Japan’s Sustainability Disclosure Standards (Exposure Drafts)

Description of Characteristics:

• Policy-Driven & Top-Down Approach: The SSBJ Exposure Drafts are heavily influenced by the policy directives set by the Financial Services Agency (FSA), aiming to create a standardized framework for sustainability-related financial disclosures in Japan. The top-down approach ensures consistency and comparability across disclosures.
• Rapidly Evolving: The SSBJ Exposure Drafts are the first step in establishing sustainability disclosure standards in Japan. The standards are expected to evolve and be refined based on feedback and practical implementation experience.
• Market-Oriented: While policy-driven, the standards aim to enhance transparency and comparability of sustainability-related information, facilitating informed decision-making by investors and other stakeholders.
• Focus on Transition: The standards emphasize the disclosure of climate-related risks and opportunities, including transition plans, reflecting the importance of transitioning to a low-carbon economy.
• Strong Alignment with International Standards (ISSB): The SSBJ Exposure Drafts are closely aligned with the IFRS Sustainability Disclosure Standards, promoting global consistency and comparability. The SSBJ has incorporated all the requirements of IFRS S1 and S2, with some additional jurisdiction-specific alternatives and requirements.

Targeted Audience:

• Listed Companies (Initially Prime Market): The primary target audience is listed companies, particularly those on the Prime Market of the Tokyo Stock Exchange, who are expected to engage in constructive dialogue with global investors.
• Other Companies (Voluntary Adoption): While the initial focus is on listed companies, the standards can also be voluntarily adopted by other companies seeking to enhance their sustainability disclosures.
• Investors and Other Stakeholders: The standards aim to provide investors and other stakeholders with relevant and reliable information to assess companies’ sustainability-related risks and opportunities.

Specific Criteria:

• Core Content Disclosure: The standards mandate disclosures on four core elements: Governance, Strategy, Risk Management, and Metrics and Targets.
• General and Climate-Specific Standards: The exposure drafts include a General Standard for broader sustainability disclosures and a Climate-Specific Standard for more detailed climate-related reporting.
• Industry-Specific Metrics: The Climate-Specific Standard encourages referencing industry-specific metrics from the SASB Standards and ISSB’s Industry-Specific Guidance, promoting comparability within sectors.
• Quantitative and Qualitative Information: The standards require both quantitative and qualitative disclosures on various topics, including financial impacts, targets, and resilience assessments.

Reporting Principles:

• Transparency and Comparability: The standards emphasize clear, concise, and comparable disclosures to enable informed decision-making by investors.
• Materiality: Disclosures should focus on material information that could reasonably influence the decisions of primary users.
• Connectivity: The standards require companies to show the connections between different disclosures and how sustainability factors relate to financial statements.
• Reasonable and Supportable Information: Disclosures should be based on reasonable and supportable information, considering the company’s specific circumstances and available resources.

Reporting Process:

1. Identify Risks and Opportunities: Companies identify and assess material sustainability-related risks and opportunities, considering their business model and value chain.
2. Develop Strategy: Companies develop strategies to manage and respond to these risks and opportunities.
3. Implement Risk Management: Companies establish processes to identify, assess, prioritize, and monitor sustainability-related risks.
4. Set Metrics and Targets: Companies set measurable targets and select relevant metrics to monitor progress and performance.
5. Disclose Information: Companies disclose information on governance, strategy, risk management, and metrics and targets in their sustainability-related financial disclosures.

Connections to Other Frameworks:

• IFRS Sustainability Disclosure Standards: The SSBJ Exposure Drafts are closely aligned with the ISSB standards, ensuring international consistency and facilitating cross-border comparisons.
• SASB Standards: The standards encourage the use of industry-specific metrics from the SASB Standards, promoting comparability within industries.
• TCFD Recommendations: The standards incorporate the core elements of the TCFD recommendations, focusing on governance, strategy, risk management, and metrics and targets.

Challenges:

• Evolving Standards: As the first set of sustainability disclosure standards in Japan, there will be a learning curve for companies in implementing and complying with the new requirements.
• Data Availability and Quality: Gathering reliable and comparable sustainability-related data can be challenging, particularly for smaller companies and those in certain industries.
• Comparability: While the standards aim to enhance comparability, differences in interpretation and implementation could still arise.

Compliance Guidance:

• SSBJ Exposure Drafts and Final Standards: The Exposure Drafts and the final standards will serve as the primary source of guidance for companies.
• Supporting Guidance and Examples: The SSBJ is expected to provide additional guidance and examples to assist companies in implementing the standards.
• External Expertise: Companies may need to seek external expertise to navigate the complexities of sustainability reporting and ensure compliance.

Usability Evaluation:

• Level of Adoption: Adoption will initially be driven by regulatory requirements for listed companies on the Prime Market. Voluntary adoption by other companies is expected to increase over time.
• Ease of Use: The standards can be complex, requiring companies to invest in resources and expertise to implement them effectively.
• Focus Areas: The standards primarily focus on climate-related disclosures, with additional requirements on general sustainability-related risks and opportunities.

SyncFrame Compatibility:

SyncFrame’s capabilities in impact measurement, data management, and ESG reporting can be a valuable asset for companies implementing the SSBJ Standards. The platform can help companies:

• Data Collection and Management: Streamline the collection and management of sustainability-related data from various sources.
• Metrics and Target Tracking: Monitor progress against sustainability targets and identify areas for improvement.
• Reporting and Compliance: Generate standardized and compliant sustainability reports aligned with the SSBJ Standards.
• Stakeholder Engagement: Communicate sustainability performance and progress to investors and other stakeholders effectively.

Overall, the SSBJ Exposure Drafts represent a significant step towards establishing a robust sustainability disclosure framework in Japan. By aligning with international standards and leveraging tools like SyncFrame, companies can navigate this evolving landscape and demonstrate their commitment to sustainable business practices.

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