We have been suffering under the Covid-19 pandemic for more than a year and a half while historic climate events are happening around the world. There have been unprecedented floods in Europe, ever-bigger heatwaves and wildfires in southern Europe and North America, and in Japan, the hottest ever Olympic Games was followed by widespread floods and landslides caused by record rainfall.
Responding to environmental change and ensuring sustainability are the most urgent challenges now facing companies. Japan Exchange Group, Inc. (JPX) believes that listed companies which work on these and other ESG issues will become more enticing to investors and therefore enhance their corporate value, improving the attractiveness of the market overall.
Under this philosophy JPX joined the Sustainable Stock Exchanges (SSE) Initiative in December 2017 and soon after created a Sustainability Committee to co-ordinate and encourage action on the key issues across the Group, with the CEO as chair and the COO as vice-chair.
Sustainability is an important part of JPX's current Medium Term Management Plan. It includes initiatives from the standpoint of market operator, such as strengthening Environmental, Social and Governance (ESG) product lineup and providing training and information on disclosure to listed companies, and from the standpoint of a listed company, such as strengthening disclosure, creating structures for governance of ESG issues, and carbon neutrality.
As a market operator
From the perspective of a market operator, JPX's sustainability efforts comprise three main areas: encouraging sustainable activities by companies, encouraging sustainable investment by investors, and taking part in international discussion.
For the first, JPX has been focusing mainly on information disclosure with the belief that quality information is the first step needed to start constructive dialogue with investors and other stakeholders, which leads to more action.
In 2015, JPX group company Tokyo Stock Exchange, Inc. (TSE) implemented the Japanese Corporate Governance Code, which includes ESG issues. In June 2021 the Code was revised to include further principles on sustainability. For example, it now asks that company boards develop a basic policy for sustainability initiatives and that Prime Market-listed companies make disclosures on environmental issues using the recommendations of the Task-Force for Climate-Related Financial Disclosures (TCFD) or an equivalent. JPX has also held a series of seminars to introduce and explain reporting frameworks and ESG data service providers/ratings agencies to listed companies.
In March 2020, JPX published the Practical Handbook for ESG Disclosure, which brings together issues that companies face when starting ESG disclosure and splits them into four steps that companies can follow as needed. To tackle the gap in understanding that existed between companies and investors over what investors were asking for, we incorporated institutional investors' perspectives which help to clarify what information is useful for investment decisions.
At the time there was also a lot of confusion over the multiple disclosure frameworks that were being promoted for use, especially where Japanese information was scarce. The Handbook introduces the main existing standards and frameworks, including TCFD, the Sustainable Accounting Standards Board (SASB) and the Japanese government's Guidance for Collaborative Value Creation, explaining the differences between them and how to use each one.
Having published the Handbook we knew that to maximise its effectiveness we would need to raise awareness and provide training to companies on its contents. In addition, we felt there was a need for more in-depth, hands-on and up-to-date information to build on and widen understanding of the contents of the Handbook on an ongoing basis.
The result of this was the JPX ESG Knowledge Hub, which launched in November 2020. The Hub is a platform where listed companies can access a variety of ESG investment and sustainable finance-related information in one place. Content is provided by a variety of related parties including institutional investors, regulators, the Japanese government, and other listed companies, and is updated on a regular basis. All content is in Japanese and is tailored to be helpful to Japanese listed companies specifically.
Listed company employees can also sign up to a mailing list to receive updates directly. And while the Hub is mainly aimed at listed companies, access is freely available to everyone so it also provides a good resource for other interested parties, such as individual investors wanting to discover more about sustainable investment, or academics and researchers looking into the subject.
In another initiative to encourage sustainable activity among listed companies, TSE works each year with the Ministry of Economy, Trade and Industry to publish lists of companies which are making proactive efforts in women's participation (Nadeshiko Brands) and employee health (Health & Productivity Stocks).
In the second area, encouraging sustainable investment, JPX offers products which enable investment taking into account ESG issues. These include indices which feature ESG factors in their calculation methodologies such as the S&P/JPX Carbon Efficient Index series, as well as ETFs and ETNs which follow ESG indices. We also provide a market for infrastructure funds which invest in renewable energy infrastructure, and a dedicated information platform for green and social bonds.
JPX also considers it an important part of our role as a national exchange to put forward opinions from the perspective of Japan, or even Asia, in international discussion on sustainable finance and related topics to make sure that diverse perspectives are taken into account. We do this partially through memberships of the World Federation of Exchanges (WFE) and SSE. We take an active role in the drafting of WFE and SSE guidance documents and contribute our opinions to joint consultation replies to international organizations, as well as submitting our own replies as a company. As a member of the International Integrated Reporting Council, we also join international debate on disclosure frameworks.
As a listed company
As well as acting as a bridge between investors and listed companies, a stock exchange which is also a listed company can take a leading role by improving its own sustainability. In April 2021, JPX created an official Sustainability Department (as part of the Sustainability Committee) and appointed an executive officer in charge of sustainability to further strengthen the governance of sustainability activities across the Group. We have also been enhancing our information disclosure on ESG issues over the past few years and plan to continue this in the future.
In support of the Japanese government's pledge to achieve net zero by 2050, and in line with its own Environmental Policy, JPX announced in July that it will switch 100% of electricity consumed by the Group to renewable energy by FY2024 and aim for carbon neutrality across Group companies on the same timeline.
This will be achieved not simply through the purchase of carbon credits, but also by using renewable energy, including eventually generating renewable energy through our own energy generation facilities. We are currently researching a number of options for this, and in the meantime, will be switching the electricity contract for the TSE Building main office this autumn.
JPX sees sustainability, from both market operator and listed company perspectives, as a key part of its strategy going forward and we will continue working on new initiatives as well as enhancing the existing ones.
The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.