Sustainability Reporting

Mandatory Sustainability Reporting in Japan: FIEA Rules & ISSB Alignment for Global Companies

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read
Slide outlining Japan’s mandatory sustainability disclosures: FIEA/ISSB pillars, financial-materiality focus, phased adoption timeline and assurance outlook.

TL;DR

  • From FY 2023 disclosures, Japan’s Financial Instruments and Exchange Act (FIEA) requires listed firms to add a “Sustainability Information” section in the Annual Securities Report (Yūhō).
  • The framework mirrors TCFD/ISSB pillars (governance, strategy, risk management, metrics & targets) and focuses on financial materiality.
  • Human-capital metrics on diversity and workforce development are now mandatory; assurance remains optional but under review.
  • US companies with Japanese ties must map data gaps, align with ISSB baselines and prepare for phased expansion and potential assurance rules.

Table of Contents

  1. The New Framework: Sustainability in the Annual Securities Report
  2. Materiality: Japan's Focus on Financial Relevance
  3. Assurance: The Next Frontier in Credibility
  4. Implications for US Companies
  5. Conclusion

Globally, the landscape of corporate reporting is undergoing a profound transformation. Driven by escalating investor demand, regulatory pressure, and societal expectations, information regarding environmental, social, and governance (ESG) factors – collectively known as sustainability information – is moving from the periphery of voluntary reports into the core of mandatory financial filings. Japan, a major global economy, has taken a significant step in this direction, integrating key sustainability disclosures into its primary corporate reporting framework. For US companies with investments, partnerships, subsidiaries, or supply chain connections in Japan, understanding these new requirements is becoming increasingly vital.

Effective for fiscal years ending on or after March 31, 2023, amendments to regulations under Japan's Financial Instruments and Exchange Act (FIEA) mandate the inclusion of specific sustainability-related information within the Annual Securities Report (Yūka Shōken Hōkokusho, often abbreviated as Yūhō), the main statutory disclosure document for listed companies and certain other entities. This marks a pivotal shift, elevating sustainability reporting from a largely voluntary practice to a regulated component of corporate disclosure.

The New Framework: Sustainability in the Annual Securities Report

The FIEA amendments created a dedicated section within the Annual Securities Report specifically for "Sustainability Information" (サステナビリティに関する考え方及び取組 - sasutenabiriti ni kansuru kangaekata oyobi torikumi). This structured approach aims to provide investors and other stakeholders with consistent and comparable information. The framework adopted heavily mirrors the structure recommended by the Task Force on Climate-related Financial Disclosures (TCFD) and subsequently integrated into the standards developed by the International Sustainability Standards Board (ISSB). It is organized around four core pillars:

  1. Governance: How the company's governance bodies oversee sustainability-related risks and opportunities. This includes describing the board's oversight role and management's responsibilities.
  2. Strategy: The actual and potential impacts of significant sustainability-related risks and opportunities on the company's business model, strategy, and financial planning over the short, medium, and long term. For climate change, this often involves discussing resilience based on different climate scenarios.
  3. Risk Management: The processes used by the company to identify, assess, manage, and monitor sustainability-related risks.
  4. Metrics and Targets: The quantitative and qualitative metrics and targets the company uses to assess and manage its performance in relation to significant sustainability-related risks and opportunities, and to track progress towards its stated goals. For climate, this specifically includes disclosing Scope 1 and Scope 2 greenhouse gas (GHG) emissions, with disclosure of Scope 3 emissions (value chain emissions) also encouraged and increasingly expected where material.

Materiality: Japan's Focus on Financial Relevance

A critical concept underpinning which specific information needs to be disclosed under the "Strategy" and "Metrics and Targets" pillars (Governance and Risk Management disclosures are generally required) is materiality. In line with the primary purpose of FIEA disclosures – providing information useful for investment decisions – Japan's framework currently emphasizes financial materiality (often termed single materiality).

This means companies should disclose sustainability information if its omission or misstatement could reasonably be expected to influence the decisions that primary users of general-purpose financial reports (i.e., investors, lenders, and other creditors) make based on that report. The focus is on how sustainability factors affect the company's enterprise value, financial position, and future cash flows.

This approach aligns with the direction taken by the ISSB in developing its global baseline standards (IFRS S1 and S2). It contrasts with the double materiality approach mandated by the EU's Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS). Double materiality requires companies to report not only on how sustainability issues affect the company's value (financial materiality or the "outside-in" perspective) but also on the company's own impacts on society and the environment (impact materiality or the "inside-out" perspective), regardless of whether those impacts currently affect enterprise value. While Japanese companies may voluntarily report on broader impacts, the mandatory FIEA requirement is currently anchored in financial materiality.

Specific Mandatory Disclosures: Human Capital Takes Center Stage

While much of the sustainability disclosure under FIEA is governed by the company's own materiality assessment, Japan has taken the step of explicitly mandating the disclosure of certain human capital metrics, reflecting separate legislative and societal priorities. These requirements apply regardless of a company-specific materiality assessment for these particular items. Key mandated human capital disclosures within the "Sustainability Information" section include:

  • Ratio of Female Managers: The percentage of women in management positions.
  • Male Childcare Leave Uptake Rate: The rate at which male employees take childcare leave.
  • Gender Pay Gap: The difference in average wages between male and female employees. Regulations often require this to be disclosed across different employee categories (e.g., regular employees, non-regular employees, and the total workforce).

Companies must also disclose their policies related to human resource development and ensuring a positive workplace environment that promotes diversity. This mandatory inclusion signals the strong emphasis placed on gender equality and workforce development within Japan's broader policy goals, integrating these social factors directly into the core corporate reporting framework viewed by investors.

Alignment with Global Standards: ISSB and the Role of SSBJ

Japan is actively working to ensure its domestic sustainability reporting framework aligns with emerging global standards to enhance international comparability for investors. The Financial Services Agency (FSA) and the Sustainability Standards Board of Japan (SSBJ) – established within the Financial Accounting Standards Foundation (FASF) in July 2022 – are key players.

The SSBJ's primary role is to develop Japanese sustainability disclosure standards. Its stated policy is to achieve alignment with the ISSB's IFRS Sustainability Disclosure Standards (IFRS S1 - General Requirements and IFRS S2 - Climate-related Disclosures), incorporating modifications only where necessary to reflect specific Japanese circumstances. In March 2024, the SSBJ released exposure drafts of its initial standards based directly on IFRS S1 and S2, seeking public comment until July 31, 2024. Final Japanese standards are anticipated by March 2025.

While compliance with these forthcoming SSBJ standards is currently voluntary, the FSA's working groups have indicated an intention to mandate their use within the FIEA framework in the future. A phased approach is currently proposed, potentially starting with the largest companies listed on the Tokyo Stock Exchange's Prime Market (e.g., those with market capitalization exceeding JPY 3 trillion) for financial years ending March 2027, with gradual expansion to other Prime-listed companies thereafter. This signals a clear trajectory towards adopting ISSB-aligned standards as the mandatory baseline in Japan.

Assurance: The Next Frontier in Credibility

Currently, unlike the EU's CSRD which mandates limited assurance (moving towards reasonable assurance later), Japan's FIEA does not require third-party assurance over the mandatory sustainability disclosures included in the Annual Securities Report. Companies can voluntarily seek assurance, but it is not a legal requirement.

However, the topic of assurance is under active discussion. The FSA has established working groups to consider the necessity and feasibility of introducing mandatory assurance requirements for sustainability information in Japan. The development of international assurance standards, notably ISSA 5000 by the International Auditing and Assurance Standards Board (IAASB), is being closely monitored.

Key challenges include the capacity of assurance providers (primarily audit firms, given the connection to financial reporting and internal controls), the cost burden on companies, defining the appropriate scope and level (limited vs. reasonable) of assurance, and developing the necessary expertise among both preparers and assurers. While mandatory assurance is not imminent, it is widely expected to be introduced in Japan in the coming years, likely following the phased implementation of the SSBJ standards, to enhance the reliability and credibility of the disclosed information for investors.

Practical Challenges for Japanese Companies

Despite the progress towards standardized reporting, Japanese companies face several practical hurdles in implementing these new requirements, as often highlighted in discussions among practitioners and regulators:

  • Breaking Down Internal Silos: Sustainability reporting requires collaboration across departments that traditionally operated separately. Finance and accounting teams, which typically manage FIEA reporting, must work closely with sustainability departments, investor relations, legal, HR, and operational units to gather data, ensure consistency, and integrate sustainability considerations into strategic narratives. Bridging these organizational gaps is a significant undertaking.
  • Data Collection and Quality: Gathering accurate, reliable, and consistent data, especially for forward-looking information, complex metrics like Scope 3 GHG emissions, or data spanning global supply chains, remains a major challenge. Many companies are still developing the necessary systems and processes.
  • Setting Meaningful KPIs: While disclosure frameworks provide guidance, defining Key Performance Indicators (KPIs) that are genuinely material to the specific company's strategy and value creation, rather than resorting to generic or easily achievable metrics, requires deep strategic thinking. Concerns exist about "greenwashing" or "ESG-washing" through selective or superficial KPI reporting (e.g., reporting high male paternity leave uptake rates based on very short leave durations). Explaining the linkage between chosen KPIs and long-term corporate value is crucial for investor credibility.
  • Cost and Resource Allocation: Implementing robust sustainability reporting processes, including data collection systems, internal expertise development, potential consulting fees, and future assurance costs, represents a significant financial and human resource commitment, particularly for smaller listed companies or those new to ESG reporting.

Implications for US Companies

The mandatory sustainability disclosure regime in Japan has several implications for US businesses:

  • Enhanced Transparency: For US investors, the rules provide more standardized and accessible sustainability information on Japanese companies, potentially improving investment analysis and engagement capabilities.
  • Benchmarking: US companies can better benchmark their own sustainability performance and disclosures against their Japanese competitors and peers operating under a mandatory framework.
  • Supply Chain Data Pressure: As Japanese companies increasingly report on Scope 3 GHG emissions and other value chain impacts (human rights, biodiversity), US companies within their supply chains may face growing requests for sustainability data from their Japanese customers.
  • Subsidiary Compliance: US corporations with subsidiaries listed or operating significantly in Japan must ensure those entities comply with the FIEA disclosure requirements, necessitating oversight and potentially resource allocation from the parent company.
  • Global Convergence & Alignment: Japan's strong alignment with ISSB standards reinforces the global trend towards a common baseline for sustainability reporting. While the US SEC's own climate disclosure rules face legal challenges and differ in scope, the direction suggests increasing pressure for US companies to align with international norms driven by frameworks like ISSB, which Japan is actively adopting. US companies operating globally will benefit from understanding the ISSB-based approach being implemented in major markets like Japan.

Conclusion

Japan has decisively entered a new era of corporate reporting by mandating sustainability disclosures within its core FIEA framework. This move, driven by global investor pressure and aligned with international standard-setting efforts (particularly TCFD and ISSB), significantly increases transparency regarding climate-related risks and opportunities and human capital management. While the current focus is on financial materiality, the inclusion of specific human capital metrics underscores the integration of key social priorities into corporate accountability.

Challenges remain, particularly around data collection, defining meaningful metrics, breaking internal silos, and the future implementation of mandatory assurance. However, the trajectory is clear: sustainability information is no longer optional but an integral part of corporate reporting in Japan. For US companies engaged with the Japanese market – as investors, partners, suppliers, or parent companies – closely monitoring these developments, understanding the specific requirements, and anticipating the broader global convergence towards standardized sustainability reporting are essential for navigating the evolving landscape of international business.