Practical Guide to Climate Leadership for Board Directors in Japan

Climate risk is an immediate, material and decision-relevant governance issue – and company board directors simply cannot afford to think otherwise.

In light of this, ClientEarth Japan has launched its latest toolkit to help directors sitting on the board of Japanese corporations to navigate their duties, stakeholder expectations and strategic responses.

This report is an up-to-date and holistic guide for company board directors to understand climate-related risks and opportunities, in relation to key regulatory obligations under the Japanese law. The Asia Investor Group on Climate Change (AIGCC) and the Commonwealth Climate and Law Initiative (CCLI) have supported the development of sections of this toolkit.

Legal considerations under Japanese law

As mandated by the Companies Act of Japan, board directors must act in their company’s best interests. These interests cover ‘long-term’ considerations, taking into account sustainability and climate-related risks and opportunities.

Beyond these obligations to the company and shareholders, directors must comply with the general practice of taking into account a wider range of stakeholders.

Directors have broad discretion in making business decisions under the Business Judgement Rule (BJR). However, if the decision-making process and/or the substance of the decision are grossly unreasonable, the BJR does not apply and that constitutes a breach of duty of care. To rely on the BJR, directors should take sufficient steps to obtain relevant information. Especially in the climate-related context, directors should identify, evaluate and manage climate-related risks and impacts on the company, and consider all possible options to implement appropriate measures to prevent damage to the company.

Beyond fiduciary duty: why climate leadership matter

• Japan’s national decarbonisation policy places large corporate emitters at its core. Directors cannot overlook that policy and regulatory environment are regularly evolving in this regard.
• Climate-induced impacts translate directly into asset damage, productivity loss, reduced insurance coverage and balance-sheet risks – all of which are material risks to business operations.
• To safeguard long-term values and business competitiveness, investors are entitled to expect meaningful engagement with boards through dialogue, reporting and proxy voting, in line with Japan’s Corporate Governance Code.

Practical response to climate-related issues

In fulfilling their fiduciary duties in the context of climate change, Japanese boards are expected to embed effective climate governance through the following best practices to support long-term value creation and regulatory compliance,

• Climate governance: boards are expected to put in place supporting structures at both board and management levels, with defined roles, reporting lines and coordination mechanisms.
• Climate-related disclosure: SSBJ Standards are now incorporated into the statutory Sustainability disclosure under the FIEA. They are becoming mandatory for companies on a rolling basis depending on their size.
• Transition plans: This is a road map showing how a company intends to achieve both value creation and decarbonisation. Transition plans must be aligned with mid-term management plans and business strategies.