Japan mulls ISSB-based sustainability disclosure, mandatory after 2027

Japan is considering whether to require all of its primary listed companies to publish an annual sustainability report which substantively conforms with the standards issued by the IFRS’ International Sustainability Standards Board ("ISSB"). The new mandatory disclosure rule would be applied in phases based on the size of market capitalization, with the biggest companies planned to be entering into the scheme from the financial year ending March 2027. The regulator in charge, the Financial Services Agency ("FSA"), established an ad hoc advisory board, the Working Group on Sustainability Disclosure (Reporting) and Assurance ("Sustainability Disclosure WG") under its Financial System Council in February 2024. A public consultation in respect of the local adaptation of some of the ISSB standards will end on 31 July 2024.

Timeline and scope

All companies listed on the “Prime” section of the Tokyo Stock Exchange are eventually intended to be made subject to the new mandatory disclosure rule. Further, approaches to promoting voluntary sustainability disclosure among those beyond the Prime-listed companies are being considered. As the mandatory rule is currently intended to be applied to the Tokyo-listed companies only, (unlike the approach adopted in the EU) the extra burden to be imposed on local subsidiaries of non-Japanese multinational corporations is expected to be limited at this stage. At the Sustainability Disclosure WG meeting held on 14 May, the FSA secretariat proposed a schedule for introducing the new rule in phases based on the companies' market capitalization. Under the proposal, Prime-listed companies with a market capitalization of JPY3 trillion and above (which consist of 55% of the stock exchange's entire market capitalization) will be required to issue their first sustainability report for the financial year ending March 2027, while those with market capitalisation of JPY1 trillion and above (covering 74% in aggregate) will follow one year later. The timeline for extending the scope to all the TSE Prime-listed companies remains as open as "sometime in 2030's".  The schedule will be revisited after observing the effects of earlier phases and international trends.

Deviations and modifications

With respect to jurisdiction-specific deviations, the FSA has made it clear that, with a view to fostering investors' confidence while at the same time curbing the compliance burden on the part of businesses with a global presence, endorsing standards equivalent to or compatible with the ISSB standards must be adopted rather than introducing entirely bespoke Japanese regime.

In line with the discussion at the Sustainability Disclosure WG and in cooperation with the FSA, the Sustainability Standards Board of Japan ("SSBJ") published an exposure draft, which substantively follows the ISSB standards, though with a number of deviations and modifications. Consultation responses are due by 31 July and the SSBJ is scheduled to issue the final draft of their standards by March 2025. No meaningful challenge against this approach of being heavily guided by ISSB standards has been observed during the Sustainability Disclosure WG meetings.

Further issues under discussion

The Sustainability Disclosure WG is also considering matters such as:

• Two-step disclosure: whether the sustainability report should be issued as a part of the statutory financial statements (which must be filed within three months after the end of a financial year) or should be subjected to a separate, subsequent deadline.
• Transitional reliefs: if the sustainability report is to be issued as a part of the statutory financial statements, whether some transitional or mitigating measures should be introduced (e.g., deferring application of the assurance scheme, extending ISSB transitional reliefs).
• Safe harbour for unreliable disclosures: whether some exceptions from the accurate and complete disclosure principle should be introduced on the basis that the companies may need to rely on and disclose certain unreliable information (such as unverified information obtained from value chain sources) as a part of the sustainability report.
• Incentives: whether any measures to incentivise compliance and/or to reduce the compliance burden should be introduced.

What next?

The Sustainability Disclosure WG is expected to continue to discuss the open issues until March 2025, around which time the final draft of the SSBJ standards will be published. This will allow the companies at least two years of voluntary compliance period before the rule will have mandatory effect as early as March 2027. During this period, the rules may be fine-tuned following consultation with the business community and observing the situation in the European Union (which has implemented its own sustainability reporting regime) and other countries which will have introduced the ISSB-based standards by then. The regulator will continue communicate with its foreign counterparts and relevant stakeholders to ensure the Japanese standards will earn international recognition as well as the support from the business community.