The Expert Panel on Sustainable Finance, set up by the Financial Services Agency to discuss the issues surrounding the role of the financial industry in contributing to Japan's carbon neutrality target, published its recommendations in June. Tokyo Stock Exchange was a member of the Panel. This article summarizes those recommendations.

In October 2020, the Japanese Prime Minister announced that Japan would aim to achieve carbon neutrality by 2050.  That December, the Japanese Financial Services Agency (FSA) established a new study group, the Expert Panel on Sustainable Finance, to discuss the issues and possible policy approaches surrounding the role of the financial industry in contributing to this goal.  The Panel was tasked with producing recommendations which the FSA would then refer to in policy development.

The Panel included 17 experts from across the industry, including a representative from Tokyo Stock Exchange, while the Ministry of Finance, Ministry of Economy, Trade and Industry, Ministry of the Environment, and the Bank of Japan took part as observers.  These members met (virtually) eight times between January and June 2021, and the Panel released its report on June 18, with an English translation published later.  Below is an overview of the Panel's recommendations.

The Panel identifies a number of overarching issues that are important to consider when discussing sustainable finance.  Firstly, it is recognized that concerns over fiduciary duty have in the past prevented ESG from being utilized as an investment strategy, but the Panel explains that current wisdom in Japan allows, or even encourages, investors to take ESG factors into account as a means of fulfilling fiduciary duty.  Secondly, the Panel would like to see further discussion on how issues around impact investment can be solved and how such strategies can contribute to sustainable finance.  Thirdly, while it is understood that a taxonomy for green activities could have potential as a policy tool, the Panel recognizes several issues that would hamper the effectiveness of such a tool, and recommends that international trends in this area should be observed before any action is taken.  On the topic of transition, the Panel recommends that the government's planned transition roadmaps should have enough transparency and credibility to serve as a model internationally, and that information disclosure from companies should be enhanced and should comply with international frameworks such as TCFD.

With an understanding of these overarching issues, the Panel gives recommendations in three main areas: 1) promoting corporate disclosure, 2) using capital market functions to provide investment opportunities, and 3) climate risk management at financial institutions.

1) Corporate disclosure

The Panel states that investors are only able to incorporate ESG factors in investment decisions when they have sufficient information disclosure from companies.  On wider sustainability-related disclosure, the Panel recommends that Japan proactively contributes to the formulation of global unified sustainability disclosure standards by the IFRS Foundation, with the understanding that comparable disclosure is necessary, but also that enough flexibility is needed to reflect variation of countries and industries.  On climate-related disclosure, the Panel recommends the continued encouragement of enhanced disclosure based on TCFD, but also recognizes the need for continued discussion on whether this should be included in statutory disclosure documents.

2) Capital market functions

The Panel asserts that attracting the listings of sustainability-related bonds and funds would contribute to the funding of decarbonization, and specifically recommends a mechanism should be developed that objectively certifies the eligibility of bonds claiming to be ESG-related.  The Panel also gives recommendations on the roles of each capital market player.

For institutional investors, the Panel recommends that they should actively participate in international initiatives in order to accumulate expertise in ESG issues, and that the government could consider a framework for supporting this kind of participation.  For retail investors, the Panel recommends that as there are no common criteria for selecting stocks for ESG-related funds, providers and distributors of investment trusts which include "ESG" or "SDGs" in their names should use concrete metrics to explain to customers how the product fits this description.  It also encourages the FSA to examine business practices in this area and work to provide education for retail investors on sustainable finance.

On the topic of ESG ratings and data providers, the Panel points out a number of issues including a lack of transparency of evaluation methods and the possibility of conflicts of interest.  It recommends that as well as improvements made by the providers themselves, Japanese companies should try to disclose in a way that enables these providers to use the data more easily, and that the FSA should promote discussion on a code of conduct that providers should follow, as well as contributing to international discussion on the topic.

For the exchange, the Panel recommends that it should enhance its provision of information for both investors and companies; specifically, information on ESG bonds, information and training on ESG for investors and companies, and provision of ESG indices.

3) Climate risk management at financial institutions

The Panel stresses the importance of financial institutions incorporating sustainability-related opportunity and risk perspectives, especially climate-related risks, into their strategies and risk management when carrying out investment and loan decisions.  The Panel recognizes that financial institutions may need to continue financing conventional activities while working on new finance to enable a smooth transition.  It also encourages financial institutions which are promoting climate-change measures in their investee companies to develop the right know-how and skills to help them carry out these measures.  To support this, the Panel encourages the FSA to work on guidance for financial institutions on climate-change measures.

On risk management, the Panel recommends that financial institutions integrate climate risks into their existing risk management frameworks, and that the FSA creates guidance on its supervisory expectations based on the guidance given by the Network for Greening the Financial System.  It also recommends that the FSA continues discussions with financial institutions on the use of scenario analysis, including perhaps creating a common scenario that can be used.


Taking into account these recommendations, in August the FSA published its Priorities for July 2021 – June 2022, which included to promote disclosures in line with TCFD and discuss with financial institutions regarding climate risk management and creating ESG-related value through financial services.  The Panel also met again on September 22 to discuss the practical implementation of its recommendations and plans to continue holding meetings where necessary.  In collaboration with the FSA, JPX will make every effort to contribute to the implementation of the Panel's recommendations going forward.