Sustainability Stars: Norio Masuda

posted by Marsha Vande Berg on January 12, 2022 - 12:43am

SAN FRANCISCO (Callaway Climate Insights) — Hitachi Ltd., a Japanese Fortune 500 conglomerate headquartered in Tokyo, headlines its corporate web page with the now familiar icon that marked the UN’s COP26 climate summit in November. Swipe that webpage one over, and we discover — not surprisingly — a banner headline laying claim to Hitachi’s 21st century corporate profile that intertwines business with social mission: “Hitachi social innovation is powering good.”


Like other big-time, global companies, Hitachi finds itself at a tipping point in its climate and ESG corporate ambition. The conglomerate is not only leveraging its relatively new sustainability profile with a full-fledged suite of cutting-edge digitized offerings, it’s racing to walk the talk about committing to zero carbon by 2050 and in the interim, work on behalf of the UN Race to Zero Campaign and the Paris pact goal of limiting the rise in global warming to below 1.5°C. 

Lumada is Hitachi’s proprietary software platform, connecting data-driven solutions to five digitization-focused areas — mobility, smart life, industry, energy and IT. The emphasis helped win Hitachi an $800 million contract in 2020 to supply San Francisco’s Bay Area Rapid Transit system with a very au courant communications system for controlling subway trains — and then last year, a $2.2 billion contract to deliver lighter and more energy efficient cars equipped with cyber security safety features to Washington D.C.’s Metro subway system. 

Hitachi’s mission is being realized in its realigned operations. It comes complete with “western style” corporate leadership and governance — one of the outcomes of a wisely executed turnaround to lift itself up and out from under the ashes of the 2008 Global Financial Crisis. In 2014, Toshiaki Higashihara, now executive chairman and CEO and committed to Hitachi’s transformative mission, took the reins as president. 

Not long thereafter, Hitachi had a sustainability division, and Norio Masuda moved into the role of senior manager with a promotions portfolio. He also became Hitachi’s liaison to the ESG Working Group, a collection of more than 90 big hitters, mostly from Japan Inc., who are intent on influencing the direction of corporate sustainability disclosure for Japanese listed companies in step with emerging international trends. 

Difficult questions hang over the efforts, however. Can a talk shop be of much, if any, consequence? Or is it a helpful venue for capturing the domestic zeitgeist by way of recommending solutions for how to deliver to Japanese investors and businesses what they want and need when it comes to disclosure requirements? Can such a pulse to the ground scenario adequately incorporate the relevant sentiments developing as a result of international and other regional developments? How does a regulator best shape requirements that must straddle domestic and international concerns?  

The world of business, investment and sustainability disclosure regulations and compliance is now literally in the early throes of deliberation and taking action. Getting an acceptable international baseline standard is now the work of the IFRS Foundation and its ISSB. The European Union is forging aggressively ahead under its Green Deal and CSRD (Corporate Sustainability Reporting Directive) plus taxonomy to guide disclosure compliance and enforcement.

In the U.S., the SEC is slow-walking the process in a difficult political environment. So far, the commission under Chair Gary Gensler’s leadership, has taken the pulse of key stakeholders as to what should be the scope and extent of sustainability disclosure regulation. But that’s as far as it’s gone, perhaps due to building pushback from political forces intent on raising the specter of regulation overreach. 

In Tokyo, the Financial Services Agency (FSA), the lead financial services regulator, has put in place requirements — fully effective in the spring — that large companies must report their greenhouse gas emissions along with other climate-related disclosures. Reporting is expected to be in line with the framework set out by the Task Force on Climate Disclosure (TCFD).

Noteworthy is that the FSA requirement is to take effect at or about the same time that the IFRS and IISB will be finalizing their framework for baseline global sustainability reporting standards, also in line with the TCFD guidelines. The timing may turn out to be fortuitous for Japan Inc. and sustainability leaders including Masuda. 

Recent indicators already are suggesting that the FSA is indeed inclined to encourage, if not require certain disclosures in line with the reporting baselines IFRS and IISB now are working on. 

But the devil will be, as always, in the details. For the time being, we all will wait and see. 

Crystal clear, however, is that sustainability reporting regimens are necessary worldwide and that investors want information that is credible, comparable and consistent. Just how global and domestic standards get married, implemented and enforced remains to be worked out.

The following interview attempts to address these and other questions. The conversation with Musada was conducted via zoom in early December.

Question:  Is a consensus building in Japan in favor of adopting the sustainability disclosure regimen now being set up under the International Sustainability Standards Board (ISSB) and to be enforced in parallel with but separate from the IFRS financial accounting and disclosure rules? 

Answer: I am very interested in this new ISSB as announced during COP26 and the fact that its work will reflect the IFRS Foundation’s consolidation with both SASB (the Sustainability Accounting Standards Board now called the True Value Foundation) and the Carbon Disclosure Standards Board (CDSB). This is a notable move that says to me the trend in disclosure standard setting will revolve around two initiatives going forward, that of the IFRS Foundation and the CSRD (Corporate Sustainability Reporting Directive) in Europe. 

(Under the banner of its Green Deal, the European Commission has captured the pole position in disclosure rule-setting by putting the CSRD in place. It now requires sustainability disclosure by 50,000 companies based on what’s called double materiality — or the impact that climate is having on a business’ stakeholders as well as financially on its enterprise value.) 

I can’t predict whether Japanese companies will or will not adopt the IFRS/ISSB framework but there are two important facts that suggest this is the direction things are going. 

First, the number of companies adopting IFRS financial accounting standards in Japan continues to increase every year, so that today the market cap of companies using IFRS accounts for one-half or more of Japanese listed companies. Hitachi, for one, has adopted IFRS accounting standards. 

Given that more companies are now following IFRS financial accounting standards means that more companies also will be strongly aware of the work of the ISSB on non-financial disclosure standards which will go into place in parallel with but separate from IFRS accounting disclosure rules. 

Second, the Keidanren, an influential business organization, has issued its own recommendations to those working on domestic disclosure standards to consider international opinion. They did this immediately after the IFRS Foundation announced last November that it is creating the ISSB. As I look ahead, I think our discussions about domestic regulation will deal with IFRS and ISSB by proceeding through public/private partnerships that also involve the Japan Financial Services Agency (JFSA).

(A bit of regulatory history: In 2013, Japan’s FSA revised its Cabinet Office Ordinance to encourage further application of IFRS financial disclosure standards for Japanese companies. As a result, the number of companies eligible to use IFRS increased from 621 to 4061, covering virtually all listed companies in Japan. And since 2010, eligible listed companies have been permitted to use IFRS as designated by Japan’s FSA in their consolidated financial statements in lieu of Japan GAAP. The Japanese GAAP rules are not identical to IFRS but rather are found to be equivalent to IFRS rules as adopted by the European Union starting in 2008.

In the U.S., financial reporting practices are set forth by the FASB (Financial Accounting Standards Board) and organized as GAAP or a common set of accepted accounting principles, standards and procedures that companies and their accountants follow. The primary difference between GAAP and IFRS is GAAP disclosure is rules-based while IFRS is principles-based, leaving more room for interpretation.)

Q: The Keidanren is such an influential organization in Japan. Are you saying they are favorably inclined to recommend adoption of ISSB rules?

A: Yes, they could take that position. But then they also could decide that the better course is to follow what Europe is doing, given the number of Japanese companies that are engaged in business globally, including and especially in Europe. By the same token, they also could favor a third way, which is to wait and watch what direction the U.S. SEC takes. 

(Subsequent to this interview, Satoshi Ikeda, chief sustainable finance officer at Japan’s FSA, said the FSA recognizes the ISSB as a “very significant game-changer.” Speaking at the SASB 2021 annual online symposium in early December, Ikeda said the FSA is engaged with the process underway with IFRS and IISB and consequently deeply conversant with the work as it is evolving. The IFRS’ consolidation with SASB and the CDSB plus its intention to incorporate the TCFD framework in the mechanics of its disclosure requirements combined to strengthen the appeal of the ISSB to Japanese companies. 

“With these developments, the ISSB will be in a potentially strong place in Japan,” said Ikeda. 

An additional twist is underway at the Tokyo Stock Exchange, also serving to strengthen ISSB awareness and standing among Japanese companies. From early spring this year, the TSE will require all listed companies to disclose their climate-exposure by way of using the TCFD framework. Understandably, the rule is expected to have a major impact on companies and their business strategies.)

Q: What would adoption of ISSB standards mean for Hitachi?

A: It will be a bit difficult to balance our reporting between the two sets of standards — the ISSB and EU’s CSRD. It’s because there’s a conflict around disclosure based on materiality. EU rules embrace a double materiality philosophy, requiring disclosure of climate change’s impact on both a company’s stakeholders and its financial impact on enterprise value. Hence the name, double materiality. 

Q: We first met over a year ago to talk about your engagement with the Japan ESG Working Group, a collection of representatives of Japan Inc., financial and business services. What is the working group’s mission, its status – and then what does it mean when the Group talks about disclosure standards with Japanese characteristics?

A: The ESG Working Group, of which I co-represent, has members from more than 100 listed companies, institutional investors and audit firms. It is one of the largest private communities in Japan that is discussing disclosure of ESG information. 

We are practitioners, not policy makers. Our purpose is not to create new standards but as practitioners involved in disclosure of ESG information, to explore how disclosure can build stronger engagement with stakeholders as well as corporate value while keeping an eye on global trends. 

I also think it’s necessary to take into account factors that are unique to Japan whenever we talk about sustainability disclosure. Two examples come to mind. First, Japan is becoming a super-aging society compared with the rest of the world. This ultimately will threaten a major labor shortage which in turn is sure to pose an obstacle to a company’s long-term sustainable growth pathways. This also underscores just how important it is for a company to have strong human resources and to promote diversity. 

My second example is about the issue of governance. In many European countries, corporate governance is a legal consideration. But in Japan, corporate governance is a set of guidelines or soft law under FSA and our stock exchanges. I don’t think that Japan's Corporate Governance Code is significantly different from that of the rest of the world, but Japan’s Code has been revised this year to require that corporate boards be more involved in ESG matters. 

I believe it is necessary to be aware of these matters when disclosing information in Japan.

Q: So, will regulators and businesses in Japan want to apply Japanese characteristics to the global baseline disclosure requirements that are expected from the ISSB? 

A: Ultimately, I think the decisions will favor the ISSB global standards and not Japanese domestic issues because so many of our members in the Working Group are doing business globally. Consider Hitachi, for example. More than half of Hitachi’s sales are from outside of Japan. 

Q: I’d like to push on this issue a little more. Are you anticipating two sets of disclosure rules in Japan — one for the larger, multinational companies but another set for those companies that are all domestic? 

A: Maintaining the balance will be very difficult, as I’ve said. It actually would be very tough to combine them. But members of the ESG Working Group include government representatives as well as financial services people. So it will be important that we really discuss among ourselves just how we are going to achieve efficient sustainability disclosure.

Q: Clearly, the ESG Working Group is an important forum for the exchange of ideas at a high level and involving practitioners in both the public and private sectors. Would you say that the level of engagement also indicates that Japanese companies as well as regulators are now seeing sustainability disclosure as a necessity? 

A: Yes, I think the movement is growing. An illustration of that is the commitment on the part of a very large number of Japanese companies to disclose climate impacts following TCFD principles. 

Q: Japan’s prime minister, Fumio Kishida, announced shortly after taking office late last year a plan to launch a panel of experts to consider what he described as Japan’s new form of capitalism. A descendant of Shibusawa Eiichi (1849 – 1931) will be on the panel. Shibusawa is revered in Japan as the father of ‘ethical capitalism,’ or ‘gappon shugi’. His picture also will grace the yen’s highest denomination starting in 2024. Is the application of gappon shugi purely a domestic interest — or could it be an arena where Japan intends to try to influence notions of corporate purpose globally? 

A: It is clear that neither the ‘new capitalism’ as advocated by Prime Minister Kishida nor the philosophy of gappon shugi as advocated by Shibusawa apply only to domestic interests. That’s because today, capital sharing and business development are global matters. Everyone brings something to the ability to conduct business — and everyone should share in the results. The results should enrich everyone. This is the idea behind gappon shugi. It is also the idea behind stakeholder capitalism. Both are ideas with potential to spread globally. 

In my opinion, there will be a new wave of capitalism in the near future. It will reflect economic activity that derives from a company’s purpose. It’s a movement that could be called purpose-ism. It’s not aimed at purely maximizing capital but at maximizing purpose. 

We don’t talk about gappon shugi in the ESG Working Group, but our philosophy is very similar. Gappon shugi aims to recognize the public’s interest and to direct human resources and capital toward achieving purpose alongside the promotion of business. Our group, on the other hand, believes that a company’s sustainability can only be achieved through business contributing to social sustainability. We believe that social and corporate sustainability need to be synchronized and integrated. So we are similar to gappon shugi but different, too. 

Q: Do you see the philosophy of gappon shugi as your Working Group considers it, applying to businesses globally? Is this an area where Japan could lead the global sustainability movement?

A: Gappon shugi is not a system that permits concentration of wealth in the hands of some people, but a system that because everyone contributes to the ability to carry out business, then everyone shares in the results. It is slightly different from capitalism, which aims to maximize the wealth of capitalists. 

In fact, Eiichi Shibusawa, who advocated gappon shugi was — is regarded as the father of modern capitalism in Japan. He also was involved in establishing more than 400 companies in his day, but he did not use the word capitalism. It’s unclear whether this idea could be accepted in the world, and whether Japan could lead a movement. However, a highlight of today’s trends is this idea to synchronize corporate and social sustainability. There’s a word for it — sustainability transformation. It is similar to the idea of gappon shugi advocated by Shibusawa more than 100 years ago.

Q: Does Hitachi’s participation as sponsor of the COP26 summit illustrate gappon shugi? 

A: Hitachi is committed to be carbon neutral by 2030 and to extend that commitment throughout its value chain by 2050. This is a very ambitious commitment and will be difficult to achieve. Getting the cooperation of a global supply chain will be challenging. But we are motivated — and that goes back 100 years to our founder, Namihei Odaira. He had a strong will to contribute to society. His interest was in maximizing the public interest rather than capital — and that is a philosophy in step with gappon shugi.  So yes, our participation and our mission can be described as in keeping with gappon shugi

For example, Hitachi now operates a clean and safe railway business all over the world, with a total of 18.5 billion users. Hitachi also provides 70 million people worldwide with safe and secure water and sewage systems. The company manages a quarter of the world's energy substations and realizes a stable power supply. We are a global leader in social innovation that also uses business to solve global social and environmental issues. 

Q: If you could see into the future 10 years from now, what would that future look like for Japanese business and sustainability disclosure? 

A: I predict that sustainability disclosure in Japan will line up more and more closely with global standards. Personally, I would hope that the disclosure requirements also reflect application of double materiality. 

This also is in keeping with a basic set of business values that Japanese companies have followed since the Edo period a hundred years ago. It’s referred to as sanpou yoshi. That means that business should share its profits with society, customers and sellers. It’s a way of thinking that parallels today’s stakeholder capitalism. 

In the meantime, discussions about the direction sustainability disclosure should take will be complicated due to various factors. But in the end, the requirements will be in line with sanpou yoshi.