Japan Proposes IFRS-Based Sustainability Reporting Standards

Japan has taken a significant step towards enhancing corporate transparency and accountability with the release of proposed sustainability reporting standards based on the IFRS S1 and S2 standards of the International Sustainability Standards Board (ISSB). This aligns with a growing global trend toward standardized sustainability reporting, which links environmental, social and governance (ESG) disclosures with financial reporting practices.

The proposed standards, released by the Sustainability Standards Board of Japan, aim to provide investors and stakeholders with consistent and comparable information on organizations’ sustainability performance. This initiative reflects Japan's commitment to advancing sustainable development and meeting the evolving needs of investors seeking reliable ESG data for decision-making.

Key requirements

The proposed standards outline specific requirements for reporting on a range of sustainability-related issues, including climate change, diversity and inclusion, human rights and supply chain management. Organizations will be expected to disclose relevant ESG metrics, targets and performance indicators, providing stakeholders with a comprehensive view of their sustainability practices and impact.

Reporting dates and deadlines

While the proposed standards are still in the draft stage, it is anticipated that organizations will begin voluntarily adopting them in early 2025, with a required reporting date to be announced at a later date. This estimated timeline provides organizations the chance to familiarize themselves with the new reporting framework and implement necessary changes to their reporting processes.

Who is impacted?

The exposure drafts do not lay out requirements on which organizations will have to report, but it is likely that the final regulation will cover about 4,000 organizations listed on the Tokyo Stock Exchange. Compliance with the standards will require organizations to disclose sustainability-related information under the four pillars of governance, strategy, risk management, and metrics and targets, all of which are common across the Task Force on Climate-related Financial Disclosures (TCFD) framework and ISSB standards.

Organizations will need to assess their current ESG reporting practices against the proposed standards and, if impacted, make adjustments to comply with new requirements.

Additionally, investors, analysts and other stakeholders stand to benefit from enhanced transparency and consistency in sustainability reporting, enabling more informed decision-making.

Alignment with international standards

By basing the sustainability reporting standards on IFRS S1 and S2, the Japanese government aims to promote global harmonization of sustainability and ESG reporting  and facilitate international comparisons of ESG performance. This alignment with international standards is intended to enhance the credibility and reliability of sustainability disclosures from organizations doing business in Japan, potentially fostering greater trust among investors and stakeholders worldwide.

Integration of financial and nonfinancial information

One of the key principles underlying the proposed standards is the integration of financial and nonfinancial  information, such as organizational data regarding customer satisfaction, employee engagement or environmental footprint. By providing a more holistic view of an organization's performance, this integrated reporting approach enables stakeholders to assess the long-term sustainability and resilience of businesses, supporting value creation and risk management.

Enhanced disclosure on climate-related risks

Given the increasing focus on climate change and its potential impacts on businesses, the Japanese government’s proposed standards include specific requirements for disclosing climate-related risks and opportunities, such as low-emission energy development, more efficient resource management and stronger supply chain processes. Organizations will be expected to assess and disclose their exposure to physical and liability risks associated with climate change, as well as risks related to transitioning to a low-carbon economy — i.e., what are the risks associated with installing solar panels on a warehouse roof?

In addition, organizations will need to disclose their strategies for mitigating these risks and capitalizing on opportunities.

Stakeholder engagement and materiality

The proposed standards emphasize the importance of stakeholder engagement and materiality in sustainability reporting. Organizations are encouraged to identify and prioritize ESG issues that are most relevant to their business and stakeholders,   focusing their efforts on providing meaningful and actionable information.

Japan's proposed ISSB-based sustainability reporting standards represent a significant milestone in the global push towards standardized ESG disclosure. By aligning with international standards, integrating financial and nonfinancial information and enhancing disclosure of climate-related risks, these proposed standards have the potential to drive greater transparency, accountability and sustainability performance among organizations active in Japan.