This week, Jun Kono – Climate Solutions Director of Persefoni Japan – provides an overview of what Japan's climate policies mean for international businesses. With over 15 years of expertise in GHG accounting, including a focus on scope 3 emissions and Life Cycle Assessment (LCA) across various industries and academic research, Jun shares strategies for navigating Japan’s climate disclosure landscape.
The state of corporate sustainability in Japan
In Japan, topics like sustainability, ESG, and SDG’s (Sustainable Development Goals) are regularly discussed in newspapers, on TV, and on social media. In fact, as of April 2023, nearly 90% of Japanese citizens are aware of SDGs – quite a significant percentage. The management and disclosure of non-financial, sustainability information are becoming recognized as major corporate responsibilities. Along with this, "carbon accounting" is increasingly being recognized as the first step in turning climate data into corporate value.
Navigating Japan’s corporate climate policies
Various regulations have already been implemented in Japan concerning corporate GHG emissions. For example, companies consuming large amounts of energy, over 1,500 kl of oil equivalent per year, are required to report their direct and indirect emissions (scope 1 and 2) to the government under the Act on Promotion of Global Warming Countermeasures, which began in 2006. In 2020, around 12,000 companies submitted their scope 1 and 2 emissions in response to these regulations.
With the 2021 Corporate Governance Code revision, companies listed on the Tokyo Stock Exchange’s Prime Market are required to disclose climate-related information based on TCFD recommendations on a comply-or-explain basis. This recommendation covers scope 1, 2, and 3 GHG emissions as defined by the GHG Protocol. As of January 2023, approximately 50% of companies have disclosed this information.
However, this is not enough. Global GHG emissions are increasing, and the consequences are becoming obvious. Research result from the Japan Meteorological Agency has confirmed that the heavy rains and high temperatures in Japan in the summer of 2023 were caused by anthropogenic global warming. To avoid catastrophic climatic changes in the upcoming decades, there is a need to go beyond what has been traditionally regulated by governments to reduce GHG emissions.
With the finalization of IFRS S1 and 2 standards (officially in effect January 2024) by the International Sustainability Standards Board (ISSB), standardized climate-related disclosures will be available internationally, including in Japan. The Sustainability Standards Board of Japan (SSBJ) has released a roadmap for the adoption of IFRS standards in Japan. Based on this roadmap, the final version of the reporting standards in Japan should be released in March 2025, and reporting is expected to begin in mid-2026 based on prior fiscal year data by March 31, 2026. Companies subject to the submission of such reports will need to be prepared to comply with these new regulations.
How to comply with Japan’s climate regulations
The impact of the reporting can be analyzed from two perspectives: for Japanese companies and for non-Japanese companies.
The number of Japanese companies that need to take steps to comply with the upcoming regulatory requirements is large. Today, around 1,000 companies on the Tokyo Stock Exchange’s Prime Market are ready to calculate and submit their scope 1-3 emissions. That leaves over 10,000 companies who need to build and test their carbon accounting and climate disclosure capabilities in just under three years, many from scratch.
Once this regulation and reporting are up and running, non-Japanese companies will be able to receive better climate data from Japanese companies. International companies will be able to collect primary emissions data from the Japanese companies and better support green procurement decisions. This transparency will be true for jurisdictions where ISSB-based climate disclosure rules will be introduced, such as Australia, Brazil, Canada, Hong Kong, Kenya, Korea, Nigeria, Singapore, Taiwan, the UK, and more to come.
Of course, mere disclosure is not the goal. Green purchasing decisions based on improved climate disclosure are expected to reduce corporate and global carbon emissions, as well as drive corporate value. For companies to reflect their reduction efforts in their climate reporting, they will need to establish an accurate process for collecting and calculating climate data. This will take time. The sooner companies start preparing their disclosures, the more they will be able to gain economic benefits from the disclosure.
Despite the benefits, many Japanese companies are short of human resources to get these things done in-house. As such, various attempts have been made by the government and industry associations to increase the number of carbon accountants. However, increasing this talent pool will take some time. Given the situation, digital solutions, along with proper data governance/management schemes, have a significant role to play in meeting regulatory demands and maximizing the benefits of carbon accounting.
Climate & ESG News Roundup
COP28 to kick off this week in Dubai
The annual United Nations Climate Change Conference, COP28, is set to begin in Dubai this week. World leaders will gather from Nov. 30 to Dec. 12 to address climate change impacts, greenhouse gas reduction efforts, and the critical issue of funding for climate-related costs. Against the backdrop of the hottest recorded year, the meeting aims to evaluate global progress in adhering to the Paris Agreement's goal of limiting global warming to well below 2 degrees Celsius. However, a recent U.N. analysis indicates that greenhouse gas emissions continue to rise, putting the planet on track for at least 2.5 degrees Celsius of warming by the end of the century.
A contentious topic at COP28 is expected to be the compensation wealthy nations should pay to those most affected by climate change, known as "loss and damage." The discussions will also revolve around the inadequacy of the pledged $100 billion annually from industrialized countries for climate finance, with the developing world estimating a need of at least $2.4 trillion annually by 2026. As thousands gather for COP28 in the oil-dependent host country, the stakes remain high, and the conference will be closely watched for concrete actions and commitments to address the escalating climate crisis.
US and EU invest in climate initiatives
The U.S. and the European Union are making substantial investments in climate initiatives. President Biden announced over $6 billion for climate resilience, with a focus on critical areas such as the modernization of the U.S. electric grid, reduction of flood risks, advancement of drought resistance, and the promotion of community-level clean energy deployment and climate justice efforts. Meanwhile, the European Commission approved over €396 million for 171 projects across EU countries, addressing nature restoration, circular economy, climate change mitigation, and clean energy transition. Both initiatives emphasize the urgency of climate action and demonstrate their commitment through significant financial backing, aligning with global efforts to combat environmental challenges.
Investors raise concerns about unsupported sustainability claims, study shows
The latest Global Investor Survey by PwC reveals growing investor concerns about corporate greenwashing, with 94% of respondents believing that sustainability reporting contains unsupported claims, up from 87% in the previous survey. Investors express a desire for more transparency, with 76% emphasizing the importance of companies reporting the costs of meeting sustainability commitments and 74% seeking a roadmap to meet those commitments. There's a heightened interest in the environmental and societal impact of companies, with 75% wanting reporting on these aspects.
Investors are increasingly relying on emerging regulatory reporting frameworks – such as CSRD, the SEC climate disclosure rule, or ISSB standards – to address greenwashing concerns, emphasizing the need for companies to show credible evidence of their sustainability efforts. These findings underscore the growing importance for companies to show their work when it comes to climate and broader ESG claims.
