Fiduciary duties of directors in Japan

Introduction

Numerous weather-related disasters occurred around the world in the summer of 2026. The heatwaves in Europe in and floods in Nepal claimed many lives. These disasters have been linked to climate change. In Japan, localised torrential rains have caused severe damage in many regions.

As climate change continues to impact our lives, extreme weather events such as intense heat and heavy rainfall are expected to become more frequent. Companies engaged in a wide range of activities across society need to address their responsibilities of the impact of their company’s activities and on the environment.

This article raises the question, do directors have a legal duty to address the various risks posed by climate change?

Directors’ Legal Duties and Climate Change

Article 330 of the Companies Act provides that the relationship between a company and its officers, including directors, is governed by the provisions on mandates, because directors are entrusted by the company with its management. These provisions are found in the Civil Code. Article 644 of the Civil Code states that a mandatary (director) has a duty to “administer the mandated business with the care of a prudent manager.” This is known as the duty of due care and is understood as the degree of care ordinarily expected of a person in that position and those circumstances.

In addition, under the Companies Act, directors have a duty to perform their responsibilities faithfully for the company, to comply with laws and regulations, the articles of incorporation, and resolutions of shareholders’ meetings, and to establish and operate appropriate internal control systems for risk management. All of these duties require directors to act in the best interests of the company. Here, “interests” include not only short-term profits but also interests that support long-term sustainability.

It is prudent to therefore consider the relationship between these legal duties of directors and climate change.

Climate change is causing major impacts and damage to our lives and society. At every level—from individuals and local governments to nation states—we recognize both the effects and threat of climate change, while also acknowledging the need to respond.

Many companies in Japan have already identified various climate-related risks through their internal control systems and regard them as material risks. In the case of listed companies, this is clear from their disclosure documents. Their directors therefore already foresee climate-related risks. Accordingly, directors are expected to exercise due care in considering, in the company’s best interests, whether they can mitigate or avoid the company’s exposure to climate-related risks, or turn climate change into a business opportunity.

If directors fail to fulfil these duties, they may be liable to compensate the company for damages (Article 423 of the Companies Act). Where there has been bad faith or gross negligence, they may also be liable to third parties who suffer loss as a result (Article 429 of the same Act).

The “Business Judgment Rule”

However, liability for damages may not be automatically recognised by a court. reason is because if courts, which lack specialized experience and knowledge in business decision-making, hold directors liable based on circumstances that became known only after the fact, directors may become overly cautious in managing the company, potentially undermining the interests of the company and its shareholders.

Courts therefore allow directors broad discretion when making business judgments. Even if such a judgment causes loss to the company, the courts take the view that it does not constitute a breach of a director’s duty of due care “unless the process or substance of the decision is markedly unreasonable” (Supreme Court judgment of 15 July 2010). This is known as the “business judgment rule” and serves as the standard for assessing whether a director has breached the duty of due care in making a business judgment.

Even so, where directors fail to respond appropriately to climate risks, careful consideration is needed as to whether their business judgment will be respected under the business judgment rule. Although directors have discretion under this rule, it does not relieve them of the duty to obtain relevant information and make decisions on a reasonable and sufficiently informed basis.

A useful reference is the Tokyo District Court judgment of 13 July 2022, which ordered former executives of Tokyo Electric Power Company (TEPCO) to pay more than ¥13 trillion in damages in connection with responsibility for the 2011 accident at the Fukushima Daiichi Nuclear Power Station.

Case Study: The Fukushima Daiichi Nuclear Accident

In its judgment concerning the Fukushima Daiichi accident, the Tokyo District Court stated that nuclear power operators, whose accidents can cause catastrophic harm, have a social and public-interest duty to prevent severe accidents at all costs. If such an accident occurs, they may face enormous liabilities and a threat to their continued existence. The court found that a massive earthquake and tsunami had been foreseeable from government earthquake forecasts and other information with a reasonable degree of scientific reliability, prepared with the involvement of leading researchers in Japan. It held that postponing countermeasures was “markedly unreasonable” and found a breach of the duty of due care required of directors of a nuclear power operator.

The Tokyo District Court judgment was overturned on appeal and is now before the Supreme Court. Nevertheless, the fact that the court of first instance reached such a decision has major implications for companies and their directors. It shows that where a director’s business judgment produces serious consequences, application of the business judgment rule may be scrutinised strictly. A breach of the duty of due care may be found, and substantial liability for damages may follow. At a minimum, the judgment indicates that where a director departs, without special circumstances, from the assessment or judgment of internal or external experts or specialist bodies, the process and substance of that decision may be deemed markedly unreasonable and a breach of the director’s duty of care may be established.

While this case did not concern climate change, it offers useful lessons for how directors should respond to climate-related issues. Directors should gather information on climate risks and related matters grounded in scientific and technical knowledge, identify risks relevant to their company, assess their impact with respect to the company’s business, potential losses and the severity of possible harm, and formulate and implement necessary and reasonable response measures. To avoid breaching their duty of due care, directors must follow such a process in their day-to-day decision-making.

What ClientEarth’s is doing

ClientEarth Japan organizes events on directors’ duties in relation to climate change for corporate directors, sustainability professionals, investors, and others.

On the 28 August 2026, following a roundtable held in June this year, we co-hosted a webinar with the Japan Climate Leaders’ Partnership (JCLP).

At the webinar, Professor Yasuhiro Yamada of Ritsumeikan University’s College of Law and lawyers from ClientEarth Japan explained directors’ legal duties in relation to ESG matters, the duty of due care and governance, climate-change risks, and the importance of transition plans. More than 100 corporate representatives and others attended, and there was extensive discussion of topics including environmental litigation against companies and sustainability-related disclosure standards for companies to be introduced in Japan.

We will continue to convene events of this nature to keep the conversations going.

ClientEarth has also produced the “Practical Guide to Climate Leadership for Board Directors,” with support from the Asia Investor Group on Climate Change (AIGCC) and the Commonwealth Climate and Law Initiative (CCLI). The guide provides information to support directors’ decision-making on climate-related risks and opportunities. You can download the latest edition here.