Tackling legal and business challenges, avoiding the pitfalls of greenwashing

By C Bryan Jones

Environmental, social, and corporate governance (ESG) is an area of growing importance to businesses, and many countries require disclosure of risk factors, earning potential, and more. But the requirements differ by location and are evolving. Around the globe, governments, investors, and stakeholders are demanding greater accountability and transparency about corporate environmental and social performance. This special edition of _The ACCJ Journal_ grew out of conversations with the American Chamber of Commerce in Japan (ACCJ) Sustainability Committee about the definition of the term. What does sustainability mean to you? That’s the first question we asked, and one to which the answer varies from person to person. You’ll find thoughts from 10 ACCJ leaders and members in this issue—a starting point for a plethora of content related to sustainability.

On April 8, the American Chamber of Commerce in Japan (ACCJ), the British Chamber of Commerce in Japan, and the Australia and New Zealand Chamber of Commerce in Japan jointly held a virtual event entitled ESG Disclosures: Tackling Legal and Business Challenges and Avoiding the Pitfalls of Greenwashing to discuss the changing landscape. The session, co-hosted by the ACCJ Legal Services & IP and Sustainability Committees, brought together a panel of four experts:

Reiko Hayashi, director and deputy president of BofA Securities Japan Co., Ltd.
Tim Power, partner at White & Case LLP’s Global Environmental Interest Group
Katie Schmitz Eulitt, director of investor outreach at the Sustainability Accounting Standards Board (SASB)
Natsuho Torii, deputy secretary general of the Japan Exchange Group (JPX) Sustainability Committee

ACCJ Sustainability Committee Co-chair and EY Japan Co., Ltd. director Heather McLeish moderated the discussion.

Investors are really becoming much more articulate about these topics and, therefore, I think the conversation around connectivity is resonating with more people.

Framing the issues, McLeish explained that, when companies look at ESG, they are talking about risk factors, and disclosing these risks is important for investor confidence. While disclosure in Japan is entirely voluntary at present, many countries are making it mandatory.

“We see the European Union, the UK, and, very recently, the United States moving forward on promotion of key factors that they think are financially relevant for companies and may even have national interests—certainly from a security perspective,” McLeish said.

Still, more than 90 percent of companies in Japan produce some sort of sustainability report despite not being required to do so by the government.

**Reiko Hayasahi**

Director and deputy president BofA Securities Japan Co., Ltd.

Key Drivers

While there are various forces that drive ESG disclosures, Hayashi believes the three biggest are:

Senior management’s commitment to enhance ESG initiatives
Organizational infrastructure that enables disclosure to stakeholders
Regulations and external calls for transparency

“If all stakeholders work together in a proper manner, the disclosure should go forward,” she said. “It’s not only by regulatory requirement, but also by company initiatives from top down, and organizational structure.”

Torii, who sits between companies and investors in her position at JPX, agrees that these are the key drivers. Also playing a particularly big role, she said, are investors. They include institutional and retail investors, as well as asset owners and managers.

“Now more and more investors are signing up for the stewardship code,” she said, referring to the government document finalized in 2014 and revised in 2017 and 2020. Japan’s Stewardship Code outlines principles to enable responsible institutional investors to promote the sustainable growth of companies through investment and dialogue.

**Natsuho Torii**

Deputy secretary general Japan Exchange Group (JPX) Sustainability Committee

“They start looking at the G in ESG, of course, but also the E and S elements. The companies themselves want to communicate their ESG efforts to various stakeholders, including investors—and not only investors, but other stakeholders, such as local communities, NGOs, and the global community. And nowadays, they don’t see ESG disclosure as a burden, but as a value-creation driver. So, I think they are positively working on ESG disclosure as well as ESG activities.”

Another driving force, Torii said, is Japan’s Corporate Governance Code—compiled by the Financial Services Agency and the Tokyo Stock Exchange (TSE)—which was published in 2015 and revised in 2018. The code establishes fundamental principles for effective corporate governance at listed companies in Japan. It is currently undergoing revision in light of changes to the business environment brought on by Covid-19 and preparations for the TSE’s shift to a new market segmentation in April 2022.

Proposed revisions include asking companies listed on the TSE Prime Market to:

Disclose climate change-related risks and earning opportunities, based on the recommendations of the Task Force on Climate-related Financial Disclosures
Disclose their initiatives on sustainability when disclosing their management strategies
Provide information on investments in human capital and intellectual properties in an understandable and specific manner
Provide necessary information in English

“The revised code mentions a lot of sustainability and ESG elements, including climate change, so I’m very excited to see this, and expect that more companies will start disclosing ESG information,” Torii added.

The Right Data

What are the differences between what investors are looking for and what companies are disclosing? How can you bring the two sides into sync? According to Eulitt, it is important to think about who your audience is and what information they are seeking.

**Tim Power**

Partner White & Case LLP’s Global Environmental Interest Group

While 96 percent of G250 companies—the world’s 250 largest companies by revenue as ranked by the annual Fortune 500 list—are issuing sustainability reports, only 29 percent of investors say these reports provide the information they need. She said that three constant requests are:

Comparability
Consistency
Reliability

Many investors are dissatisfied with the quality of the information they are receiving in these areas. That’s in part due to the fact that a lot of it is binary. “It’s a yes or no answer to the question of do you have a policy in place about a particular topic,” Eulitt said.

“That’s useful for some stakeholders, but not in an investor context about how to price the risk inherent in whether or not a company is managing risk properly, depending on whether they do or don’t have a policy in place. It’s impossible to know. What you really want as an investor is to see how a company is managing an issue over time. You need data,” she explained.

To better deliver that data through disclosure, you need a framework. But with more than 400 types of reporting instruments in 64 countries, how can a company choose?

**Katie Schmitz Eulitt**

Director, investor outreach Sustainability Accounting Standards Board (SASB)

Eulitt said JPX’s ESG guidance is “one of the most comprehensive tools I’ve seen that can help companies think through how they would go about choosing a tool.” She also cited a paper in which her organization, SASB, participated.

“This was a joint statement that was really meant to do a number of things,” she explained. “One was to start disabusing people of the notion that [ESG disclosure] was alphabet soup, which we often hear, and to think of it more as a system of puzzle pieces, if you will, and that the puzzle does fit together. But you can’t just cram in one piece where another one ought to go.”

SASB joined the four other major disclosure players:

CDP, a non-profit charity that runs the global disclosure system for managing environmental impact
The Climate Disclosure Standards Board (CDSB), a non-profit international consortium of business and environmental NGOs
The Global Reporting Initiative (GRI), an independent international group that enables organizations to be transparent and take responsibility for their impacts
The International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, companies, standard-setters, the accounting profession, academia, and NGOs

These framework- and standards-setting institutions, which Eulitt affectionately calls the Group of Five, worked together to produce the Statement of Intent to Work Together Towards Comprehensive Corporate Reporting, to align on a definitive shared vision and resolve confusion surrounding sustainability disclosure.

“It’s unlikely that there’s ever going to be a single standard that wins them all,” Eulitt said. “It’s much more likely that we’ll have a system. And what we’re talking about quite extensively through the Group of Five, as we work with the [International Financial Reporting Standards] trustees on building out a comprehensive global system for reporting, [suggests] it’s much more likely that it will be a sort of building block system that will have a foundational level for investors, supplemental building blocks looking at impact for other stakeholders, and then, on top of that, regional nuances that a particular jurisdiction may choose because of the nuances in their particular environment.”

Legal Perspective

The call for, and process of, sustainability disclosure is evolving in complex ways from a legal standpoint—particularly as there is no uniform set of requirements, while expectations differ from country to country.

Power, a lawyer with more than 30 years of experience in environmental and climate-change issues, said that governments are reacting by adopting one of two models:

Promulgating guidelines
Legislating enforceable obligations

One concern with corporate regulators setting guidelines is that they could be too narrow. Power gave the example of Australia, where he is based. He shared how guidelines there focus on areas such as climate-change risk and future financial performance, but fail to address other sustainability and ESG issues.

As an example of evolving legislative approaches, he talked about the European Union’s Taxonomy Regulation, which went into force on July 12, 2020, and will apply from January 1, 2023.

“The taxonomy regulation will require large European companies to quantify, in terms of their turnover or capital expenditure, the extent to which they are undertaking activities that meet a defined economic sustainable activity,” he explained.

To qualify as economically sustainable per the regulation, an economic activity must meet four conditions. It must provide:

Provisioning services (i.e., food and water)
Regulating services (i.e., control climate and disease)
Supporting services (i.e., nutrient cycles and oxygen production)
Cultural services (i.e., offer spiritual and recreational benefits)

“So, the EU looks to be adopting a very transparent financial model where it will be very readily apparent to regulators—and to shareholders and investors—to what extent Company A is spending money and generating revenue from sustainable economic activities as opposed to Company B,” he said. “And, in a sense, I think—from a market perspective—that’s what investors want to see.”

However, with regulations differing by country and region, complexity mounts.

“The challenge of all this, of course, is that the compliance task of meeting the Australian requirements, the European requirements, and the Japanese requirements can be not insignificant for organizations with global footprints,” Power said.

Future

Whether through guidelines, regulations, or sustainability goals, Hayashi—who has been heavily involved in Japanese government discussions surrounding sustainable finance with the Financial Services Agency and the Ministry of Economy, Trade and Industry—sees more unity and hope in recent events.

She noted that there has been no clear consensus among corporate willingness and government attitude. However, things have changed, she stated, since Prime Minister Yoshihide Suga announced in January that Japan aims to achieve net-zero carbon emissions by 2050.

“Suddenly, everybody is going in the same direction, because the government is committed to carbon neutrality and is working together with corporations, JPX, and financial institutions to have a more efficient way to achieve the goal and share the burden,” she said. “I’m trying to deliver the message, not only to the government but also to the client, that this should be done. Of course, there are different attitudes, depending on the region and industry, but the goal is the same. We have to share the same goal and then discuss openly, with transparency, how to achieve the goal. I think that will go well. We know that we need to deliver a beautiful planet to the next generation. It’s clear to everybody that we should do something now before it is too late.”

Eulitt also sees changing attitudes that bode well for the future. “Investors are really becoming much more articulate about these topics and, therefore, I think the conversation around connectivity is resonating with more people.

“So I would agree that, in the beginning, it may have been, for some people, a compliance exercise—or, ‘I don’t know why I’m doing this but everyone else is doing it, so I ought to.’ But if you’re thoughtful about [disclosure],” she explained, “then it can really be tied into enterprise value creation and, hopefully, the avoidance of erosion.”

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Tackling legal and business challenges, avoiding the pitfalls of greenwashing

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