Japan strengthens ESG efforts with new code of conduct

Japanese regulator seeks to push the ESG agenda, spearheaded by GPIF, closer to the centre of investment calls. Code of conduct aims to ensure better data framework for assessing ESG.
Japan strengthens ESG efforts with new code of conduct

As Japanese investors, led by the Government Pension Investment Fund (GPIF), increase their focus on environmental, social and governance (ESG) factors, Japanese government bodies are also making a further push to increase the quality of these efforts.

On July 12, Japan’s Financial Services Agency (FSA) sent out a new draft code of conduct for ESG evaluation and data providers. The voluntary code advises investors to pay attention to the objectives and limitations of ESG data.

Chihiro Ashizawa,
Clifford Chance

"Focussing on fostering sustainable finance, the report mainly summarises the current issues and recommendations concerning ESG evaluation and data providers as well as investors and companies with the aim of ensuring that ESG evaluation and data are used reliably throughout the investment chain," Chihiro Ashizawa, counsel and head of capital markets at the Japanese branch of international law firm Clifford Chance, wrote in a comment to the code of conduct.

Among other things, the draft suggests that ESG data providers with Japan-based operations should ensure they have a sufficient number of qualified analysts while giving companies time to examine information for errors.

The proposed code will require data providers to “secure necessary professional human resources'' and “develop capacity building of human resources…even if individual employees do not necessarily have all the necessary expertise.” The ESG market is currently facing a shortage of skilled human resources, the code said.

The proposed code is a new move from FSA and is a response to the International Organisation of Securities Commissions (IOSCO) recommendations published last year. The organisation called for a tighter policing of data providers amid mounting concerns over a lack of transparency and potential conflicts of interest.

"The code of conduct is expected to be implemented as soft law and not as legally binding regulations. The in-scope dataproviders are not expected to become subject to monitoring by the authorities," Ashizawa wrote.

The call for comments to the draft code ends on September 5, 2022.


The world largest pension fund, the GPIF, has a large footprint in Japanese markets and is a juggernaut that helps to push the ESG agenda onwards in corporate Japan.

As of March 31, 2022, GPIF’s portfolio of Japanese equity was valued at ¥49.5 trillion ($371.8 billion), while the Japanese bond portfolio stood at ¥53.2 trillion.

As described in its annual report for fiscal year 2020, GPIF promotes ESG integration across all asset classes “in order to reduce the negative impacts of environmental and social issues and improve long-term returns on its entire investment assets.”

The pension fund works with the notion that to encourage companies to address ESG issues and disclose information proactively, it is important to help them deepen their understanding of the principles of ESG evaluation and index construction.

To promote such understanding, GPIF requests index providers to publicly disclose how they conduct an ESG evaluation and how they construct indexes, as well as to proactively engage with companies.

“As a result, dialogue between index providers and companies is increasing rapidly, which we hope to lead to an improvement in responses to ESG issues and information disclosure by Japanese companies,” GPIF wrote in the report.


The effect of GPIF’s drive to push the ESG agenda has trickled down among its Japanese peers and managers alike.

According to the results of the 2021 Sustainable Investment Survey conducted by the Japan Sustainable Investment Forum (JSIF), Japan’s sustainable investment balance was ¥514.5 trillion, an increase of 65.8%, or ¥204.0 trillion, compared to the 2020 survey.

The numbers include investments by GPIF, but also other large Japanese asset owners, such as insurers Dai-Ichi Life, Meiji Yasuda Life, and Sumitomo Life as well as the Pension Fund Association for Local Government Officials, better known as Chikyoren.

“ESG initiatives are being actively developed in Japan, and the failure to address these rapid and public-facing initiatives can lead to risk. In addition, like other markets, we are seeing a significant increase in ESG-related investments, from both domestic and international investors,” Clifford Chance wrote in the briefing "Insights into ESG in Japan” in February 2022.

Although the subsequent recovery of the global stock market did play a part in the high growth rate for 2021, this rate still exceeded 50% when adjusted to exclude this recovery, according to the JSIF survey. The ratio of sustainable investment assets to total assets under management (AUM) of the respondent institutions increased nearly 10%, from 51.6% in 2020 to 61.5% in 2021. In addition, the number of asset owners and asset managers included in the survey increased by five, up from 47 in 2020 to 52 in 2021.

By asset class, the balance of assets other than stocks grew considerably in 2021, continuing the trend from 2020. For instance, the investment balance for bonds increased year on year by 68.2%, to ¥302.9 trillion, when combining the balances of Japanese and non-Japanese bonds.

“Japanese companies are now even more aware of the importance of ESG and recognise that ESG is becoming a tool to obtain trust from all stakeholders, and developing policies and standards to incorporate ESG considerations into how they manage their investments and businesses, including their interaction with supply chains, employees, customers, public officials, and the general public,” stated the Clifford Chance Japan briefing.

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