JAPAN: Proposed Code of Conduct for ESG Evaluation and Data Providers Presents Significant Implications for Asset Management and Investor Communities

By Yuki Sako

On 12 July 2022, as widely anticipated, the Financial Services Agency of Japan (“FSA”) proposed “the Code of Conduct for ESG Evaluation and Data Providers” (“Proposed Code”), and is soliciting comments from the public until 5 September 2022.

The stated focus of the Proposed Code is to provide a set of principles and guidelines for ESG evaluation and data providers (“Provider(s)”) that would require Providers who decide to endorse such code to “comply or explain” such code, i.e., a Provider would be required to comply with, or provide an explanation as to why the Provider is departing from, such code.

Notably, the Proposed Code also includes “recommendations” to investors (“Investor Recommendations”) which calls for “investors” to:

• “carefully examine and understand the purpose, methodologies, and limitations of ESG evaluation and data they utilize for their investment decisions”;
• “when there are issues in the evaluation results,” “engage in dialogue with [Providers] or companies”; and
• “publicly clarify the basic approach of how they utilize ESG evaluation and data in their investment decisions”.

It is not clear how the proposed Investor Recommendations would be implemented or enforced.  However, they present significant implications for asset managers and institutional investors.  For example, the Proposed Code refers to “investors” to mean a variety of entities and persons that invest proprietary or client funds, which would include shareholders, bondholders, a broad range of asset managers and pension plans.  However, Investor Recommendations do not appear to have the flexibility to accommodate different types of roles, responsibilities or obligations (including confidentiality obligations to their underlying investors or other stakeholders) that these “investors” have.  Such sweeping Investor Recommendations, in particular requiring engagement with Providers or companies that provided data to Providers, or mandating public disclosure, do not appear to work for all the asset managers and institutional investors, and may be even inconsistent with their responsibilities or obligations that they owe to their underlying clients or respective stakeholders.  Furthermore, it should be noted that there is no specific statutory or regulatory authority that directly mandates such Investor Recommendations, which appears to be inconsistent with the FSA’s general approach to regulate asset managers.

Overall, while the purposes of the Proposed Code to provide a set of principles and guidelines for Providers – which include: ensuring the quality of the information, more transparency and fairness, addressing conflicts of interest issue, securing appropriate personnel, proper handling of non-public information and better communications with companies – should generally be welcoming news to the asset management industry and institutional investor community, Investor Recommendations appear to have significant implications for asset managers and institutional investors. 

Interested parties should consider participating in the public comment opportunity.