In recent years, the terms "environmental, social and governance (ESG)" and "sustainability" have been steadily making their way into the everyday vocabulary of capital market institutions. For listed companies, sustainable corporate value creation is a central pillar of corporate strategy, and investors are duty bound to chase sustainable returns on investment. With this in mind, understanding is growing among companies and investors of the importance of action on sustainability issues for their mid- to long-term survival.

In our position as owner of Tokyo Stock Exchange (TSE), Japan Exchange Group, Inc. (JPX) has been a leading voice in the push for action on sustainability in Japan. In December 2017, JPX joined the UN Sustainable Stock Exchanges (SSE) Initiative, and in July 2018 we set up a Sustainability Committee to oversee all sustainability-related operations, headed by the CEO. Under the Committee's leadership, JPX has hosted and co-hosted multiple events and worked together with other organizations to encourage action on sustainability. As a starting point, we have been focusing on ESG information disclosure at listed companies, and as part of this, earlier this year we published a Japanese translation of the SSE's Model Guidance on Reporting ESG Information to Investors.

The SSE Initiative

The SSE Initiative was initiated by the UN Secretary General in New York ten years ago in 2009, and is a UN Partnership Programme of the UN Conference on Trade and Development (UNCTAD), the UN Global Compact, the UN Environment Programme Finance Initiative (UNEP FI), and the Principles for Responsible Investment (PRI). It aims to equip the world's stock exchanges with the tools needed to promote sustainable development among their listed companies and market participants, through guidance, in-depth policy analysis and creating a network for communication between its members. This includes an annual report on the progress of sustainability initiatives across the member exchanges, in-depth reports on how exchanges can support the SDGs (sustainable development goals), green finance, gender equality and other issues, a bi-annual "Global Dialogue" event, and other events such as Ring the Bell for Gender Equality, which takes place on International Women's Day every year at exchanges worldwide, including TSE.

SSE currently has 90 Partner Exchanges, who have declared support for the Initiative's goals and promise to actively encourage action on sustainability in their home markets. SSE's partners cover most countries in the Americas, Europe, Asia and Australasia, and a growing number of countries in Africa. In addition, 16 financial regulators from around the world, including Japan's Securities and Exchange Surveillance Commission, make up the SSE Regulator Working Group, which advises on the SSE's work from a regulatory perspective. There are also four "Observer Exchanges", which have no listed companies (e.g. derivatives exchanges) but actively work with the SSE to achieve its goal of sustainable and transparent capital markets.

Model Guidance on Reporting ESG Information to Investors

The Model Guidance that JPX has translated into Japanese was originally published by SSE in 2015, as a general guide for exchanges to give to their listed companies to encourage information disclosure on ESG issues. SSE regards sustainability (ESG) issues as crucial to the financial success of a company, impacting for example its risk management, brand value, recruitment, and attractiveness to investors. The number of investors including ESG in their investment strategies is growing fast, now including some of the biggest institutional investors in the world, and these investors are calling for better ESG disclosure from their investee companies. Publishing this kind of information can also help a company stay ahead of regulatory developments. Most importantly, setting clear progress goals through disclosure is likely to lead to improved performance on ESG factors and therefore improved financial performance in general.

The Guidance is split into five "Guiding Principles" that companies should follow when preparing ESG disclosure. First, the company should determine who has responsibility and oversight for ESG issues – preferably the Board of Directors, who should embed sustainability into their core duties. Second, the company should clarify what benefits they expect from publishing the information, and who their main audience is. Third, the company must identify what issues within the scope of ESG are relevant or "material" to their business, link these to long-term value, and decide on specific performance indicators by which to judge progress. Fourth, the company should decide on the mode of disclosure and how to make the information accessible to the desired audience. Finally, the company should make sure of the credibility of its disclosure, by building robust internal data collection processes, engaging with investors on an ongoing basis, and if possible, hiring outside assurers.

Encourage First-Time Disclosure

Principle 2.3 of the Japanese Corporate Governance Code states that companies should take positive and proactive measures to address sustainability issues. To add to this, Principle 3 of the Code was revised in June 2018 to clarify that ESG matters are included in "non-financial information" for reporting purposes. With this background, JPX hopes that more Japanese listed companies will begin to consider ESG disclosure, and that when they do, the Japanese translation of the SSE Model Guidance can help them to take the first step.