Japan's corporate governance code 'failing to address sustainability'

8 June 2016

Japan’s much-heralded new corporate governance code is failing to address sustainability in supply chains, according to a report.

The report by Rainforest Action Network (RAN) found that while the code – introduced amid much publicity in June 2015 – was having an impact on governance issues such as board independence, it was making little impact on sustainability.

RAN examined reports made under the code by 10 major Japanese companies with known links to tropical deforestation in their supply chains, trading divisions or financial relationships. All 10 companies reported attempts to address sustainability issues.

But RAN found these attempts varied in quality and were “generally inadequate relative to the environmental, social and governance risks associated with tropical forest-risk commodities”.

Despite a recent Tokyo Stock Exchange report, where 99% of firms claimed to be fully complying with these specific sustainability and stakeholder provisions, RAN found sustainability risks to be significantly under-reported.

All the companies analysed by RAN were exposed to supply chain risks including destruction of high conservation value forest, high carbon stock forest and conflict with local communities.

Yet none of these companies disclosed these risks in their corporate governance code report.

Meanwhile, none of them considered the impact of their supply chains on communities nor offered grievance mechanisms.

Only two forest sector companies, Sumitomo Forestry and Oji, reported some information on tropical forest risk supply chain policies.

Overall, the findings suggest many companies are systematically misreporting compliance with sustainability and stakeholder obligations or are failing to understand these obligations, said RAN.

And the corporate governance code itself facilitates this misreporting due to its ambiguity over what measures are “appropriate” in addressing sustainability issues and what non-financial information should be disclosed.

“Consequently, Japan’s corporate governance code does not presently enable shareholders or other stakeholder groups to have sufficient confidence in the corporate sustainability performance of Japanese companies,” said RAN.

It called for the code’s sustainability and stakeholder reporting obligations and guidance to be strengthened and clarified and for companies to urgently improve efforts to understand and address sustainability and stakeholder issues.

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