Asia corporate giants feel the heat
text size

Asia corporate giants feel the heat

Companies in Asia have been getting away with disclosing the bare minimum on managing the escalating financial risks due to climate change. But big international investors are ramping up pressure on Japan's three so-called megabanks Mizuho Financial Group, Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG) as well as one of the country's largest electricity producers, Chubu Electric Power.

The boards of these Japanese powerhouse companies have been under the spotlight as they faced world-first shareholder resolutions at annual general meetings this week, requesting disclosure on how directors are managing climate risk.

At the same time, companies across Asia and globally are feeling the heat from national regulators as new climate-related International Financial Reporting Standards (IFRS) known as IFRS Sustainability S2 are rolling out.

Implementing these new international sustainability standards is vital to improving the connection between climate reporting and financial reporting.

Markets from Australia to Hong Kong and Singapore are adopting new standards, forcing companies to be much more transparent on their emissions and how they are aligned with agreed global net-zero targets.

Japan's largest companies from banks, to the power and fossil sectors have all been failing to adequately disclose climate-related financial risks. Yet greater transparency is just around the corner as new sustainability standards are set to be adopted, forcing Asia's largest companies to reveal how they are aiding the transition to a net zero economy.

Corporate Japan is largely underprepared for new mandatory reporting to be overseen by the Japanese Financial Services Agency, even though the regulator is giving the companies until at least March 2027 to get their disclosures in order.

Make no mistake, the failure to disclose sufficient climate-related financial information represents failed corporate governance. This failure by company boards to be completely honest and transparent about how they are meeting their responsibilities to mitigate dangerous climate change is a calamity for humanity and a blight on their economic management.

Climate change is a global problem, and international companies are feeling the heat. The biggest companies in Europe and the United States are grappling with how to meet new disclosure requirements on climate-related risks.

Until now, woefully inadequate disclosure of climate-related financial risks has been led by sustainability or investor relations teams, with weak board oversight.

In fairness there has been an alphabet soup of global and national climate reporting initiatives, without consistency between multiple international and national standards. Mountains of climate reports have been disclosing minimal information to tick boxes rather than assist companies to make a genuine contribution to meeting global climate goals.

There is no doubt of the importance of providing sufficient information to the users of general purpose financial reports in making decisions. However, information disclosure ought to be a means to make positive change to companies in line with expectations by investors and customers rather than a compliance box-ticking exercise and an end in itself.

The new international sustainability reporting standards require companies to disclose expected changes they will make to their business models due to climate change, including on financial performance and cash flows over the short, medium and longer term. These changes challenge the very foundation of running a business.

Climate change is the biggest challenge we have ever faced and companies must be part of the solution. That's why investors and companies need to see strong oversight by the Board of Directors that have sufficient competencies in managing skyrocketing climate risks.

Japanese companies rank near the bottom on the disclosure of governance, way behind frontrunners Australia, Malaysia and India, among 12 markets in the Asia-Pacific region according to a recent report by the Asian Corporate Governance Association. It is a shameful result for an economy as advanced as Japan.

Investors need to be confident that companies' Boards have sufficient oversight of climate-related risks and opportunities. It's time companies come clean on how their board has contributed to its strategy and progress on transition to a net-zero economy. More investors are demanding to know the selection criteria of company directors, to assess how competent boards are to oversee climate-related risks and opportunities to overcome challenges faced.

Companies such as BP, Total, and Origin Energy lead the pack, disclosing more extended descriptions of why board members are selected and what they do to address climate change.

Amid greater investor and regulatory scrutiny, Japanese companies have tremendous opportunities to improve climate governance and maintain long-term corporate value as the world shifts toward a net-zero economy.

Now is the time for investors to intensify stewardship by engaging with companies to improve corporate governance for the sake of the climate and their financial bottom line. Investors must be firm and vote against directors unless they have what it takes to meet the greatest challenge of our lifetimes: climate change.

Sachiko Suzuki is Asia Climate and Energy Analyst, Market Forces. Dr Suzuki is a sustainable finance expert and has previously worked for the Japan International Cooperation Agency (JICA), posted in Southeast Asia.

Do you like the content of this article?