFRS S2, and addresses specific requirements for climate-related disclosures.

Scope of Application

The standards are applicable to companies listed on the Tokyo Stock Exchange Prime Market or a subset thereof.

Tentative Timeline for SSBJ Standard Implementation

Based on discussions at the Financial System Council’s Working Group on Sustainability Information Disclosure and Assurance (Third Meeting, 28 June 2024), the timeline is anticipated as follows.

2025: Finalisation of SSBJ Standards.

2026: Introduction of disclosure standards for the fiscal year ending March 2026.

2027: Mandatory application of standards for the fiscal year ending March 2027.

2028: Introduction of assurance mechanisms for the fiscal year ending March 2028.

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 coordination, 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 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 Legalization 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.
• Impact of Mandatory Recycling for Solar Panels: the introduction of the FIT program in 2012 led to a rapid expansion of solar-power installations in Japan. Consequently, a peak in solar panel waste is projected to occur by the mid-2030s. To tackle this issue, legislation requiring the recycling of solar panels is currently under consideration, with the bill expected to be submitted to the Diet by 2025. If enacted, this law would impose recycling obligations on solar-panel owners and manufacturers, likely resulting in financial and logistical burdens for these stakeholders.

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

In Japan, Prime Minister Kishida resigned in 2024, and Prime Minister Ishiba’s Cabinet was formed. However, with regard to GX policies, it is expected that the new Cabinet will continue the direction set by the previous administration. Therefore, the change in leadership is unlikely to result in significant shifts in these 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.

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, Prime Market companies are expected to comply with disclosure requirements under the SSBJ Standards in the future.

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.

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,Prime Market companies are expected to comply with disclosure requirements under the SSBJ Standards in the future.

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 their 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 with 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 with 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 with 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 Nonprofit 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 Nonprofit 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 Nonprofit 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.

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 clients 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. In February 2024, Japan issued GX Transition Bonds; in March, the Sustainability Standards Board of Japan (SSBJ) published a draft of domestic sustainability disclosure standards. In May, the “Impact Consortium”, a public-private partnership aimed at promoting impact investing, was officially launched. 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 2024, the Japanese government released the following key documents.

• Publication of the “Asset Owner Principles” (June 2024): the government introduced guidelines for asset owners, encouraging them to make sustainability investments in line with their stakeholder interests and operational goals. This includes urging asset managers to consider sustainability factors in their investment strategies and requiring them to develop sustainability investment policies where applicable.
• Development of the “Basic Guidelines” for Impact Investing: these guidelines were formulated to serve as a reference for participants in the impact investing market, including fundraisers and investors. The document provides guidance on structuring investment projects, securing funding, and promoting collaboration among stakeholders in the impact investment space.

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).

These guidelines were updated in 2024 to reflect revisions made to international principles, ensuring they align with global sustainability standards. More information can be found on the Ministry of the Environment’s website.

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 3 trillion yen. 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 in 2024 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 SDGs (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.

Access to green financing is still limited in Canada. One method of green financing is Canada’s Green Bond programme, which began in March 2022 to mobilise capital in support of its climate and environmental objectives. In its initial release, the programme saw extensive demand, which led to a final book order of over CAD11 billion.

In November 2023, the government updated its Green Bond Framework to align with Canada’s 2030 Emissions Reduction Plan, with updated priorities in terms of expenditures. Despite government green bonds being popular, corporate green bonds have yet to make as significant an appearance in Canada, as they have in other major financial jurisdictions.

Initiatives by the BOT, the SEC and the SET to promote green financing have been steps toward sustainability. Many Thai banks and financial institutions are increasingly interested in engaging in sustainable financial products, such as green loans or bonds, sustainability-linked loans or bonds, and ESG-focused investment options. Investors and companies are also seeking to align with ESG principles.

In order to access sustainable finance, companies are required to meet the relevant standards and regulations – eg, green loan or bonds principles, the SEC’s criteria for sustainable bonds or sustainability-linked bonds. Smaller corporate entities may find it more challenging to meet the ESG criteria or access sustainable financial products due to limited expertise or resources.

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:

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

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 3 trillion yen. 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 in 2024 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 SDGs (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.

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 toward 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.

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 future, companies required to submit securities reports may also be obliged to disclose climate-related information under the SBBJ standards, which are currently under development. Should these standards mandate the disclosure of transition plans, companies filing securities reports will also have to disclose such 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:

• the Financial Services Agency (FSA);
• the Tokyo Stock Exchange (TSE); and
• the 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.

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, with the expected implementation of SSBJ standards in the coming years, the number of disclosure requirements is expected to increase.

This will inevitably raise the risk of false or inaccurate disclosures being included in company reports. Therefore, companies must enhance their ability to accurately and comprehensively understand and report their sustainability information.

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.
• 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, as far as the author is aware, 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.

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 toward environmental conservation.

As far as the author is aware, there have been no cases in Japan where investors have brought claims alleging greenwashing.

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 toward 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.