Business

How Major Japanese Companies Are Misreporting Sustainability Under The Corporate Governance Code

Shareholders Beware – How Major Japanese Companies Are Misreporting Sustainability Under The Corporate Governance Code by Rainforest Action Network

Executive Summary

The introduction of Japan’s Corporate Governance Code in June 2015 was heralded as a major step forward in improving the transparency and accountability of Japanese listed companies. Whilst the Code appears to be having some positive impact on governance issues such as board independence, the same cannot be said of the Code’s effect on the reporting and integration of sustainability and stakeholder issues.

The provision of environmental, social and governance (ESG) information related to business operations (including through a company’s value chain) is a vital consideration for shareholders and other stakeholders in assessing a company’s performance and investment potential. The omission or concealment of such information can cause unforeseen losses to investors from company links to harmful environmental or social impacts.1 Such impacts are not only detrimental to the environment and people impacted, but can also result in brand reputation losses, cancellation of supplier contracts, supply chain disruptions, operational delays, shutdowns in production, or legal action.

The Code’s key sustainability and stakeholder provisions are contained in Section 2 of the Code, while reporting of nonfinancial information is required under General Principle 3. According to a recent Tokyo Stock Exchange (TSE) synthesis report of company compliance with the Code, more than 99 per cent of firms self-reported to be fully complying with these specific sustainability and stakeholder provisions.

Rainforest Action Network (RAN ) examined the Code reports of ten major Japanese companies with known links to tropical deforestation and associated social risks through their supply chains, trading divisions or financial relationships. All ten companies surveyed reported on their measures to cooperate with stakeholders and address sustainability issues, however measures varied in quality and were generally inadequate relative to the ESG risks associated with tropical forest-risk commodities.

Key findings of our assessment are:

  • All companies were exposed to significant ESG risks in their forest-commodity supply chains and/or financing relationships, including the destruction of High Conservation Value forest (HCV ), High Carbon Stock (HCS ) forest,3 and conflict with local communities;
  • None of the companies sufficiently disclosed these ESG risks in their Corporate Governance Code report;
  • None of the companies adequately considered affected communities, a consistently overlooked stakeholder group, and none offered any grievance mechanism;
  • Only two forest-sector companies, Sumitomo Forestry Corporation (Sumitomo Forestry) and Oji Holdings Corporation (Oji), reported some information on progress in implementing their sector-based policies relevant to tropical forest-risk supply chains;
  • Only one financial institution, Sumitomo Mitsui Trust Holdings, explicitly considered ESG issues as part of their risk management framework and engagement with companies; and
  • None of the financial institutions had publicly available, relevant and sector-specific financing policies to address their exposure to ESG risks through their client base.

The findings in this report suggest that many companies are systematically misreporting compliance with their sustainability and stakeholder obligations under the Code, or, have a fundamental lack of understanding as to what constitutes meaningful sustainability reporting and stakeholder engagement. While this is not the fault of the Corporate Governance Code itself, the ambiguity in the Code and Guidelines facilitates this misreporting. In particular, there is a lack of clarity on the range of stakeholders that should be considered, what measures are “appropriate” in addressing sustainability issues and what non-financial information should be disclosed (see Recommendations section). Consequently, Japan’s Corporate Governance Code does not presently enable shareholders or other stakeholder groups to have sufficient confidence in the corporate sustainability performance of Japanese companies.

In order to remedy the deficiencies identified in this study, the Code’s sustainability and stakeholder reporting obligations and guidance must be strengthened and clarified, and companies must urgently improve efforts to understand and address the serious range of sustainability and stakeholder issues connected to their business operations.

Recommendations to the Financial Services Agency (FSA): Improving the Corporate Governance Code

General Principle 2: Appropriate Cooperation with Stakeholders

General Principle 2 points to the importance of “… establishing a corporate culture where the rights and positions of stakeholders are respected…,” including those of “local communities”.

  • “Rights” to be respected should be further referenced, and include those reflected in international norms and instruments, such as the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multi-National Corporations, ILO Conventions and the UN Declaration on the Rights of Indigenous Peoples.
  • In conceptualizing relevant stakeholders, including “local communities”, the Code should specify that stakeholder relationships are defined by the full scope of a company’s business activities and relationships, and are inclusive of stakeholders that are adversely impacted through the activities of those companies with which it enters supply chain and/or financing business relationships, and civil society groups.
  • In ensuring the rights of stakeholders are respected, the Code should encourage companies to identify and elaborate on their stakeholder engagement procedures, including access to relevant grievance, conflict and dispute resolution mechanisms.

Principle 2.3: Sustainability Issues, Including Social and Environmental Matters

Principle 2.3 calls on companies to “take appropriate measures to address sustainability issues, including social and environmental issues,” further noting under Supplementary Principle 2.3.1 that these matters should be addressed “positively and proactively.”

  • The Code should provide further clarity on the term “appropriate measures”, by including reference to best-practice ESG procedures and frameworks for companies to identify, assess and seek to address the sets of sustainability issues relevant to their business, such as those found in the Global Reporting Initiative (GRI) G4 framework.
  • While recognizing the value of many Corporate Social Responsibility activities, the Code should explicitly encourage companies to integrate social and environmental issues into their core business strategies, risk management and remedies to negative impacts.
  • As it relates to companies with business exposure to tropical forest-risk commodities (but also more widely) the Code should encourage companies to elaborate values-led sector-specific ESG policies and commitments as a basis for “taking positive and proactive measures toward ESG matters”.

General Principle 3: Disclosure of Information

General Principle 3 calls on companies to disclose information on “non-financial information” including “risks”, noting that the provision of such non-financial information “is an effective means to develop shared awareness and understanding with… stakeholders, in particular given that as outsiders they suffer from information asymmetry.”

  • Consistent with the overall sustainability objectives of the Code and with Principle 2.3, the Code should explicitly require comprehensive disclosure of information related to ESG risks including the identification of negative impacts in company operations and wider business relationships as part of its reporting.
  • The Code should require companies to consider and explain how the provision of such information improves the quality and constructiveness of their stakeholder relationships and engagement with not only shareholders, but other stakeholders including affected communities and civil society groups.

Recommendations to the Tokyo Stock Exchange (TSE ): Enhanced Guidance for Reporting

Section I-1, Basic Views on Corporate Governance and Other Basic Information

Require companies to report on how they are complying with General Principle 2, Principle 2.3, and General Principle 3.

Section III-3, Status of Measures to Ensure Due Respect for Stakeholders

  • Include reference to local communities and civil society in the indicative list of stakeholder groups.
  • Clarify that stakeholders include those that are impacted by a company’s operations and business relationships, including through the activities of companies with which it enters supply chain and/or financing relationships.
  • Improve guidance to ensure that companies report the full set of reports where ESG information is disclosed, and reference by URL.

Section IV: Matters Concerning Internal Control System

  • Add specification of ESG risk management systems as specific part of risk management reporting.

Other

  • Add discussion and disclosure of framework(s) used to identify, assess, determine and update ESG risk priorities, targets and action plans
  • Require the companies to identify and disclose the information about its sustainability issues as an important element of risk management and report how the board takes actions and considers addressing them positively and proactively.

Japan's Corporate Governance Code

Japan’s Corporate Governance Code

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