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Companies' climate change obligations – A perspective from Tokyo

31 August 2020 | Insight
Legal Briefings – By Tom Bowes

As climate change moves up the global agenda, we assess the dynamics facing Japanese corporates.

For some time, it has been recognised that climate related risks should figure in long term planning for all organisations. There is now increasing appreciation of the extent to which climate change considerations are important to business decision making today, encompassing the physical changes to the environment resulting from climate change, and the transitional risks such as changes to regulation and investor and insurer behaviours associated with management of a changing climate.

Industries such as power and automotive have been dealing with mandatory emissions and efficiency standards for some time. But outside of binding targets, the risk of climate related liability under general legal frameworks should now be very clear. To take one example, every jurisdiction imposes duties on directors or managers to act in the interests of their company. It is increasingly acknowledged that climate change represents a financial risk and, therefore the bests interests of the company includes having regard to climate risk. Directors need to consider to what extent they should be proactively managing climate related risk. Are they sufficiently informed about the potential impacts on the company’s performance? Is the company making appropriate disclosures?

Organisations are facing climate change litigation from NGOs, municipalities, landowners, insurers and increasingly from shareholders. Claims can relate to negligence in failure to mitigate foreseeable harms, breach of obligations to disclose material information, or be based on an interpretation of existing environmental and safety regulation, to name a few.  Herbert Smith Freehills has acted and is acting on a number of major climate related matters, including torts (nuisance) law suits in California, assessing the risk of shareholder class actions in Australia, as well as on Government led investigations and insurance disputes.

In day to day business, companies are finding that tendering authorities, banks and joint venture partners are imposing more demanding ESG related standards as a condition of participation in projects. Engagement with shareholders, investment funds, and ESG rating agencies is occupying an increasing amount of time for investor relations and legal departments.

Implementing ‘climate resilience’ in an organisation is not an easy task, nor a quick fix, however the rewards for investment in this area could be significant.

A key reference point for effective management of climate related risks has become the recommendations of the Financial Stability Board (FSB) through its Task Force on Climate Related Financial Disclosures (TCFD), published in 2017.[1] The FSB was established at the request of the G20 in the aftermath of the financial crisis of 2007/8 in order to encourage better coordination between financial authorities in their approach to regulating and safeguarding stability in financial markets. The FSB established the TCFD in recognition of the unique macro-stability risks posed by climate change.

The Japanese government, particularly since its turn as president of the G20 in 2019, has played an active role in encouraging adoption of the TCFD recommendations and investment by companies in the assessment of the risks they face. The Ministry of Economy, Trade and Industry (METI) has a dedicated website for TCFD, where it reports that as of June 2020, 276 Japanese companies are among the 1269 globally that support the adoption of the TCFD.[2] A leading example is the Government Pension Investment Fund (GPIF), Japan’s largest public investor by assets.[3] METI is also reporting on developments in other jurisdictions towards making TCFD disclosure mandatory.[4]

Responding to climate related ‘transition risks’ and ‘physical risks’, in accordance with the TCFD methodologies, and incorporating these investigations into business strategy is one of the major challenges occupying senior management at the world’s largest companies. It requires coordination of various specialist functions, from climate modelling to supply chain engineering to government relations, and also keeping abreast of local and global developments. Legal departments clearly have an important role to play in understanding the evolving global regulatory landscape and evaluating the risks of climate related litigation.

Drawing from our firm’s experience with several important litigation matters and our engagement with core clients who are leaders in climate related risk disclosure, Herbert Smith Freehills has a specialist practice in climate change risk management. We offer clients a workshop which provides an overview of existing and future risks, which can be tailored to the particular concerns of a given organisation. Our advice covers the scientific and political context of current climate change related claims, the strategies pursued by litigants, as well as best practice on articulating climate change risks and opportunities internally and building them into company policy.

Major Japanese companies are rightly recognised for their ability to pursue long term investment philosophies, identifying future sources of revenue by analysing global trends. Climate change resilience will need to be part of those strategies.

[1] Available in various languages here

[2] Ministry of Economy, Trade and Industry website

[3] GPIF website

[4] Ministry of Economy, Trade and Industry website

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