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Policy Proposals  Business Law Comments on ISSB Exposure Drafts
"IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information" and "IFRS S2 Climate-related Disclosures"

July 29, 2022
Global Strategy Task Force on ESG Disclosure
Committee on Financial and Capital Markets

To: International Sustainability Standards Board (ISSB)

Keidanren (Japan Business Federation) is Japan's largest comprehensive economic organization with a membership comprised of approximately 1,500 representative companies in the nation across all sectors including manufacturing, financial services, the service industry, distribution, construction, and transportation. Many of Keidanren's members are raising and managing funds in both domestic and global markets.

Since the establishment of the IFRS Foundation, Keidanren has consistently supported the activities of the foundation and contributed to the development and dissemination in Japan of IFRS through personnel support, financial support through Japan's Financial Accounting Standards Foundation, and the submission of comments to the International Accounting Standards Board, among other efforts.

Amid an increasing demand from capital markets and their investors for the disclosure of sustainability information centered on climate change issues, the timely initiative to establish the ISSB under the IFRS Foundation for the purpose of advancing development of internationally uniform sustainability standards has been well received.

Japan also sees an increasing number of corporations that are actively engaged in the disclosure of their sustainability information centered on climate change issues. As of June 24, 2022, the country has 962 companies and institutions that have announced their support to the Task Force on Climate-related Financial Disclosures (TCFD), which is the largest number in the world. In addition, all businesses listed on the Tokyo Stock Exchange's Prime Market are required, under Japan's Corporate Governance Code, to disclose information based on the TCFD recommendations or an equivalent framework. Moreover, Japan's Financial Services Agency has firmed up its policy requiring the disclosure of material sustainability information for companies in securities reports.

It is in this way that Japan's public and private sectors are both making concerted efforts to promote the disclosure of sustainability information. We intend to actively contribute to the development of ISSB standards by utilizing the knowledge we have gained through these efforts.

In the following General Comments section, we explain our fundamental stance concerning the development of internationally uniform sustainability standards. Then, we present our opinions on the Exposure Drafts IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information ("General Requirements Exposure Draft") and IFRS S2 Climate-related Disclosures ("Climate Exposure Draft").

General Comments

We support the ISSB's intention of developing standards that, being a "global baseline," can be accepted globally and that lead to the development of internationally uniform sustainability standards, and believe it is important that this intention be fully reflected in the standards.

Given this, we believe the following points are particularly important:

  1. The general requirements standard should be flexible so that it can be widely accepted, based on the premise that there is a diversity of disclosure systems and related legal systems among countries and jurisdictions, and that the degree of maturity of sustainability information disclosure also varies.

  2. In the general requirements standard and standards by topic, the ISSB should clarify the objective of disclosure and keep disclosure requirements that obligate common disclosure to the minimum necessary content. For other items, entities should be able to make their own determination of content for disclosure based on the industry to which they belong and the unique circumstances of the entity making the disclosure. To this end, the standards should be principles-based, not rules-based.

  3. To achieve points 1 and 2 above, the ISSB should thoroughly scrutinize what disclosure items are truly necessary for users (how do users evaluate each disclosure item and use it for analysis) and whether the cost burden on disclosing entities is excessive.

Looking ahead to finalizing the standards based on the General Requirements Exposure Draft and Climate Exposure Draft so that ISSB-developed standards will be adopted globally, we strongly urge the Board to pay careful attention to the comments of market participants and implement necessary revisions to ensure content that is acceptable to each jurisdiction.

Based on such recognition, we present our specific opinions.

General Requirements Exposure Draft

1. Overall Application of General Requirements (Questions 1, 7, and 12)

  • Although paragraphs 51 and 54 state that an entity or management "shall consider" standards other than IFRS Sustainability Disclosure Standards, it is undesirable to stipulate that entities shall consider standards that have not been subjected to due process by the ISSB. If the ISSB seeks references to external standards, such standards that it decides upon as references should be clearly stipulated in IFRS Sustainability Disclosure Standards, following a due process adhering to that used in the development of IFRS Sustainability Disclosure Standards. We do not reject references to external standards, but rather believe that references to external standards are important to achieve sustainability information disclosure tailored to each industry, and that it is essential to incorporate them into standards after the ISSB has performed appropriate evaluation.

  • In addition, primarily in consideration of determining disclosure items based on a principles-based approach and the practical burden imposed on entities, we believe the disclosure topics in the industry-based Sustainability Accounting Standards Board (SASB) Standards and the Climate Disclosure Standards Board (CDSB) Framework application guidance, which are specified in paragraphs 51 and 54, should only be available for reference and consideration, rather than making consideration mandatory.

  • In cases where the items required to be disclosed under IFRS Sustainability Disclosure Standards are trade secrets or confidential matters of the reporting entity or value chain (business partners, etc.), the disclosure will be difficult. Accordingly, it should be clearly stated in the general requirements standard that, in such cases, the entity is excused from disclosure (deemed to satisfy the disclosure requirement) by stating to the effect that it is difficult to disclose.

2. Objective of Disclosure and Materiality (Questions 2 and 8)

  • It is stated that the objective of disclosing sustainability-related financial information is to "require an entity to disclose information about its significant sustainability-related risks and opportunities that is useful to the primary users of general purpose financial reporting when they assess enterprise value and decide whether to provide resources to the entity." We agree that the anticipated users are "primary users" and that the objective of information disclosure is "to assess enterprise value."

  • Sustainability should be clearly defined. Despite there being a certain explanation of the concept of sustainability in paragraphs BC30 and BC31, that by itself does not clarify the scope of sustainability.

  • Although significant is an important term that sets forth the scope of sustainability-related risks and opportunities disclosed by an entity, it is not defined. A clear definition of significant is needed, as variations in interpretation of the requirements are likely to occur.

  • The General Requirements Exposure Draft calls for the disclosure of material sustainability information that contributes to the objective of disclosure. Whereas it states that "materiality is an entity-specific aspect of relevance" in paragraph 58 and leaves the decision to the disclosing entity, it is necessary to further enhance the Illustrative Guidance by providing examples of the decision-making process, etc., in order to contribute to disclosure practice.

3. Core Content of Disclosures (Question 4)

  • In the absence of specific standards, it is unclear whether core content disclosure is effective for sustainability issues that are different from climate change (e.g., human rights). Therefore, before finalizing the standard based on the General Requirements Exposure Draft, and in light of the stipulation of paragraph BC43, namely, "The core content provides structure for the requirements, and are not intended to indicate that information must be reported in any specific order or prescribed format," the effectiveness of core content-based disclosures for representative sustainability items other than climate change should be verified by conducting a trial of the disclosures.

  • Although paragraph 13(a) requires the disclosure of "the identity of the body or individual within a body responsible for oversight of sustainability-related risks and opportunities," it should be clarified that the identification of individuals be stated only if there is no applicable governance body.

4. Scope of Reporting Entity (Question 5)

  • Paragraph 37 states, "An entity's sustainability-related financial disclosures shall be for the same reporting entity as the related general purpose financial statements. For example, if the reporting entity is a group, the consolidated financial statements will be for a parent and its subsidiaries." However, from the perspective of ensuring the feasibility of disclosure, it should be clarified that, at a minimum, a reporting entity may exclude subsidiaries that are immaterial from the perspective of sustainability information disclosure (e.g., companies with insignificant greenhouse gas [GHG] emissions when making climate-related disclosures) from the entity's sustainability-related financial information. In addition, since there may be cases in which subsidiaries are located in regions where it is difficult to collect sustainability-related data in a timely manner, it should be made possible to apply the provisions of paragraph 37 in a phased manner.

  • For the following reasons it is difficult to consistently apply the requirement to "disclose information about sustainability-related risks and opportunities related to activities, interactions and relationships, and to the use of resources along its value chain." The scope of the value chain to be disclosed and the content of the disclosures should be limited in light of the entity's capacity. The treatment of cases where disclosure is difficult should be clarified so that entities can appropriately determine the scope and content of disclosure.

    • It is difficult to collect necessary information in a timely manner from associates, business partners, etc. over which the entity has no control.
    • Information about business partners may be a source of competitiveness for the disclosing entity, and disclosure of such information may detract from enterprise value.
    • If a business partner's information contains sensitive information or trade secrets, disclosure of such information would undermine the enterprise value of the business partner, and the disclosing entity would be at risk of litigation.

5. Timing of Reporting and Location of Information (Questions 9 and 10)

  • It is problematic to rigorously require that an entity's "sustainability-related financial disclosures shall be for the same reporting period as the financial statements." It should not be required that reporting periods be strictly simultaneous, so that entities can make disclosures according to their circumstances such as the disclosure systems and legal regimes of each country and the fiscal periods of overseas subsidiaries. For example, the following exceptions should be allowed with flexibility:

    • Accept differences in the fiscal period of the reporting entity's subsidiaries (e.g., allow the use of data from the reporting period of the subsidiary that is closest to the parent company's fiscal period).
    • In cases where the acquisition and compilation of necessary data cannot be completed by the reporting date of the financial report due to practical constraints including domestic and foreign legal systems, permit the disclosure of data in a separate medium afterwards, and the performance of cross-references.
  • With regard to the location of information, the "on the same terms and at the same time" requirement should be relaxed to allow flexibility in the use of cross-references. Since integrated reports and sustainability reports, which can be considered as cross-references, are expected to be disclosed after statutory disclosure documents, cross-references to such voluntary disclosure documents should also be allowed with flexibility.

6. Restating Comparative Information (Question 11)

  • A restatement of comparative information is required in cases where there has been a more appropriate measurement of metrics. However, there would be an enormous practical burden placed on an entity to restate all the information associated with, for example, scenario analysis and GHG emissions (particularly Scope 3 emissions), given expectations that those measurement methods will be updated and the accuracy of the numerical values will increase year by year. It should be sufficient to describe in qualitative terms to the effect that the measurement method has been updated, for instance.

7. Effective Date (Question 13)

  • The General Requirements Exposure Draft and Climate Exposure Draft call for a vast array of disclosure requirements. We believe that disclosure that considers the needs of information users cannot be achieved without, at least, entities (1) accurately understanding disclosure requirements, (2) identifying material disclosure items through dialogue with information users, (3) establishing internal systems, including the infrastructure for data collection for this purpose, and deploying such systems to subsidiaries etc., and (4) conducting trial disclosures and making improvement.

  • Therefore, we believe that a sufficient period (e.g., 2-3 years) is needed from finalization of the standards to their application, depending on the content of the finalized standards. Having stated that, entities wishing to apply the standards earlier should be permitted to do so.

Climate Exposure Draft

1. Objective (Question 1)

  • To achieve the objective set out in paragraph 1, a principles-based approach to standard design should be adopted. Therefore, the finalized standard should provide for flexible disclosure based on an entity's judgment of materiality in light of the disclosure objective, rather than detailed disclosure provisions.

2. Governance (Question 2)

  • The purpose of disclosure is understood, but the disclosure provisions in paragraph 5 are too detailed. For example, whereas subparagraph (a) requires the disclosure of "the identity of the body or individual within a body responsible for oversight of climate-related risks and opportunities," it should be clarified that the identification of individuals be stated only if there is no applicable governance body.

3. Strategy (Questions 3-7)

(1) Identification of Climate-related Risks and Opportunities
  • As already indicated in our comments on the General Requirements Exposure Draft, the definition of significant should be clarified.

  • In identifying climate-related risks and opportunities, there is need to consider the application of disclosure topics that are defined with industry-based disclosure requirements. However, the industry-based disclosure requirements in Appendix B, which are based on the SASB Standards, may not suit situations in different countries or actual conditions in entities. If consideration of disclosure topics application is required, then disclosure topics that are highly versatile and that can be utilized in each country and jurisdiction should be developed with full consideration of the opinions of preparers and users.

(2) Disclosure of Climate-related Risks and Opportunities in an Entity's Value Chain
  • It is difficult to collect necessary information in a timely manner from associates, business partners, and other points in the value chain over which the entity has no control.#1 Moreover, as it is possible that such information contains trade secrets or sensitive information, there are many cases where disclosure is problematic. Consequently, the scope of the value chain to be disclosed and the content of disclosures should be limited in light of the entity's capacity. For that reason, there should be clarification of how to handle cases where disclosure is difficult.

  • We agree with the stance that the disclosure of such information "should be qualitative rather than quantitative."

(3) Transition Plans and Carbon Offsets
  • A legacy asset is defined as "an asset that has remained on an entity's statement of financial position for a long period of time and has since become obsolete or has lost nearly all of its initial value." The term should be more clearly defined, such as by clarifying whether it refers to an asset for which an impairment loss has been recognized for accounting purposes. In addition, the disclosure should be required only if an entity deems such asset is material to its business activities, instead of being uniformly required. Another concern is paragraph 13(a)(i)(1), which states that plans regarding legacy assets required for disclosure include "strategies to manage carbon energy- and water-intensive operations, and to decommission carbon-energy- and water-intensive assets." This statement gives the inaccurate impression that "carbon energy- and water-intensive operations" that presently have an economic value are included in legacy assets, and thus not suitable. This is also an inappropriate statement from the perspective of promoting a transition strategy that will be important toward achieving carbon neutrality in 2050.

  • The disclosure of transition plans is certainly important, but the disclosure requirements in paragraph 13(a) exceed the granularity of the TCFD recommendations and include content that could be considered trade secrets, such as expenditure on research and development. We therefore have concerns about the feasibility of such disclosures in practical terms. Transition plan disclosures should remain within the scope of the TCFD recommendations.

  • We understand the importance of information on carbon offsets when entities use them, and the disclosure requirement in paragraph 13(b) is reasonable. On the other hand, there is also the opinion that as carbon removal technologies for carbon offsets are not yet well established, it is premature to include measures and technologies in transition plan goals if uncertainties exist regarding their utilization. Consequently, for entities that have not yet decided to use carbon offsets, disclosure to that effect should fulfill disclosure requirements.

(4) Current and Anticipated Effects
  • Since climate change risks fluctuate over a long-term span, it is difficult to understand and analyze their direct and indirect effect. Even when calculating the effect, just a slight change in assumptions is expected to result in significantly different figures.

  • For this reason, some entities may find it difficult to quantitatively disclose, with figures that are reliable and objective, "the effects of significant climate-related risks and opportunities on its financial position, financial performance and cash flows for the reporting period, and the anticipated effects over the short, medium and long term" as required in paragraph 14. Consequently, we agree with requiring that "an entity shall disclose quantitative information unless it is unable to do so," and "if an entity is unable to provide quantitative information, it shall provide qualitative information."

  • If quantitative disclosure is required, guidance on the "short, medium, and long term" timeframes, assumptions, and calculation methods, among other matters, should be provided.

  • Concerning the disclosure required in paragraph 14(b), namely, "information about the climate-related risks and opportunities . . . for which there is a significant risk that there will be a material adjustment to the carrying amounts of assets and liabilities reported in the financial statements within the next financial year," we believe that this information is encompassed in the information required by IAS 1, paragraph 125. If entities that have already adopted IFRS are required to disclose any additional information, such information should be clarified in paragraph 14(b).

(5) Climate Resilience
  • We agree with requiring that, in the event an entity is unable to use climate-related scenario analysis, it may use an alternative method (e.g., qualitative analysis) to assess climate resilience, and disclose the reasons for doing so. Guidance, etc., should be provided regarding examples of disclosures when each analysis method is utilized.

  • With regard to climate-related scenario analysis, scenarios should be tailored to the actual conditions of each entity, but it is preferable that assumptions not unique to each entity (e.g., typhoon occurrence rates, flooding rates, etc.) and calculation methods be uniform, and guidance or other means should be available.

4. Risk Management (Question 8)

  • We basically agree. However, unlike the TCFD recommendations, the Climate Exposure Draft also requires disclosure of risk management pertaining to opportunities; therefore, examples of required disclosures should be provided.

5. Metrics and Targets (Questions 9 and 11)

(1) Seven Cross-industry Metric Categories
  • In regard to Scope 1 and Scope 2 GHG emissions, calculations should be limited to disclosures covering material consolidated entities; and disclosure of gross CO2-equivalent emissions should be required, excluding disclosures of associates, joint ventures, unconsolidated subsidiaries, and affiliates.

    • For Scope 1 and Scope 2, obtaining pertinent data in a timely manner from associates, joint ventures, unconsolidated subsidiaries, and affiliates that are not controlled by the reporting entity will pose a notable burden on the preparer. In addition, there is a concern that forcing the submission of data could lead to an abuse of a dominant position, which could create compliance issues.
    • Since consolidated entities also include entities that do not have significant GHG emissions, it should be clarified that, from a cost-benefit perspective, immaterial subsidiaries can be excluded from the calculation of GHG emissions.
  • Scope 3 disclosures should not be uniformly enforced under the current circumstances for the reasons enumerated below. On the other hand, for entities for which Scope 3 disclosures are material and that have accumulated expertise in Scope 3 measurement, etc., voluntary disclosure should be encouraged. Based on this, there should be careful consideration of mandatory Scope 3 disclosures after having made a close examination of the future development of calculation practices, the usefulness of the disclosure, and other matters. Even when disclosure is required, it is appropriate to expand the scope (category) in a phased manner.

    • It will take considerable time and effort to establish a mechanism to measure and collect the data necessary to make Scope 3 disclosures, and to request information disclosure that secures reliability and comprehensiveness.
    • A simple comparison of GHG emissions is difficult as they involve much estimation and each calculating entity has a different calculation method owing to the absence of a uniform standard for measuring those emissions.
    • Due to the ambiguity of the locus of responsibility for Scope 3 GHG emissions arising from the so-called double counting issue#2, the significance of disclosure (usefulness and utilization method for investors) needs to be sufficiently clarified.
  • As for transition risks, physical risks, climate-related opportunities, and capital deployment, the definitions of these items are ambiguous and it is difficult to make comparisons of numerical values; therefore, at this stage, disclosure should be required only if an entity deems it material to its business activities. We would like to request the development of guidances both on criteria to make decisions in such cases and on calculation methods.

  • Internal carbon prices and remuneration (executive management remuneration linked to climate-related considerations) are not necessarily being introduced to all entities. In addition, users found them less useful than other metrics according to the TCFD public consultation results published in October 2021. Moreover, the ways internal carbon prices are used vary depending on the entity, making simple comparisons between entities difficult. Therefore, at this stage, disclosure of internal carbon prices and remuneration should be required only if an entity deems it material to its business activities. Criteria should also be provided as guidance when making such decisions.

(2) Industry-based Disclosure Requirements
  • The industry-based disclosure requirements in Appendix B, which are based on the SASB Standards, are often not in line with the situation in each country and the actual status of entities. Therefore, with the current content, disclosure of industry-based metrics should not be required. There should be a reconsideration for flexible industry-based disclosure requirements that are broadly applicable to entities in each jurisdiction. For example, the following should be considered:

    • Develop examples of highly generic industry-based metrics that can be applied by entities in a wide range of jurisdictions, rather than specific jurisdictions, and that users will greatly need, by taking full consideration of the views of preparers and users; based thereon, each entity selects metrics to be disclosed in light of materiality.
    • Rather than presenting specific industry-based metrics, indicate the objective (intent) of the metrics sought; based thereon, each entity determines and discloses metrics that are in line with this objective.
  • Note that industry classifications based on the SASB Standards are not necessarily consistent with the industry classifications of each country. It is also unclear how entities with multiple businesses would select the industry category. What highly generic industry classification should be like needs to be reexamined so that the industry classification chosen by entities will be clear.

  • Many industry-based disclosure requirements call for metrics related to water management. We understand that one of the causes of water scarcity is the issue of climate change. Nevertheless, water scarcity is caused by multiple factors, not just climate change, and water scarcity itself is an important sustainability issue. This standard should propose disclosure requirements directly related to climate change issues; and as such, it is not desirable to require disclosures about water management, which is also related to other topics.

6. Effective Date (Question 14)

  • Same as stated in "7. Effective Date" of the General Requirements Exposure Draft section above.

  1. For example, one opinion is that "in the manufacturing industry, it is possible to assume the identification of, and a certain degree of control over, suppliers and other upstream supply chain players; however, for consumer products with no after-sales service, it is no easy matter to track and control the downstream commercial flow, including wholesalers and purchasers."
  2. Double counting is an issue that arises when an entity belonging to the value chains of various companies has its GHG emissions counted against the Scope 3 GHG emissions of those companies.

Business Law