Changes in sustainability information disclosure and the emergence of the SSBJ standards

Director of Zeroboard Research Institute, GSSB Board Member Tomoo Machiba

With the release of a draft of the "SSBJ Sustainability Disclosure Standards," which will set disclosure standards for securities reports, at the end of March 2024, listed companies in particular are being urged to take early action. However, many Japanese companies are already disclosing non-financial information in various forms, so rather than focusing on the SSBJ alone, it would be wise to prepare based on past practice. In this column, we will look back at the history of non-financial and sustainability disclosures and explain the background to the emergence of the SSBJ standards.

The origins of sustainability disclosure

The beginnings of sustainability information disclosure date back to the early 1990s, when multinational corporations began issuing environmental reports. This was due to growing criticism from NGOs of some companies causing or being involved in serious pollution and human rights violations in developing countries, and the legal requirement to record and disclose the flow of chemical substances and waste. Sustainability information disclosure began as a tool to ensure accountability and transparency to consumers, business partners, local residents, and others. In Japan, Tokyo Electric Power Company has been issuing its "Environmental Action Report" since 1992.

In the mid-1990s, the idea of ​​the "triple bottom line" was proposed, calling for companies to take responsibility for not only financial (economic) but also environmental and social performance, striving for sustainable development. As a result, some companies began to expand the scope of their reporting from environmental reporting to sustainability reporting. In 1997, the Global Reporting Initiative (GRI) was launched, aiming to mainstream environmental and social Issue by elevating non-financial reporting to the same level as financial reporting. For nearly 30 years since then, GRI has continued to create indicators for global voluntary disclosure with the participation and agreement of a wide range of stakeholders, and these have been adopted by many companies. During this development stage, the concepts of "materiality," which calls for disclosure to focus on important Issue, following the example of financial reporting, and third-party assurance to enhance reliability were introduced. ^*1

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Movement towards mandatory disclosure

Sustainability information disclosure began voluntarily as part of corporate social responsibility (CSR). However, in the 21st century, leading European countries began to move toward legislation, recognizing the importance of this information for stakeholders to assess corporate activity. France was the earliest to adopt this approach, enacting the New Economic Regulation (NRE) in 2001, which required listed companies to disclose data in their business reports on how they considered the social and environmental impacts of their business activity. ^*2 This was rolled out across the European Union (EU) as the Non-Financial Reporting Directive (NFRD) in 2018, and the Corporate Sustainability Reporting Directive (CSRD) began to apply in 2024, requiring even more standardized and transparent disclosure for companies above a certain size. Similar to the GRI Standards, the CSRD requires specific disclosure of 82 items across 12 criteria, covering environmental (E), social (S), and corporate governance (G), as part of the European Sustainability Reporting Standard (ESRS). ^*3 In the EU, the Sustainable Finance Disclosure Regulation (SFDR) for Financial Institution will come into effect in 2021 ^*4 , and the proposed Corporate Sustainability Due Diligence Directive (CSDDD) for major companies was adopted by the European Parliament in April 2024.

In countries outside of Europe, social and environmental disclosure has become a de facto obligation, with stock exchanges requesting listed companies to disclose social and environmental information in accordance with guidelines. According to the Sustainable Stock Exchange (SSE) initiative promoted by the United Nations, it began in 2007 when the Shenzhen Stock Exchange in China issued a directive on social responsibility, followed by the Shanghai Stock Exchange in 2008 with guidelines on environmental information disclosure, and the Stock Exchange of Thailand in 2012 with guidelines for preparing sustainability reports. Of the world's 121 stock exchanges, 73 (60%), including Tokyo, provide guidance on ESG disclosure to listed companies, and 96% of these recommend referring to the GRI Standards. ^*5*6

The emergence of an investor disclosure framework

Socially responsible investing (SRI), which has grown over time mainly in the United States, began to enter the mainstream of global finance as ESG investing in the 21st century. In 2006, the United Nations proposed the Principles for Responsible Investment (PRI), and the institutional investors and rating agencies that signed it called for a framework for ESG information disclosure that would enable transparent and fair corporate evaluations. This led to the establishment of the International Integrated Reporting Council (IIRC) and the US Sustainability Accounting Standards Board (SASB) in the 2010s. In 2013, the IIRC published an integrated reporting framework that explains how organizations create value over the long term, based on integrated thinking based on the relationships between the various capitals that an organization uses and influences. In 2018, SASB published financially material sustainability disclosure indicators for 77 Industry as SASB Standards. ^*7

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Concern about climate change risks

Among the many sustainability Issue, the steady progression of global warming and the frequent occurrence of natural disasters have led to a growing sense of crisis among stakeholders regarding climate change. In 2000, the CDPs(formerly the Carbon Disclosure Project) was launched in the UK, sending questionnaires to companies around the world regarding their GHG emission amount and efforts to combat climate change, ranking and disclosing the information, and providing it to institutional investors as a basis for their decisions. However, the movement toward information disclosure has rapidly accelerated as not only NGOs but also financial market participants have begun to view climate change as a serious future risk to the stability of the financial system, comparable to or even significantly exceeding the Lehman Shock of 2008.

In response to a request from the G20, the Financial Stability Board (FSB), which includes central banks and financial supervisory agencies from various countries, established the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 to discuss the potential impact of climate change on financial markets and risk management. The TCFD final recommendations, published in 2017, recommended that companies identify the risks and opportunities of climate change that affect their business activity, and disclose information on four areas: governance, strategy, risk management, and metrics and targets. Climate change information disclosure based on these recommendations spread throughout the world. ^*8

The Birth of the IFRS Sustainability Disclosure Standard

As we enter the 2020s, the need for a comprehensive and consistent reporting system is being called for from all quarters, and the proliferation of disclosure frameworks for investors is beginning to move towards collaboration and integration. The International Financial Reporting Standards (IFRS) Foundation announced the establishment of the International Sustainability Standards Board ( ISSB ) at the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26), held in Glasgow, UK in November 2021. The Value Reporting Foundation (VRF), which was formed through the merger of the IIRC and CDPs, and the Climate Change Disclosure Standards Board (CDSB), whose secretariat is CDP, have been absorbed into the IFRS Foundation. ^*9

In June 2023, the ISSB published the final standards for IFRS S1 (general disclosure standard for sustainability information) and IFRS S2 (climate-related disclosure standard). Based on existing standards and frameworks, the four pillars of the TCFD recommendations (governance, strategy, risk management, metrics and targets) are adopted as the core of disclosure, and reference to SASB standards is required. Disclosure is required at the same time as financial statements, marking a major step forward in integrating financial and non-financial reporting. Disclosure standards related to biodiversity, human capital, and other areas are also expected to be considered in due course. ^*10

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Japan's response and the development of SSBJ standards

In Japan, the Ministry of the Environment and the Ministry of Economy, Trade and Industry have only provided disclosure guidance based on the GRI Standards and the IIRC Integrated Reporting Framework, adapted for domestic use, and it has been left to the voluntary efforts of each company. However, the Japan Exchange Group joined the aforementioned SSE Initiative in 2017, and the financial markets have begun to move towards mandatory disclosure. In June 2021, the Tokyo Stock Exchange's Corporate Governance Code was revised, requiring listed Company to disclose sustainability Issue in general, and for Company listed on the TSE Prime , the code calls for the quality and enhancement of disclosure based on the TCFD recommendations or an equivalent framework, particularly with regard to the impact of climate change-related risks on business activity . ^*11

In response to this movement, the Financial Services Agency has begun a working group of the Financial System Council to consider the legal obligation to disclose sustainability information in securities reports based on the TCFD recommendations and the IFRS Sustainability Disclosure Standards . In January 2023, the Cabinet Office Ordinance on the Disclosure of Corporate Contents was revised, and companies that are required to submit securities reports and securities registration statements will now be required to disclose sustainability information in these documents by adding a section titled "Sustainability-related Philosophy and Initiatives." ^*12*13

Based on the ISSB's activities, the Sustainability Standards Board of Japan (SSBJ) was established under the Financial Accounting Standards Foundation (FASF) in July 2022, and discussions are underway on disclosure standards for Japanese investors based on the IFRS Sustainability Disclosure Standards. In March 2024, the SSBJ published an exposure draft of the Universal Sustainability Disclosure Standard and thematic standards (general disclosure standards and climate-related disclosure standards), and is accepting comments until the end of July.

The SSBJ Standards are scheduled to be finalized by March 2025, and the Financial Services Agency is considering making them specific standards for sustainability disclosure in the above-mentioned securities reports, with a proposal to make them mandatory as early as the fiscal year ending March 2027. They will first be applied to companies listed on the Tokyo Prime with a market capitalization of 3 trillion yen or more, and are expected to be expanded to companies with a market capitalization of 1 trillion yen or more the following year. ^*14

Summary: Preparation for SSBJ Standards

As such, the SSBJ Standards are not New, but rather reflect over 30 years of sustainability information disclosure practice and changes in stakeholder information needs and usage. Rather than rushing to comply with short-term regulations, companies should gradually build on their existing disclosure practices by considering how to provide logical and transparent reporting that meets the demands of investors and other stakeholders regarding sustainability Issue, and how to integrate and present financial and non-financial information. We will provide a detailed explanation of the SSBJ Standards in a separate article.

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＜Reference source＞

1. Takatsu Hanae , "The Deeper Nature of Environmental Issues from a Lawyer's Perspective, Vol. 30 - Trends in Sustainability Information Disclosure," Environmental Management, June 2023 issue
2. Tamaki Abe , "ESG in France: Evolution through Legislation," PwC website, January 19, 2018
3. Toshiharu Kato, "The Latest Trends in CSRD, Three Major Issues to Look Ahead, and the French CSRD Limited Guarantee Guidelines," KPMG website, November 15, 2023
4. Shogo Isobe and Kenji Tominaga, "The EU's Sustainable Finance Disclosure Regulation (SFDR) Launches: Delays in the Formulation of Detailed Regulations and Companies' Responses," Nomura Sustainability Quarterly, Spring 2021
5. Sustainable Stock Exchanges Initiative, ESG Disclosure Guidance Database webpage
6. Sustainable Stock Exchanges Initiative, ESG Disclosure Guidance Database webpage
7. Hidetoshi Tahara, "Trends in Sustainability Information Disclosure," PwC Views, May 2022
8. Japan Exchange Group , "Introduction to the ESG Information Disclosure Framework - TCFD Recommendations," website, May 16, 2024
9. Japan Exchange Group , "Introduction to the ESG Information Disclosure Framework - IFRS Sustainability Disclosure Standards," website, April 24, 2024
10. Nagaaki Kobayashi , "overview of IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2)," Accounting Information, October 2023 issue
11. Japan Exchange Group , "Initiatives to Promote ESG Investment," website
12. Naotaka Itatsu, "IFRS Sustainability Disclosure Standards in the Spotlight: A Framework Equivalent to TCFD," Nomura Sustainability Quarterly, Spring 2022
13. Takatsu Hanae , "The Deeper Nature of Environmental Issues from a Lawyer's Perspective, Vol. 30 - Trends in Sustainability Information Disclosure," Environmental Management, June 2023 issue
14. Takahiro Soma, "ISSB Disclosure to Become Mandatory as Early as 2027: Domestic Standards for Sustainability Disclosure Revealed," Nikkei ESG website, May 20, 2024.