Marsha Vande Berg's Sustainability Stars: With Norio Masuda, Senior Manager, Hitachi Ltd.

(Marsha Vande Berg is director of MJGlobal Insights, a resource for corporate and fund decision-makers when shaping their dynamic sustainability stakeholder narratives. The former CEO of the Pacific Pension & Investment Institute, Marsha has worked with pension executives worldwide. A Stanford University Distinguished Careers Fellow and author of MJGI Briefs, you can reach her at linkedin.com/in/mjvb and follow her @MarshaJVB.)

By Marsha Vande Berg

SAN FRANCISCO (Callaway Climate Insights) — So much has happened in the world of ESG disclosure in the past year. We at Sustainability Stars and Callaway Climate Insights now find ourselves reaching to get a read on what this New Year portends for sustainability in the face of increasingly difficult inflationary pressures, the threat of recession in the major economies, China’s challenge in unleashing itself from its zero-Covid policies, and the reverberations of Russia’s brutal war in Ukraine.

Yes, the drive for corporate and regulatory sustainability disclosure will push forward – albeit in fits and starts and facing significant headwinds. In Europe, widely viewed as the leader in corporate disclosure and transparency, the EU’s governing body has given the final green light to the Corporate Sustainability Reporting Directive (CSRD) and upped the ante on corporate accountability and Europe’s economy-wide transition toward sustainability.

The European Financial Reporting Advisory Group (EFRAG) now has draft disclosure standards underway but which must also pass the muster of the EU’s 27 governments, including Poland and Hungary.

In the U.S., the SEC is likely to move its proposed climate disclosure rule to enforcement status during this first quarter and simultaneously prepare to defend its ground in the face of political and legal challenges. It maintains its rule reflects its mission as a regulator doing its job to protect investors and capital market integrity.

In the U.S. in particular, the pitch of the political and legal challenges is increasing. State and local governments are getting into the act by targeting public fiduciaries. As of year-end, states have BlackRock BLK 0.00 in the crosshairs and are threatening to pull some $3.3 billion from the world’s largest asset manager because of its ESG investment strategies. Meanwhile, ESG strategies also are attracting mounting criticism for turning a blind eye to greenwashing.

At the same time, large asset managers are recalibrating their own public relations. Capitalism can be a catalyst for change and help shape society — but business cannot go it alone, BlackRock CEO Larry Fink wrote in his annual letter to CEOs last month. Business can’t be the “climate police…We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”

The forces at play are deep, important and the result of multiple countervailing currents. This is why what Japan does about sustainability disclosure matters. It’s the world’s third largest economy with a stock market capitalization of nearly $7 trillion. Its global companies are household names — including Toyota, Honda, Mitsubishi, Panasonic and Hitachi.

Prime Minister Kishida Fumio has called for liberal democratic capitalism that balances growth and distribution. His message emphasizes digitization together with investment in green technology and human capital. The island nation intends to be a carbon neutral economy by 2050.

With this Sustainability Stars’ column, we turn again to Hitachi’s senior executive for sustainability, Norio Masuda, featured a year ago in this column for his work at Hitachi, a Fortune 500 conglomerate headquartered in Tokyo and a pioneering technology leader including in green technology. Masuda is also Hitachi’s liaison to the important ESG Disclosure Study Group, a collection of big hitters, mostly representing Japan Inc. and who are intent on influencing the direction of corporate sustainability disclosure for Japan’s listed companies – in step with emerging international trends and Japanese corporate culture characteristics.

This column’s objective is to benchmark anew Japan’s efforts vis a vis the ISSB’s intended global sustainability financial disclosure standards for application side by side with the IFRS Accounting Standards. The status of the regulatory emphasis on sustainability as well as of corporations like Hitachi can serve as a bellwether for the prospective pace for integrating disclosure protocols globally.

By way of brief background, the ISSB is a sister agency to the International Accounting Standards Board (IASB) under the IFRS Foundation. While the London-based ISSB focuses on sustainability financial factors, the IFRS is responsible for the IFRS Accounting Standards now followed in 144-plus jurisdictions around the world.

There is also the J-ISSB, under Japan Financial Services Agency. They are working on a proposal for mandatory climate risk disclosure with up-to-date disclosure guidelines that reflect SSB protocols and are complementary to EU and SEC protocols.

Currently in Japan, the Corporate Governance Code recommends that all companies listed on the Tokyo Stock Exchange produce sustainability reports disclosing opportunities and risks that relate to climate change. As of last April, companies designated as Prime Market by the TSE are obligated to follow TCFD guidelines.

The combination of the corporate focus and FSA’s intent has positioned Japan in the forefront of the debate on mandatory versus voluntary disclosure even as the paradigm continues to shift in favor of disclosure at some level particularly as it relates to climate, the environment and human capital.

It also positions Japan as a leader across Asia where regulatory considerations and corporate emissions and climate risk disclosure gained traction in recent years. But it’s clear that this year, they also face a range of significant challenges. Here we welcome to the conversation, Norio Masuda, Senior Manager, Hitachi Ltd. and Co-Representative Director of ESG Disclosure Study Group.

Question: Masuda-san, please update us on the relationship between the IFRS, the ISSB rules and Japan’s efforts?

Masuda: This has been an ongoing process in Japan. But now I think we are finally all moving in the same direction toward putting in place ESG disclosure rules that reflect Japan’s business culture and that are in step with the international standards that the ISSB is drafting.

Q.: What exactly are Japanese authorities doing, particularly regulators?

Masuda: The Accounting Standards Board of Japan (ASBJ) is discussing internally how best to address the ISSB standards, two of which could be finalized for implementation as early as the first quarter of this year. Our concern — which is shared by other Japanese multinationals — is the outcome of the current conversation between the ISSB and their European counterparts to identify points of common interest. That’s because so many of us do business in Europe.

As things now stand, we want Japan’s own disclosure rules in place. But we also want to be sure our rules work with ISSB standards and with what is happening and legally enforceable in other jurisdictions. We don’t believe in simply taking our own pathway.

Q.: How will authorities achieve compatibility across all these regulatory jurisdictions?

Masuda: The ISSB is about setting global standards. What the Europeans are doing applies to countries that are members of the European Union, that is assuming that each of the 27 EU country governments OKs the CSRD. In Japan, it’s our plan to align our own rule-making with the efforts of the ISSB, taking advantage of what the IFRS calls interoperability — providing a platform within the standards for ensuring that application can succeed in multiple jurisdictions.

To date, the ISSB has completed two standards. Once finalized and endorsed by IOSCO as is anticipated, we will be ready to add Japan’s requirements and put them into effect.

Editor’s note: Since its founding in November 2021, the ISSB has issued two draft standards – the first for disclosure generally and the other related to material climate-related disclosure. Their adoption is voluntary. They also are likely to win the critical endorsement of the International Organization of Securities Commission (IOSCO) and from there evolve in line with adoption of best practices around the world.

Q.: Is there a common denominator across jurisdictions?

Masuda: You may consider the TCFD framework a common point of interest. TCFD protocols are integrated into the ISSB’s climate standard, and they are central to what the Japan FSA is discussing. In Japan, this reflects the growing interest in climate change disclosure generally and in TCFD protocols specifically. We have the highest number of institutions in favor of TCFD protocols worldwide and this support is a key driver in favor of climate change disclosure.

Editor’s note: Arriving at a common definition of what is material and therefore what is materially disclosable is still very much part of the discussion. A key difference is the emphasis on a single, point-in-time material dynamic that points to what should be disclosed versus dynamic materiality that references point-in-time materiality together with material factors that evolve dynamically over time. The EU’s rulemaking focuses on double and dynamic materiality.

Q.: Is there any pushback — either from government sources or the all-important business lobby in Japan, the Keidanren? (The Japan Business Federation is the country’s largest comprehensive economic organization with membership of more than 1,400 Japanese companies across all sectors. Many members do business in global markets.)

Masuda: I have to say it’s truly an in-depth conversation that is underway in Japan. It’s taking place between Japanese companies and regulatory authorities, business and government and between Japan regulators and the IFRS Foundation and the ISSB. We also are in conversation with the SEC and EFRAG in the EU (among others).

Editor’s note: The Keidanren’s published comment last May on the draft SEC disclosure rule suggests the corporate-wide support in Japan for TCFD protocols. The comment commends the SEC rule-making and recommends SEC disclosure requirements that align with the protocols.

Further, Hiroshi Komori has been appointed as a full-time member of the ISSB, effective Sept. 1. Prior, he served as senior director and head of stewardship of the ESG Division of GPIF, 2015-2022. And in October, Ken Shibusawa was named special adviser to ISSB Chair Emmanuel Faber. His focus is jurisdictional matters specifically related to adopting IFRS sustainability standards in Japan. Shibusawa is a member of the steering group of the United Nations Development Programme SDG Impact and a director of Keizai Doyukai, the Japan Association of Corporate Executives.

Q.: So all the key players are pretty much on the same page. What then is the time frame you are anticipating for getting rules in place?

Masuda: Yes, I think so but I really don’t anticipate any announcement until maybe the first quarter of this new year. I also don’t expect the requirements will be mandatory for all companies, especially not for smaller companies and companies only doing business domestically. I might add that disclosure is already in effect mandatory for a global company like Hitachi doing business in Europe.

Editor’s note: For the past 12 months, Japanese companies have been engaged in an historic overhaul in how they address corporate governance, capital management as well as financially material environment and social risks to seek long term sustainable growth. The issues date back to the era of Abenomics. It was the late Prime Minister Shinzo Abe who made corporate governance the centerpiece of his economic reforms.

Revisions to the Corporate Governance Code in June 2021 expanded the emphasis on the role of corporate boards and independent directors together with sustainability issues including gender diversity and climate change. Starting last April, the Code has targeted 60% of the country’s 3,800 listed companies to comply or explain their sustainability credentials. This puts Japan on the cusp of a new wave of deeper and more comprehensive reforms than those under Abenomics.

Q.: All this positions Japan in the vanguard of countries willing and interested in integrating the ISSB standards, does it not?

Masuda: Yes, that’s right.

Q.: By this time next year, does it also mean we could be looking at a dramatic increase in the numbers of companies providing comparable, credible sustainability disclosures?

Masuda: Yes, that’s right.

Q.: Is there an example of a Japanese characteristic you would anticipate being part of the disclosure rules Japan ultimately embraces?

Masuda: One area is in human capital — or how the workforce is treated. In Japan, there are related cultural aspects we want to see reflected in the disclosure rules that are ultimately put in place.

Q.: Do these developments mean that your working group will be winding down?

Masuda: No, to the contrary. Our next steps will include how we can improve corporate integrated reporting; how we can better integrate reporting on human capital issues; and financial connectivity. These are the three seeds that will inform our next steps.

Editor’s note: Integrated reporting is a framework for corporate reporting in which corporate financial and sustainability information are integrated into a single disclosure statement. An integrated report includes material information about a company’s strategy, governance and performance. Its usefulness is communication with providers of financial capital about how an organization creates value over the short, medium and long term.

Q.: What will be the emphasis for Hitachi going forward given these new and emerging disclosure circumstances?

Masuda: Hitachi is clearly a leader in green technology. We are providing a green railway system for some 18 billion passengers. Although much work remains to be done in this arena, Hitachi’s work illustrates Japan’s leadership role globally especially when it comes to green technology.

How we deal with human capital is another matter. Here we still need to improve. Hitachi believes – and I believe achieving diversity, equity and inclusion is essential for companies’ successful growth. At Hitachi, we’ve partnered with Kyoto University Graduate School of Management to analyze key work relationships using human capital measures and financial indicators. It’s very interesting work, and it has shown that increasing the number of female managers as well as employee satisfaction correlate positively with sales and return on invested capital.

Q.: What exactly is Hitachi’s position when it comes to gender diversity?

Masuda: For example, my boss is an Italian female! Hitachi’s workforce includes 30% women and more than half of all Hitachi group employees are non-Japanese. Diversity is also an important element of our governance. Hitachi has 12 people on its board of directors. Four are women and nine are independent and external to Hitachi’s executive. Hitachi also doesn’t discriminate based on age.

Q.: And how does Hitachi handle sustainability disclosure generally speaking?

Masuda: It all revolves around what is financially material to the bottom line and to creating value. To begin, we take into account a range of items, including the health and well-being in the community and society where we are operating, governance matters, workforce diversity and carbon footprint. We then identify the relevant KPIs that also align with our business strategy. We then make our assessments and disclosures. That’s all very broad brush.

Q.: Is there a prominent KPI that you can identify that translates into impact?

Masuda: In the environment space, it would be achieving carbon neutrality by the end of 2030. This applies to Scope 1 and 2 carbon emissions in house at our businesses. But we also assess the entire value chain in terms of achieving neutrality by the end of 2050. We also set KPIs during each fiscal year to reflect our environmental goals.

Q.: Does that make Hitachi a sustainability leader in the corporate space in Japan?

Masuda: Fortunately, these are practices which are followed by Japan’s leading companies and many companies worldwide.

Q.: So there’s no resting on laurels for Hitachi?

Masuda: No, I would say no resting on laurels … I would also like to add how very pleased I am to be having these conversations. It’s my honor to share our activities with your audience. Thank you.

And thank you, Masada-san!