How climate-related financial disclosure is shaping Japan's sustainable future

The escalating climate crisis is significantly impacting the global economy. According to the World Meteorological Organization, disasters from weather, climate and water-related events caused $4.3 trillion in economic losses during the nearly 50 years leading up to 2021.

The World Economic Forum’s Global Risks Report 2023 highlights the failure to mitigate and adapt to climate change, natural disasters, biodiversity loss and environmental degradation as five of the top 10 risks. The increasing threat posed by climate change is compelling businesses to undergo substantial transformations in their business models, recognising the profound impact on their operations.

In response to these challenges, the Task Force on Climate-related Financial Disclosures (TCFD) was established in 2015. Two years later, it released recommendations to encourage efficient disclosure of climate-related information with consistency, comparability, reliability, and clarity to assist in making informed investment decisions related to climate change factors.

The TCFD recommendations, focusing on four core elements of organizational operation – governance, strategy, risk management, and metrics and targets – serve as a new global standard for disclosure criteria related to climate change.

In 2022, the Tokyo Stock Exchange restructured its cash equity markets into three new segments – Prime, Standard and Growth – in the hopes of revitalizing Japan’s stock market. Listed companies in the newly created Prime Market are now obligated to disclose business risks in line with TCFD recommendations.

This significant market restructuring and disclosure requirements based on TCFD recommendations are bolstering the groundwork for the consistent disclosure of climate-related information. As of November this year, a total of 4,925 companies and institutions globally have endorsed TCFD, with 1,488 of them being Japanese entities, showcasing the country's pro-active stance ahead of the global curve.

There is also growing momentum on disclosing the financial impact of climate change in annual securities reports. In 2023, over 1,000 listed domestic companies, accounting for about 30%, disclosed their responses to TCFD recommendations in their reports. This represents nearly double the previous year's figures, reflecting a keen commitment among Japanese companies toward sustainable business practices.

With the increasing prevalence of such disclosures, domestic and international investors will find it easier to access comparable quantitative information, likely stimulating greater market participation. Consequently, the content and scope of disclosures by Japanese companies will be expanded, making investment decisions more straightforward, hopefully creating a virtuous circle in which funds flow to companies that proactively disclose climate risks.

The Ministry of Economy, Trade and Industry (METI) established the TCFD Consortium in 2019, aiming to support Japanese companies in seamlessly conducting assessments and disclosing information related to climate change. Concurrently, it fosters active discussions on effective approaches to information disclosure.

As part of its commitment to achieving a 46% reduction in greenhouse gas emissions by 2030 compared to 2013 levels and striving for carbon neutrality by 2050, the Japanese government launched the GX League in 2022.

This serves as a platform for collaboration among industry, government, academia and finance to create new markets and discuss and implement the green transformation toward an economy and society centred around renewable energy. Aspiring to be a collective force guiding future companies towards realizing the societal and corporate vision of 2050, the GX League currently boasts 566 participating companies.

Furthermore, METI has been organizing the annual TCFD Summit since 2019, advancing international discussions on improving the quality of climate risk disclosure, promoting transition finance, and determining the finance needed for the societal implementation of innovative decarbonization.

The summit serves as a crucial platform where global leaders from industries, finance, government, regulatory bodies, and international organizations convene, fostering a cycle of positive interaction between environmental sustainability and economic growth. This year, in a move to lead international rule-making for achieving emission reduction and economic growth through public-private collaboration, the Global GX Conference (GGX) to discuss the global green transformation merged with the TCFD Summit to form the GGX×TCFD Summit, held in October.

While numerous companies have declared support for TCFD, and there has been progress in terms of the number of organizations who now disclose climate-related information in Japan, one challenge persists: the limited disclosure of specific indicators that shareholders and investors can use for their decision-making.

According to a recent survey by Nikkei, among companies disclosing the financial impacts of climate change in their annual securities reports, only 24% specifically quantify the risks, and 18.7% the opportunities. Some investors have voiced concerns about the difficulty of evaluating companies without specific numerical data, highlighting data refinement as a future task.

Moreover, the survey found that only 29.8% of companies analyze and disclose risks associated with biodiversity loss. As investors increasingly call for companies to address the conservation of forests, water resources, reduction of plastic use and sustainable agriculture, efforts in managing risks related to natural capital will need to be strengthened.

From 2024 onward, the International Sustainability Standards Board (ISSB) of the IFRS Foundation will take over the responsibility for monitoring the progress of companies' climate-related information disclosure from TCFD. As IFRS Standards based on TCFD recommendations are expected to be more detailed, raising disclosure standards, Japanese companies are expected to lead the world not only by improving the quality of disclosure information but also by establishing a process to reassess corporate value.