As sustainability regulations evolve worldwide, Japan has taken a significant step in mandatory environmental, social, and governance (ESG) disclosures. These requirements, which align with global reporting frameworks, aim to increase transparency and corporate accountability. For U.S.-based companies operating in Japan, this shift has significant implications for compliance, reporting obligations, and strategic sustainability planning.

In this post, we’ll explore Japan’s new mandatory ESG reporting regulations, how they compare with global frameworks like the EU’s Corporate Sustainability Reporting Directive (CSRD), and how U.S. companies with operations in Japan can prepare for these changes.

Japan’s Mandatory ESG Reporting Requirements

Japan’s sustainability reporting framework is undergoing a transformation, primarily driven by regulatory bodies such as:

• The Financial Services Agency (FSA) – Overseeing financial and securities markets.

• The Tokyo Stock Exchange (TSE) – Regulating corporate governance.

• The Ministry of the Environment (MOE) – Setting environmental disclosure guidelines.

The country has already taken significant steps in mandatory sustainability reporting, aligning with international frameworks such as TCFD (Task Force on Climate-related Financial Disclosures) and ISSB (International Sustainability Standards Board). Below are the key regulatory requirements that U.S. companies need to be aware of:

1. TCFD-Aligned Climate Risk Disclosures

In 2021, Japan became the first country to mandate TCFD-based climate risk reporting for companies listed on the Tokyo Stock Exchange’s Prime Market. This applies to approximately 4,000 companies, including subsidiaries of foreign firms.

Key Requirements:

• Companies must disclose climate-related financial risks in annual securities reports (Yuho reports).

• Reporting must align with four key pillars of TCFD:

  1. Governance – Oversight of climate risks by corporate leadership.

  2. Strategy – Business impact of climate change and resilience planning.

  3. Risk Management – Identification, assessment, and mitigation of climate risks.

  4. Metrics & Targets – Emissions tracking, science-based targets, and carbon reduction plans.

Impact on U.S. Companies:

• U.S.-based companies listed on the TSE or operating through Japanese subsidiaries must integrate climate risk disclosures.

• Companies must align their climate risk assessments with Japan’s disclosure standards, which are closely tied to IFRS S2 under ISSB.

• Increased investor scrutiny will require clear climate mitigation strategies and emissions reduction pathways.
  
  

2. New Sustainability Reporting Standards: ISSB Adoption

Japan is transitioning toward full adoption of ISSB sustainability standards (IFRS S1 & S2), which emphasize climate and sustainability-related risks.

Key Requirements:

• Companies must disclose financially material sustainability risks and opportunities.

• Focus on GHG emissions reporting (Scope 1, 2, and 3).

• Comprehensive reporting on climate transition plans and net-zero targets.

Impact on U.S. Companies:

• Cross-border compliance pressure – If a U.S.-based company operates in Japan, it may need to harmonize ESG disclosures across regions.

• Companies that have already aligned with SEC climate disclosure proposals will find Japan’s ISSB-aligned framework easier to navigate.

• Increased demand for climate-related financial risk scenario analysis.
  
  

3. Corporate Governance Code (CGC) – ESG Integration

Japan’s Corporate Governance Code (CGC) has introduced new sustainability requirements for Tokyo Stock Exchange (TSE) Prime Market companies.

Key Updates:

• Board-Level ESG Oversight: Companies must include sustainability risks in governance structures.

• Diversity & Inclusion (D&I): Mandatory reporting on workforce gender diversity, pay equity, and social impact policies.

• Stakeholder Capitalism: Enhanced transparency on how businesses interact with communities, employees, and the environment.

Impact on U.S. Companies:

• U.S. firms operating in Japan may need to expand board governance structures to oversee ESG issues.

• Investors and regulators will expect greater transparency in diversity, equity, and inclusion (DEI) efforts.

• Aligning with Japan’s CGC may require adjustments to corporate reporting practices.
  
  

4. Japan’s Carbon Pricing Mechanisms

Japan has introduced a phased approach to carbon pricing, including:

• GX League (Green Transformation League): A voluntary emissions reduction framework that could evolve into a mandatory cap-and-trade system.

• J-Credit Program: A carbon credit system that allows businesses to offset emissions through verified carbon reduction projects.

• Upcoming Carbon Levy (2026): Expected introduction of a carbon tax on high-emission industries.

Impact on U.S. Companies:

• U.S. companies operating in Japan may need to purchase carbon credits or adjust supply chain emissions to comply with Japan’s carbon pricing framework.

• Firms with science-based targets (SBTs) and renewable energy commitments will have an advantage in meeting compliance obligations.

• Investors will scrutinize climate risk management strategies and low-carbon transition plans.
  
  

How Does Japan’s ESG Reporting Compare to CSRD & SEC Regulations?

What U.S. Companies Should Do Next

As Japan tightens ESG regulations, U.S.-based firms operating in the country must take the following steps:

1. Align Climate Risk Disclosures with TCFD & ISSB – Companies should assess climate risks, conduct scenario analysis, and disclose emissions reduction strategies.

2. Strengthen Board Oversight of ESG – Ensure that sustainability issues are included in governance structures and risk management frameworks.

3. Monitor Japan’s Carbon Pricing Evolution – Stay informed about GX League developments and potential carbon tax implementation.

4. Enhance Social & Diversity Reporting – Improve DEI data transparency to meet governance standards.

5. Prepare for Cross-Border ESG Compliance – Consider CSRD, SEC climate rules, and Japan’s ESG reporting standards when structuring global sustainability reports.

Conclusion

Japan’s mandatory ESG disclosure regulations mark a significant shift in corporate transparency, aligning with global sustainability reporting trends. For U.S. companies with operations in Japan, these changes require proactive compliance efforts and strategic ESG planning.

As regulatory expectations increase worldwide, businesses that integrate ESG into their corporate governance, climate strategy, and financial risk assessments will be better positioned for success in Japan’s evolving sustainability landscape. By taking early action, U.S.-based firms can remain competitive, ensure compliance, and meet growing stakeholder expectations in one of the world’s most dynamic markets for responsible business practices.