The ESG landscape and next steps forJapanese companies
Vanessa Havard-Williams, Partner, Linklaters, London
James Marlow, Associate, Linklaters, London
Introduction

was reported to have provided $16.80 billion in coalproject funding between the start of 2017 and theend of the third quarter of 2019. Over the same
period Japanese organisations represented the top
three funding providers to new coal plants, giving
rise to the potential for further shareholder
resolutions in the near future should this trend
continue.

Environmental, social and governance (“ESG”)
considerations are rapidly becoming a focal point forgovernments, investors and companies globally, witha particular emphasis on climate risks. The Paris
Agreement of 2016 was a landmark agreement tocombat climate change and to accelerate andintensify the actions and investment needed for a
low carbon future.

Recognising that the focus on ESG is part of a global
shift embodied in part by the increased numbers ofclimate-related resolutions, this article provides an
overview of the developments in the global market
and sets out steps that Japanese financial
institutions and listed companies can take bothgenerally and to respond to the investor concerns
underlying the anticipated resolutions.

The importance of ESG for companies can be seen in
the figures reported by As You Sow, the Sustainable
Investments Institute and Proxy Impact in their
Proxy Preview 2020 report released at the end of
March 2020. This report indicated that in the US
alone 429 ESG-related shareholder resolutions werefiled for the 2020 proxy season, with nearly a third ofthese focusing on climate change and environmental
issues. This is an increase from the 366 in the same
period in 2019.

The ESG landscape – Legislative and regulatory
developments
EU and UK perspective
In the EU and UK, the ESG landscape is rapidly
developing as a new legislative framework dealing
with ESG issues is being put into place. As part of its
programme to fulfil Paris Agreement commitments,
the EU Commission adopted a sustainable financeaction plan (“Sustainable Finance Action Plan”) in
March 2018 which aims to: (i) reorient capital flows
towards sustainable investment to achievesustainable and inclusive growth; (ii) manage thefinancial risks stemming from climate change,
environmental degradation and social issues; and(iii) foster transparency and long-termism inThis trend is not just limited to the US either. In midMarch 2020, the Kiko Network, an activist investor,
filed the first shareholder resolution in relation toclimate change in respect of a listed Japanesecompany. The resolution calls on the company todisclose the climate-related risks facing the businessand to publish a plan on how it is going to align its
investments with the Paris Agreement, which looks
to set the world on a track of well below 2oC
temperature increase. The resolution comes
following a BankTrack report published in
December 2019 which revealed that the company

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financial and economic activity. To implement
several of the key actions announced in the
Sustainable Finance Action Plan, in May 2018, the
EU Commission adopted a package of legislative
measures (the “Sustainable Finance Package”)

mechanism. The proposed mechanism would work
to prevent the EU’s efforts to go climate-neutral by
2050 from being undermined by international
partners by placing a carbon price on imports ofcertain goods from outside the EU. This proposed
directive has just finished the ‘roadmap’ stage of the
EU legislative process which sought feedback on the
proposal from corporates, financial institutions,public authorities, NGOs and individual citizens
over a four week period. The proposal is due to go to
public consultation in Q3 2020. The potential impact,
if introduced, could be material for those companies
based outside the EU but with regular trade withthose in the EU. The net-zero 2050 target isenshrined in the EU draft Climate Act, which also
proposes a review of the European Commission’s
existing 2030 target of an at least 40% domestic
reduction in economy-wide greenhouse gas
emissions compared to 1990. The draft proposals
suggest considering reviewing the existing target
and setting a new 50% to 55% reduction goal by
September 2020, which could push further scrutiny
and tougher actions onto companies and financial
institutions.

The Sustainable Finance Package, formed of threedifferent regulations, is to be phased in over theperiod from 2020 to 2022. The regulations, which are
the Taxonomy, Disclosure and Benchmarks
Regulations, aim to impose ESG-related disclosure
obligations on financial institutions and listedcompanies to provide greater consistency and clarity
to evaluate which financial investments arecontributing to, and facilitating, sustainable
investment.
These regulations have been accompanied by asignificant number of other legislative measures,
again with a particular focus on the financial sector.
This includes: (i) MiFID II (Markets in Financial
Instruments Directive II), which affects European
asset managers and broker-dealers; (ii) AIFMD(Alternative Investment Fund Managers Directive)
and the UCITS (Undertakings for Collective
Investment in Transferable Securities) Directive,
which impacts fund managers; (iii) the Solvency II
Directive, which focuses on insurers and reinsurers;and (iv) the IDD (Insurance Distribution Directive),
the focus of which is on insurance distributors.
Further proposals on corporate reporting are in train.

This focus has been mirrored in the UK who, alongwith Italy, is due to co-host the COVID-19 delayed
COP26 in Glasgow in 2021. The Bank of Englandlaunched the agenda for COP26 at the end of
February 2020, making it clear that private financehas a role to play in supporting the whole economy
transition to net zero. Describing 2020 as a year that‘must be a year of climate action’, the Bank ofEngland set out that every professional financial
decision needs to take climate change into accountand that all companies, banks, insurers andinvestors will need to adjust their business models
for a low carbon world. The Bank of England has
been vocal in its support for climate-related action
and implemented a number of initiatives to assist
with the transition to a low carbon economy. This
includes its various stress test initiatives. The recent
COVID-19 outbreak has impacted on these slightly,
with the annual cyclical scenario stress test of theeight major UK banks and building societies being
cancelled for 2020. However the Bank of England

In June 2019, the EU Commission also adopted
guidelines on reporting climate-related information.
These guidelines supplement the existing guidanceon the disclosure of non-financial and diversity
information by, broadly, EU-listed entities, banks
and insurers with over 500 employees.
There are numerous other measures and initiatives
being put in place that incorporate ESG, fromprudential standards for the financial sector to
proposals regarding an EU Green Bond Standard
and a voluntary “EU Ecolabel” for financial products.
On a wider level, the EU’s Green Deal also contains
a proposal for a carbon border adjustment2

has not as yet paused its review of the responses tothe discussion paper on the climate risk biennial
exploratory scenario which tests the resilience of thebusiness models of the largest banks and insurers
and the wider financial system to climate-relatedrisks. It is proposed that the biennial exploratorystress test by the Bank of England would be
conducted based on the scenario framework of the
Network for Greening the Financial System(“NGFS”).It is possible that the Bank of England’s
methods could become the de facto standard for the
stress tests to be conducted by other jurisdictions’central banks/regulators. The Bank of Japan and the
Financial Services Agency of Japan (which are
members of NGFS) could follow the Bank ofEngland’s approach if they decide to introduce
similar stress testing in Japan. The Bank of Englandis expected to announce a way forward for thisexercise in Summer 2020.

that where companies disclose statistics or figures
they are not misleading. This point was highlighted
in the SEC’s most recent MD&A guidance and the
SEC has been undertaking some work in this area.
Firstly, they have been looking into how investment
advisers determine whether an investment is an
ESG investment and how that approach is to be
applied to making investments. Secondly, they havebeen asking for public comment on its ‘Names Rule’
which requires that if a fund’s name suggests a
particular type of investment, the fund must invest
at least 80% of its assets in that perceived type ofinvestment. The SEC are interested in views on how
this rule should apply to terms such as ‘ESG’ and‘sustainable’. This is potentially significant given the
expected substantial increase of inflows into ESG
funds and the challenges that may result fromhaving properly to diligence the status of suchinvestments.

United States perspective
In contrast, in the United States, there has been
little to no work on developing a comprehensive
regulatory framework for mandatory ESG-related
disclosures. The approach is instead that ESG
disclosures are made where the relevant company
decides that such disclosures are material to anunderstanding of the company’s business, would bereasonably likely to have a material effect on its
financial conditions and/or results of operations or
are a significant risk factor. The lack of action andthe path taken in the future will likely turn on theoutcome of the 2020 presidential election.

The ESG landscape – Voluntary initiatives andcorporate pressure
Absent engagement at the United States federal
government level, the pressure on companies withrespect to ESG disclosure has come mainly fromstate and local governments and private actors suchas asset managers, shareholders and proxy advisory
companies. This is a trend we expect to continue, atleast in the near-to medium-term.
The pressure from private actors on publiccompanies in the United States is largely comingfrom shareholders, including State public pensions,asset managers and private equity funds. In 2017,
shareholder proposals on environmental and social
issues surpassed the number of corporate
governance proposals for the first time and, in 2018,
Institutional Shareholder Services introduced theEnvironmental & Social Quality Score. In addition,
legislation is pending in several states seeking to
restrict the investment of public funds in fossil fuelcompanies. The world’s largest asset manager,
BlackRock, has announced that it will be placing
sustainability at the centre of its investment
approach going forwards. This stance includes the

Beyond the political will to change the landscape, atthe regulatory level the SEC itself has expressed nointerest in mandating ESG disclosures or addressing
the issues that exist regarding the lack of a uniform
definition of ESG. The SEC has indicated that it does
not want to impede the ‘marketplace evolution ofsustainability disclosures’, putting the onus oncompanies themselves to develop disclosures andtheir own practice in this area.
Despite this lack of engagement, however, the one
area where the SEC might take action is to ensure3

removal from its discretionary active investment
portfolios the public securities of companies thatgenerate more than 25% of their revenues fromthermal coal production. BlackRock has also said
that it will ask companies in which it invests todisclose climate-related risks in line with the Task
Force on Climate-Related Financial Disclosures(“TCFD”) and publish in line with the industryspecific guidelines issued by the Sustainability
Accounting Standards Board (“SASB”), in each caseby the end of 2020. Similarly State Street Global
Advisors have launched their new ‘R-factor’ rating
which is based on ESG metrics and has beendeveloped with reference to the SASB guidelines.
From the upcoming proxy season onwards, State
Street has announced it will ‘take appropriate voting
action’ against the board members of large
companies in which it invests should their businessfall behind industry peers based on this measure andcannot explain how they intend to improve theirperformance.

government announced in their Green Finance
Strategy that mandatory TCFD-reporting was to be
the aim for such companies by the end of 2022. The
consultation paper published by the UK’s Financial
Conduct Authority on 6 March 2020 set out
proposals to make TCFD reporting mandatory for
UK premium-listed companies in the first instance.
This may be extended to standard listed companies
in due course. The paper also sets out the FCA’s
interpretation of existing requirements as they may
be applied to climate change-related financial risks.

The ESG landscape – Shareholder action
As the BlackRock and State Street announcements
show, the shifting landscape and increased focus on
ESG issues has driven increased stakeholderpressure on companies. Across the United States,
UK and EU, a growing number of shareholder
resolutions addressing climate change are being
proposed, often seeking the publication of company
targets and/or strategies which are aligned to theParis Agreement or pushing the company to make
improved disclosures on climate-related risks andopportunities.

In the EU and UK, both the TCFD and (to a lesser
extent) SASB have become widely adopted reporting
standards. The TCFD, established by the OECD’s
Financial Stability Board in 2016 after the Paris
Agreement, provides for four pillars of reporting: (i)governance; (ii) strategy; (iii) risk management; and(iv) metrics and targets. The SASB guidelines areissued on the basis of a new industry-specificclassification system covering eleven sectors and 77
industries. The purpose of the system is to assist
companies seeking to identify the financiallymaterial sustainability issues reasonably likely toimpact the financial condition or operating
performance of the company.

Examples include the ‘Follow This’1 resolutions filed
against various energy companies in 2019. BP, Shelland Equinor were all targeted, as ‘Follow This’sought to push them to establish Paris Agreementaligned targets for greenhouse gas emissions. While
BP’s shareholders rejected the resolution, the Shelland Equinor resolutions both resulted in climate
targets being agreed with investors and BP
announced in February 2020 that it is aiming tobecome a net zero carbon company by 2050 or sooner.
This builds on the BP’s commitment to describe in its
reporting how its strategy is consistent with theParis Agreement goals, which was made as a resultof constructive engagement with the investor
participants of Climate Action 100+ 2 who also
proposed a resolution be put to shareholders at the

Many of the legislative initiatives at the EU and UK
level set out in the previous section above are serving
to make TCFD-style reporting a mandatory
requirement for listed companies, large asset owners
and some regulated financial institutions. The UK

1 Follow This was founded in 2015 as a campaign by responsible shareholders in oil and gas companies to get the biggest

industry players to set Paris-aligned targets for all emissions (Scope 1, 2 and 3).
2 Climate Action 100+ was launched in December 2017 as an investor initiative to ensure that the world’s largest greenhousegas emitters take necessary action on climate change.

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2019 AGM.
It should be noted that it is not just NGOs leading
the way on these resolutions. Institutional investors
continue to have a significant impact on corporate
practice in this area. While eight of the ten largest
asset managers (by assets under management) areheadquartered in the United States, the majority
also have sizeable European operations, bringing
them in-scope for the purposes of EU ESG
regulations. This will in turn impact the investee
companies in those firms’ portfolios, who will need tostart providing increased ESG-related disclosures.
Given the complex and intricate delegation
arrangements of asset managers and institutional
investors, the impact will not stop there. It is
anticipated that many will find it easier to manage
their global portfolios in order to ensure compliancewith EU and UK ESG regulations – that is, the EU
and UK ESG regulations may become the minimum
standard to which asset managers and institutional
investors hold themselves accountable on a global
basis.

Similarly, in the mining sector, following a Climate
Action 100+ resolution, Glencore has agreed to: (i)begin disclosing longer-term projections for emission
reductions; (ii) cap its coal production; and (iii) takesteps to align with the Paris Agreement. BHP also
faced a resolution that sought to secure thesuspension of its memberships in industry
associations undertaking lobbying, advertising
and/or advocacy activities inconsistent with theParis Agreement, although this was unsuccessful.
Most recently, shareholder attention has turned tofinancial institutions perceived as funding ‘dirty’
businesses. This includes a January 2020 resolution
filed by 11 of Barclays’ institutional investors seeking
the phasing out of the financing of energy sector andelectric and gas utilities companies not aligned with
the Paris Agreement target of limiting global
warming to 1.5oC. J. P. Morgan has also announced
this year that it will no longer advise or lend tocompanies that obtain the majority of their revenue
from coal extraction, amongst a number of otherclimate-related divestment initiatives, including
those announced by BlackRock, BNP Paribas AssetManagement and Norges.

The recent history of shareholder activism on ESG
matters demonstrates how far some shareholders
are willing to go and that they will no longer beplacated by companies making commitments that do
not translate into reality. As such, companies need tobe cognisant of the risk that such challenges(including legal action) could be brought on the basisthat companies are not holding themselves to thestandards they claim to have set themselves. This
may well lead to significant adjustments in strategic
approach to climate-related risk and opportunity
management.

The trend has been similar in the United States,
although the SEC has recently announced some
proposed changes to its proxy rules which would
make it significantly more difficult for shareholders
to advance any proposals, including those related to
ESG. These changes have been proposed by the SEC
as a result of the evolution over recent decades of
how shareholders engage with companies. The SEC
hopes the changes will “facilitate constructive
engagement by long-term shareholders in a mannerthat would benefit all shareholders and our public
capital markets”. The Sustainable Investments
Institute has reported that should these new
eligibility requirements be introduced, this would
mean that 614 ESG-related resolutions raised
between 2010 and 2019 could not be raised under the
new rules. This is three times as many as the 206
resolutions excluded under the current rules.

The ESG landscape – Litigation risk
Beyond the risk of shareholder activism, there is also
the increasing risk of ESG-related litigation beingbrought against companies.
This has been most notable in the United States,
where states and local governments andshareholders have initiated a number of climatechange-related lawsuits. These have faced
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numerous legal challenges and the trend is still in its
nascent phase. The impact and success of such
litigation should not only be measured insuccessfully argued claims, given the wider businessand reputational impacts of being involved in such
litigation. That is, a “win” at court is in many cases
not the primary (or only) objective of the claimant(s).
In the United States, lawsuits are progressing basedon a number of theories of liability, including public
and private nuisance, negligence, failure to warn,
trespass, unjust enrichment and violations ofconsumer protection laws.

Conclusion and next steps
Presently, Europe and the UK are leading the way
on ESG through the rapid and seemingly
revolutionary imposition of mandatory legal
requirements to align companies and financial
institutions with climate-related goals. While thepace of change in the United States at the federal
government level is lagging behind this rate ofprogress, the momentum to effect change is clearlyin evidence at the ‘grassroots’, stakeholder level,
whether that be in the boardroom or the courts. The
stepping up of key players in the globally dominant,United States-headquartered asset management
industry will drive changes similar to those being
legislated in Europe as they change their investment
criteria and impose new reporting requirements on
the companies in which they invest.

A similar trend is developing in the EU and UK, withvarious legal theories being used to advance claims
and challenge climate policy ambition and its
implementation by government agencies. This
includes litigation concerning the Dutch national
greenhouse gas emission targets, Germany’s
emission reduction record and its alleged impact on
the right to life, health, property and occupational
freedom and a recent claim challenging a UK
government decision to approve a large-scale gas
plant on the basis that the project is inconsistent
with the UK government’s 2050 net zero target. A
similar challenge was made, successfully, in relation
to the proposed expansion of Heathrow airport.

The global shift has been set and like climate change
itself, it is no longer a question of if but rather when,
where and in what format climate-related reporting
requirements will be manifested and felt mostacutely. The resolution filed against the Japanesecompany referred to at the beginning of this article
could represent the first step down the road forJapanese companies and industry, while theJapanese Stock Exchange has also released an ESG
Handbook with guidance on making ESG
disclosures, which it is worth Japanese listedcompanies reviewing and becoming familiar with.
In order to get ahead of and prepare for further
developments similar to those seen across the EU
and United States, Japanese financial institutions
and companies may wish to consider the following
steps.

This final category of claims, aimed at governmental
decisions, has the potential for a particularly
significant impact on companies and institutions
looking to undertake or finance energy or
infrastructure projects. Recent EU claims have also
taken this one step further, with claimants bringing
actions directly against companies. This includes
claims against a Polish power plant operator alleging
liability for damage to the environment and a major
French oil company for an alleged failure toadequately asses the threats posed to human rights
and the environment by oil projects in Tanzania andUganda as required under the French corporate
duty of vigilance.

Governance3
・Make sure ESG, and in particular climate change,
is on the board’s agenda and the directors are briefed
and up to speed on the relevant developments and

3 These governance measures are beginning to be tested in Europe by company auditors as audit functions in the major

accountancy firms attract regulatory scrutiny in respect of their approach to climate risk.

6issues (including, where necessary, procuringadvisory training).

Tokyo_ClimateChangeInitiative@linklaters.com.
（本文は JOI 機関誌「海外投融資」2020 年 5 月号に掲載した和文のオリジナル版です）

・Consider allocating responsibility to one director tolead on ESG and climate change issues.
・Consider whether ESG and climate change issues
should be incorporated into a (special) committee or
relevant department for reporting to the board.
・Start a timeline with some key milestones andperformance indicators.
Understanding the current position
・Establish a cross-disciplinary business team tohelp identify what measures need to be taken to
begin preparing for the anticipated developments
and to assess the organisation’s strength andweaknesses in different climate scenarios.
・ Identify what you already do and disclose inrelation to ESG issues, and in particular climatechange, that are salient to your business.
・Review your policies and procedures to identify thegaps compared with recommendations of leading
global or local initiatives e.g. TCFD and prioritise
resolving these gaps in terms of relevance,
importance and ease of delivery.
Stakeholder engagement
・Talk to key contacts at banks, finance providers,rating agencies and other relevant firms to get asense as to their approach to ESG issues, and inparticular climate change.
・Listen to investors about their expectations, theinformation they want and find useful and theirtimelines.
・Engage with other members of your industry andregulatory actors on those ESG-related areas ofconcern most relevant and urgent for your businessIf you have any questions about this article, pleasecontact us at:vanessa.havard-williams@linklaters.com
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