Japan’s regulator urged to toughen ESG rules

June 25, 2021

Japan’s financial watchdog, the Financial Services Agency (FSA), should introduce a new code of conduct for ESG data providers and build a platform to monitor ESG-related bonds, according to an expert report commissioned by the regulator.

The recommendations were made in a report from the Expert Panel on Sustainable Finance, a group of experts from business finance and academia, set up by Japan’s FSA in December 2021 to advise on sustainability.

The report was delivered to the FSA this week and entitled ‘Building a Financial System that Supports a Sustainable Society’. In it, the expert panel proposed actions by the regulator and by asset managers and institutions to promote sustainability and help Japan transition to a lower-carbon economy.

ESG ratings and data are a subject of significant debate among global investors who face a range of different rating systems often providing conflicting views. The panel recommended Japan’s regulator promoted more discussion on the subject, including a potential code of conduct.

A proposed ‘ESG platform’ would also aim to create common standards by providing data and a system of certification for ESG-related bonds.

The panel, which met eight times over the last six months to hear evidence and debate possible measures, recommended actions to address sustainability in all its forms but with a particular focus on climate change.

The report stated that “the quality and quantity of climate-related disclosures should be enhanced” and that such disclosures should be in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The establishment of standards was a persistent theme of the report, which also recommended the FSA take an active role in international efforts to set reporting standards through organisations such as the IFRS Foundation.

Institutions and asset managers were also addressed by the report, which stated that asset managers should explain the characteristics of ESG investments. They should be held to account for these explanations by the FSA, the expert panel said.