The Commonwealth Climate and Law Initiative says the country’s courts may take a stricter stance than other jurisdictions when assessing director duties
Japanese company boards need to be more proactive at integrating climate risks into governance practices, says research published by the Commonwealth Climate and Law Initiative.
The report draws attention to Japan’s Companies Act and civil code, under which company directors’ duties are set out.
The study argues the whole board is liable for overseeing how a company deals with climate-related risks, even if specific tasks such as climate disclosures are delegated to board committees.
If boards fail to act on climate, it puts them at risk of regulatory fines, financial losses and lawsuits, the researches say.
Companies operating in economic hubs such as Tokyo and Osaka are increasingly vulnerable to typhoons, rising sea levels and extreme heatwaves. Directors neglecting to seek expert advice on climate-related risk management and/or failing to exercise due care in respect of climate risks related to such extreme weather events, could be found by the courts in breach of their duty of care to act in the best interest of the company, warns the report.
Even though Japanese law allows directors wide discretion with respect to business decisions, the authors suggest Japanese courts may take a stricter stance than other jurisdictions when assessing director duties.
“Courts assess not only the process directors use to make decisions, but also apply an objective test to determine whether inaction was significantly unreasonable at the time,” says CCLI executive director Natalie Shippen.
Disclosure obligations under Japanese financial services law do not protect directors from liability for business decisions, meaning the legal risk for directors in cases of climate-related misrepresentation or omission is higher, she says.
Regulatory pressure
Other changes to climate regulations and frameworks in the country should also signal to companies the importance of better managing climate risks, says the report.
The Sustainability Standards Board of Japan is set to phase in mandatory disclosures of Scopes 1, 2 and 3 emissions gradually in the coming years, in accordance with International Sustainability Standards Board standards.
The country’s Climate Change Adaptation Act and the Act on Promotion of Global Warming Countermeasures likewise create regulatory expectations that all sectors of the economy integrate climate mitigation and adaptation measures into business strategy.
Further, while nonbinding, Japan’s corporate governance code similarly puts pressure on corporate directors to identify material environmental, social and governance risks.
You can access the full report here.
AloJapan.com