Environmental, social and governance (ESG) considerations are essential to businesses for the opportunities they bring, and for the reputational and economic risks that arise from making the wrong decisions. In light of the growing interest and scrutiny in ESG matters from within Japan and abroad, the Japanese government has been pushing a range of measures to implement ESG initiatives.

One of the world’s most developed economies, Japan has stayed ahead of the curve in terms of environmental, social and governance (ESG) regulations. Earlier this year, on Feb. 10, the Japanese government approved a Green Transformation (GX) policy to lay out the country’s strategy to achieve its target of achieving net-zero carbon emissions by 2050. The ultimate aim of the policy is to create a shift in the country’s industrial structure, which is currently heavily dependent on fossil fuels and create one powered by green energy.

The GX policy covers a wide range of measures for the development of some 22 industrial sectors over the next decade, from the use of nuclear power to expanding renewable energy sources, along with implementing a carbon-pricing mechanism to facilitate the country’s transition to clean energy. The policy also includes efforts to replace decommissioned nuclear reactors with next-generation ones.

Over time, the GX policy will span five key initiatives, including putting in place growth-oriented carbon pricing, integrated regulatory and assistance promotion measures, new methods of financing, an international development strategy that would include the creation of an Asia Zero Emissions Community and the development of a GX league that would include companies, the government and academia.

“On the ‘E’ pillar, while immediate decarbonisation would be ideal, ‘transition’ has been strongly sought in Japan. The goal to reduce greenhouse gas emissions is the same as other countries, but the approach to it might be slightly different locally,” Akihiko Takamatsu, a Tokyo-based partner at Norton Rose Fulbright, tells ALB.


“Like other countries, ESG is essential to all sorts of businesses, both positively and negatively in Japan. On the positive side, they will bring new opportunities, but on the flip side, they may potentially cause reputational, economic and even regulatory risks when each company treats them erroneously. Various stakeholders would have been escalating demands for environmentally sustainable businesses to be conducted by the company with which they have a relationship.”
— Akihiko Takamatsu, Norton Rose Fulbright


Even before the latest Green Transformation policy was adopted, Japanese authorities issued a range of measures to push ESG forward, including finalis-ing a code of conduct for providers of ESG data and evaluation, proposing new guidelines that define the scope for ESG Public Funds and introducing mandatory ESG disclosures for public companies. More recently, the issuance of the country’s first guidelines on impact investing also signals market interest in the space.

The Japanese legal landscape in regards to ESG measures has changed rapidly.

“Like other countries, ESG is essential to all sorts of businesses, both positively and negatively in Japan,” says Takamatsu. “On the positive side, they will bring new opportunities, but on the flip side, they may potentially cause reputational, economic and even regulatory risks when each company treats them erroneously.”

Several measures are in place to promote ESG in Japan.

Amid the fast-changing regulatory landscape, Takamatsu says: “Our advice would be driven by these trends. As we need to focus on cutting-edge progressed ways for decarbonisation, we also need to properly advise on the transition at the same time.”


The performance of public companies is always a key focus for the market in Japan. Japan’s Financial Services Agency (FSA) announced its sustainability and corporate governance disclosure requirements for listed companies earlier this year.

The changes apply to annual securities reports and securities registration statements for financial years after Mar. 31. “The amended Ordinance and other relevant regulations will introduce mandatory disclosure by public companies of ESG-related information such as the company’s attitude towards sustainability and related initiatives, including information about governance and risk management (and strategy, and index and target if the company considers these to be material),” said Sayako Shiraki and Eriko Kadota, managing associates at Linklaters, in a note.

Companies will also need to disclose information on human capital and diversity, including their policies on human resource training, improvement of the work environment, and the related index.

“If the company is required by relevant laws and regulations to publish information about the proportion of women in management, rate of male employees who took paternity leave, and pay gap between male and female employees are also to be disclosed in the annual securities report, etc.,” said Shiraki and Kadota.

“In Japan, the ‘E’ pillar has been strongly accelerated by the commitments from the governmental and private sectors, and the other two ‘S’ and ‘G’ pillars look less accelerated comparatively,” says Takamatsu.

The amendments also offer clarifi-cation on forward-looking statements and liability for misstatements, while bringing some much-needed focus to the ‘S’ and ‘G’ pillars that have lagged somewhat.


The issuance of the first guidelines on impact investing in Japan signals a growing interest in this area.

And it is not just in Japan. Impact investing is a growing market globally, especially in Europe and the U.S. Takamatsu of Norton Rose Fulbright says that though Japan is a bit behind in the development of impact investment, companies are now more focused on it. The key to success in this area is “disclosure.”

“Once the disclosure is sufficient and consistent so that investors can evaluate, this area will progress,” Takamatsu says. The upshot is that Japan is taking steps to catch up with other developed economies regarding impact investing, along with many others putting a stronger ESG-regulatory environment in place.

Takamatsu says that on Jun. 30, 2023, the FSA published a report from ongoing working group discussions relating to impact investing and laying out eligibility requirements. The report is open to public comments until Oct. 10, 2023.

The upcoming guidelines for impact investing will establish four requirements: novelty, effect, profitability, and disclosures.

The FSA aims to encourage impact investors to disclose the impact and profitability of their investments using objective indicators such as the number of people who benefited from their investments or the amount of greenhouse gas emissions reduced, aiming to prevent misleading fundraising and help investors make informed decisions.

In October 2022, the FSA established the “Working Group on Impact Investment” under the Expert Panel on Sustainable Finance. The group is expected to explore ways to expand impact investment that contributes to solving social and environmental issues and creating new businesses, including startups, while referring to trends and examples of impact investment in Japan and overseas.

According to an FTSE Russell report, ESG investment in Japan is expected to further increase the need and demand for passive investment using quantitative ESG scores that are based on transparent methodologies.


Given this need for more comprehensive ESG ratings and scores, Japan has also stepped up efforts to improve the transparency of ratings and the methodologies that data providers use.

The value of ESG assets are set to reach $53 trillion by 2025, and concerns are growing over the substantial influ-ence that unregulated ESG data providers could have over the industry.

The International Organisation of Securities Commissions (IOSCO) said in a 2021 report that a lack of standards could lead to a series of risks, including greenwashing and the misallocation of assets.

Following the calls included in the report for tighter oversight of ESG ratings and data providers, Japan’s FSA finalised a new code of conduct for ESG ratings and data providers in December 2022 and opened it up for endorsement for six months.

The draft code aims to ensure that ESG evaluations and data are used reliably throughout the investment chain. It is intended to encourage “…further improvements in ESG evaluation and data provision services based on their initiatives and ensuring flexibility in response to future business model changes.”

Satoshi Ikeda, Chief Sustainable Officer at the FSA, said the code opened a dialogue between data providers and regulators, even if it is just in its initial implementation stages.

Hideki Takada, Director for Strategy Development at the FSA, said in an interview that the FSA hopes the code of conduct will improve the transparency and fairness of ESG data and assessment services, as well as the development of the ESG market.

Japan’s approach “emphasises flexibility rather than obligation,” Takada said.

Therefore, the code of conduct is designed to be voluntary on a “comply or explain” basis.

With the recent finalisation of the code, ESG data providers operating in Japan will be requested to adhere to the six principles that the code outlines.

These six principles relate to the quality of ESG ratings and data, the establishment of basic procedures, the availability of professional human resources to ensure the quality of ratings and data provision services, the development of professional skills, policies to ensure independent decision-making, and how to handle conflicts of interest appropriately.

“While not perfect, the FSA’s approach takes Japan one step closer to improving the transparency and function of ESG ratings. However, the effectiveness of a voluntary code has yet to be tested in this nascent sector. The regulator’s permissive stance over the possibility of diverse rating results is also questionable,” Hazel Ilango, an energy finance analyst with the Institute for Energy Economics and Financial Analysis, said in a February commentary.

FTSE Russell, MSCI, Sustainalytics, Refinitiv, Moody’s ESG, and ISS ESG have all made public statements in support of the code of conduct.

Japan is not alone in stepping efforts to develop standards for ESG ratings and data providers. Both the UK and Singapore are also in the process of developing their respective codes of conduct.


Japan’s FSA has also put forward a series of guidelines to promote ESG investments while combating green-washing by investment trust managers (ITMs).

The proposed guidelines define the scope of ESG Public Funds and include checkpoints for disclosures and management of ESG Public Funds, noted Tomoko Fuminaga, a partner at Morgan, Lewis & Bockius, and Kyoko Nagano, of counsel of the firm in a note.

ESG Public Funds are defined as public investment trust funds that use ESG factors as primary factors to make investment selections and which hold themselves out as such in their summary prospectus. The guidelines require ITMs to disclose specific ESG factors used in investment selection, how such factors are considered, limitations and risks in the investment process, and any ESG-related stewardship code policies. They also require ongoing disclosures about the actual proportion of investments, performance results, and actions taken under ESG-related stewardship code policies. If an ITM delegates its investment authority, it must conduct due diligence on the delegated manager and disclose any relevant matters.

In terms of management, the guidelines require ITMs to ensure it has appropriate resources, such as data and information technology infrastructure and human resources, to monitor investment management following the investment strategies of ESG public funds.

If investment management activities are delegated, the ITM should have an appropriate system for due diligence on matters related to strategies, portfolios, reference benchmarks, and ongoing disclosures.

The guidelines also require ITMs to conduct due diligence on the internal controls of ESG evaluations and data providers, including their objects, methodology, limitations, and purpose.


China: ESG driving increasing legal work

By Hu Yangxiaoxiao

Governments, regulators, and investors in an increasing number of countries have started to recognise the significance of environmental, social, and governance (ESG) factors. As a result, many businesses have integrated ESG standards into their operations and development strategies, and Chinese companies are no exception.

ESG factors are increasingly considered in domestic investments due to the ESG wave and China’s carbon peaking and carbon neutrality goals. Zhang Nei, senior partner at Co-effort Law Firm, states that private equity (PE) and venture capital (VC) firms in China are incorporating ESG considerations into their investments. ESG investment aligns with China’s green development philosophy, which aims to achieve carbon peaking by 2030 and carbon neutrality by 2060.

Comprehensive ESG assessments are gaining greater attention from investors.

ESG investments in China are booming in key areas such as new energy (renewable energy, smart grids, wind power), green transportation (electric vehicles, charging infrastructure), agricultural improvement (innovation and capacity increase), and new infrastructure (green construction). PE/VC firms conducting ESG assessments in domestic investments need to refer to both Chinese and foreign laws, regulations, and guidelines. These include the United Nations Sustainable Development Goals, the Global Reporting Initiative’s Sustainability Reporting Standards, the International Organisation for Standardisation’s Guidance on Social Responsibility, and the Chinese Corporate Social Responsibility Reporting Guidelines.

Zhang emphasises the pivotal role of lawyers in ESG assessments conducted by PE/VC firms. Lawyers provide legal advice based on domestic and foreign laws and regulations related to ESG investment, offer optimal solutions according to regulations and standards promulgated by foreign institutions and organisations, assist with documentation management and review, and more.

Furthermore, green bonds and other green financial products have seen increased adoption in China in recent years as clients leverage these products to accelerate their transformation. This has become another important service area for ESG lawyers. For example, energy industry clients use green bonds to promote investment in renewable energy projects, while power industry clients utilise such bonds to upgrade facilities or establish green power generation projects. Manufacturers tap into green financial products to advance environmentally friendly transformations in their production processes. Financial institutions actively issue green products to drive green finance development.

Advising on such projects requires lawyers to possess knowledge not only of margin trading and securities lending laws and regulations but also of the characteristics of green finance. They must implement effective compliance measures based on each client’s circumstances and design optimal deal structures.

The increasing emphasis on ESG factors, both domestically and internationally, has fueled the rapid growth of the first generation of Chinese ESG lawyers. During this process, lawyers have realised the unique requirements they must meet when advising on ESG matters.



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