✅ Roughly speaking
・ESG is a management issue that should be tackled jointly by legal, finance, and public relations departments, and it is essential to create a cross-departmental system. ・The latest laws and guidelines in the EU and Japan strongly require companies to implement effective disclosure, contracts, and governance. ・ESG is no longer simply a cost; it is being positioned as an investment that boosts corporate value.
✅ Read the summary of this article here
Whose job is ESG?
This time, we will take a slightly broader topic and look at ESG, particularly the person in charge of ESG within a company.
Considering the current climate, responding to ESG (environmental, social, and governance) issues is considered an urgent management issue for companies.
In recent years, integrated reports and sustainability reports have become commonplace, especially among listed companies, and there is sometimes a misunderstanding that "ESG = the job of the IR/PR department."
However, in reality, we believe that the legal and financial departments are the areas in which core involvement should be focused.
Below, I would like to delve deeper into the roles played by legal and financial affairs and the importance of company-wide initiatives, taking into account the latest international and domestic trends.
The role of the legal department – a cornerstone of governance and compliance
The legal department is the core of the foundation for ESG compliance.
The corporate environment has been changing at an unprecedented pace in recent years, with increasingly complex regulations, increased accountability from shareholders and investors, and increased risk of litigation both domestically and internationally.
Legal departments are now expected to go beyond simply reviewing contracts to identify risks from a legal perspective from the early stages of business strategy and support sustainable business models.
Below we will take a closer look at its central role.
Countering greenwashing and legal reorganization of advertising expressions
Greenwashing is the act of displaying and communicating a company's environmental efforts in a way that is greater than the reality.
The EU proposed a Green Claims Directive, and in 2024 an amendment (Directive (EU) 2024/825) was adopted to encourage consumers to move towards a greener society.
As a result, regulations on misrepresentations have been further strengthened, and companies are now required to back up their advertising claims more than ever before.
In Japan, the Ministry of the Environment has revised its " Environmental Labeling Guidelines ," and now any labeling that lacks rational basis or objectivity poses a risk.
It is an important job of the legal department to carefully review the appropriateness of advertising and public relations expressions in advance.
Human Rights Due Diligence and Contract Management
Respecting human rights in supply chains is no longer a corporate choice but a requirement.
As many of you may already know, it was a hot topic for a while, but the EU's Corporate Sustainability Due Diligence Directive (CS3D) will be officially announced in 2024, imposing an obligation on companies to identify and correct human rights and environmental risks posed by their business partners.
In Japan, the Ministry of Economy, Trade and Industry and the Ministry of Foreign Affairs have published the " Guidelines for Respecting Human Rights in Responsible Supply Chains, etc. ", which recommend that contracts include human rights clauses and the right to terminate in the event of violations.
Legal departments should urgently review their contracts and procurement policies in light of this.
Directors' Duty of Care and ESG Management
Directors have a duty of care under Article 330 of the Companies Act and Article 644 of the Civil Code, as applied mutatis mutandis.
If a company is aware of ESG risks such as climate change and human rights violations but fails to address them, it could be held liable in shareholder derivative lawsuits.
In fact, there are increasing cases in Commonwealth countries where directors are being held accountable for "business decisions that ignore climate risks" (CCLI: Directors' Duties Navigator 2024 ).
However, in Japan at present, there are not many cases in which ESG risks have led to immediate legal liability in relation to the duty of care, and the reality is that there are certain hurdles to overcome before litigation becomes a reality.
Nevertheless, we believe it is important for directors to prepare a system for responding to future tightening of regulations and increasing demands from investors and society at large.
The role of the finance department: Turning ESG into value-creating investments
Finance is key to transforming ESG into a value-enhancing investment rather than just a cost.
As new financial products such as green bonds and sustainability-linked loans emerge one after another, we will play a wide range of roles, from fundraising to dialogue with investors.
Here we take a closer look at the specific role that finance departments must play in helping companies achieve sustainable growth, including non-financial information disclosure, sustainable finance, and ESG investor relations.
Non-financial information disclosure and integrated reporting
From 2023 onwards, it will be mandatory to disclose sustainability information in securities reports, and in 2024 the Financial Services Agency expanded the scope of coverage (Reference: FSA English page: Weekly Review No. 524 ).
The ISSB standards (IFRS S1 and S2) have also become widespread internationally (IFRS Foundation: IFRS S1/S2 publication release ), and international standardization of climate-related financial information is progressing.
To address this, it is necessary to clarify the collection, analysis, and accountability of ESG data, and to establish a system led by the finance department.
Sustainable Finance and Capital Raising Strategies
ESG-based financing methods such as green bonds, sustainability-linked loans, and transition bonds are becoming more widespread.
The use of funds, setting of quantitative KPIs, external reviews, and reporting obligations are all required, and it is essential that the finance department responds reliably in both substance and form.
In Japanese practice, the Ministry of the Environment's "Green Bond/Sustainability Linked Bond Guidelines" can be used as a reference (MOE special website: Green Finance Portal ).
The role of the CFO in dialogue with ESG investors
ESG investors focus on medium- to long-term risk management and sustainability rather than short-term profits.
Finance departments are increasingly working with investor relations to provide expert explanations of capital costs and risk management strategies.
The trend of "CFOs becoming the face of ESG" is no longer an exception.
Division of roles and collaboration with the public relations and investor relations departments
The public relations and investor relations departments are at the forefront of communicating ESG information and are solely responsible for communication with the public.
Communicating the efforts and results we have built up within the company to society in an easy-to-understand manner is the first step in increasing the value of ESG management.
Rather than simply creating press releases and reports, it is essential that they convey a story about the company's stance and progress to a wide range of stakeholders, including the media, investors, local communities, customers, and employees.
In addition, public relations and investor relations are important channels for providing feedback from outside the company to management.
By communicating evaluations from the market and investors, as well as the expectations of consumers and local communities, to management, we create a cycle in which these are reflected in the next measures.
Using a variety of communication channels, such as social media, owned media, and events, to communicate ESG initiatives in a timely and continuous manner will help increase brand value and corporate credibility.
On the other hand, public relations and investor relations cannot cover everything on their own.
The actual implementation bodies are specialized departments such as legal and finance departments, and only when their risk management and numerical management functions properly can a company's ESG story be persuasive and sustainable.
It will become increasingly important in the future for public relations, legal affairs, and finance to complement each other and to advance internal initiatives and external communications in an integrated manner.
summary
ESG is not something that should be left solely to public relations or investor relations.
Legal matters must be approached from a risk perspective, while finance matters must be approached from a capital and valuation perspective.
In order to realize ESG as a "common language" that runs horizontally throughout the company, it is key for each department to actively participate in governance structures such as an internal ESG promotion committee.
Furthermore, by steadily advancing an ESG governance system that integrates legal, financial, and IR aspects, such as continuous monitoring of the latest laws and regulations (EU CS3D, green claims-related regulations, domestic environmental labeling guidelines, etc.) and establishing a non-financial information disclosure system led by the finance department, ESG can be transformed into an investment that increases corporate value rather than just a cost.
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