"CEAC Commentary" introduces news analyses and opinions in Japan on topics related to regional cooperation and integration in East Asia, but they do not represent the views of CEAC as an institution. 
April 30, 2007 
Establishing International Rules for Sustainable 
Finance  
By SUZUKI Keisuke 
In this paper I will discuss the purpose of a policy proposal that I have been leading to 
formulate as the Head of the Treasury and Finance Policy Unit of the Liberal Democratic Party 
(LDP) together with the members of the unit. The background of the proposal is as follows: (1) 
after the collapse of Lehman Brothers, there has been criticism and reflection on the 
short-termism, so-called "Quarterly Capitalism", mainly in Europe, UK and the United States; 
and (2) since 2015, there has been a growing sense of crisis that the "physical risks" and 
"transition risks" associated with climate change in particular will have an catastrophic impact 
on the business continuity  of corporate and financial/economic stability, and discussions on 
the regulation have progressed internationally at venues such as G20, Task Force on 
Climate-related Financial Disclosures (TCFD). In Japan, Prime Minister Suga declared in 
October that Japan would aim to become carbon neutral by 2050. In the United States, with the 
inauguration of the Biden administration, this trend has been accelerating. 
Under these circumstances, the purpose of this proposal is to logically restructure the 
“capitalism”, which has been too biased toward short-term profits, into one based on long-term 
profits. Of course, it is true that there are many short-term investors, but the reality is that 
institutional investors, especially huge asset owners such as pension funds that have no choice 
but to invest for the long term, are moving toward a trend based on such long-term returns. In 
this case, long-term investors should be concerned about the future performance of the 
companies they invest in, but the traditional financial disclosure to date is, so to speak, data on 
past performance. Non-financial reporting bridges the gap between past and future performance, 
and there has been a trend of discussion that disclosure of this information is one of the keys. In 
addition, since indirect finance plays a major role in Japan, we need a framework that focuses on 
financial institutions. By developing such a framework, it is important to create a virtuous cycle 
that will realize economic resilience and long-term stability. 
There has been a variety of discussions in the field of sustainable finance or 
Environmental, Social, and Corporate Governance (ESG) over the years. However, this year, in 
particular, Mark Carney, the former Governor of the Bank of England, who has led this series of 
events, became an advisor to the United Nations and the Prime Minister of the United Kingdom; 
The UK and European nations are chairing international conferences such as the G7, G20, and 
COP26; The International Financial Reporting Standards (IFRS) Foundation has begun 
discussions on converging the Non-financial reporting practices of companies that have been 
scattered so far. Hence, this is an extremely important year for the rule-making process of such 
regulations. It could be Japan's final opportunity to dedicate our lessons in the formation of 
international rules, as it has been conspicuously late in getting involved in rule-making so far. 
In order for Japan to be actively involved in the international rule-making process, it is 
important that a solid ecosystem is established in Japan. With this in mind, the Treasury and 
Finance Policy Unit in LDP, of which I am the Head, has been preparing to submit its 
recommendations to the government and handed our proposal to PM Suga and DPM, Aso PM. 
Specific items of the proposal include the following seven points. 
(1) Regarding the Non-financial reporting, the proposal states, “It is desirable to 
include sustainability disclosure in the Corporate Governance Code, which is scheduled to be 
revised this year. Specifically, disclosure on climate change should be based on the TCFD or 
standards to be developed by the IFRS Foundation in the coming days should be included.” As a 
future direction, the recommendation also states, “Further consideration may be given to how it 
should be done, including a legal disclosure,” and mentions the possibility of listing 
requirements of exchanges and legal methods. 
(2) Regarding the content of disclosure, the proposal states, “For the time being, it is 
realistic to take “Climate first” approach.” However, it also insists that it is necessary to 
consider other ESG factors including the “new ‘S’ such as international legal risks related to 
human rights.” This is because, for example, one may lose market access in the U.S. and other 
countries if the supply chains include companies related to human rights oppression as in 
Uyghur and/or Hong Kong. 
(3) In addition to recommending the promotion of ESG investment to asset owners 
such as corporate pension funds, the government should require public pension funds and 
financial institutions in which the government directly or indirectly holds shares to make a 
commitment to ESG investment. At the same time, institutional investors who actually manage 
ESG investments are also required to disclose information on sustainability considerations in 
their investments. 
(4) The proposal also calls for organizing ESG rating agencies to improve the 
transparency of their evaluation criteria in order to avoid confusion in the market and states the 
need to develop world-class ESG rating agencies evaluation organizations that are well aware of 
the situation in Japan and Asia. 
(5) In its inspection and supervision of financial institutions or stress tests, the 
proposal urges the Financial Services Agency (FSA) to “work with the Bank of Japan to promote 
dialogue with major financial institutions so that they can start scenario analysis by this summer, 
and to present its approach to monitoring the climate change risk management of financial 
institutions by the end of FY 2021.” 
(6) The proposal also calls on the Bank of Japan to establish a monitoring method for 
financial institutions similar to that of the FSA, and to consider whether it can expand the scope 
of asset purchases in its monetary policy, given that the green Quantitative Easing (QE) is being 
discussed in many countries and the recognition of climate change risks to the financial 
economy or the prudence policy is being shared. 
(7) The Ministry of Finance is also requested to conduct a study on green government 
bonds; the FSA is requested to steadily develop practical guidelines for social bonds; and the 
government is requested to set out long-term policies such as carbon pricing and energy mix in a 
way that is predictable to market participants in the long term. 
Taking these points into consideration, at the end, the proposal calls for Japanese 
government to strategically engage in international rule-making by constructing its own logical 
framework. Since the US, the UK, and the EU are already start their study on it, if we fail to 
start our preparation now, we may end up competing under rules created by others without 
Japanese companies being properly evaluated. That certainly should be the nightmare that 
Japanese companies have already experienced in many occasions. 
(This is an English translation of an outline of the lecture delivered by SUZUKI Keisuke, 
Former Senior Vice-Minister for Foreign Affairs, which originally appeared on the e-forum 
“Hyakka-Somei (Hundred Ducks in Full Voice)” of CEAC on March 29, 2021.) 
                