Japan's FSA Voluntary Code of Conduct Gains Ground in ESG Evaluation

28 ESG evaluation and data providers have now formally endorsed the "Code of Conduct for ESG Evaluation and Data Providers" as of December 31, 2024. This voluntary code, introduced by the Japanese Financial Services Agency (FSA) on December 15, 2022, is part of a broader effort to standardize and improve the transparency of ESG data and evaluation practices across the industry.

The Code of Conduct emerged following an extensive review by the Technical Committee for ESG Evaluation and Data Providers. Chaired by Professor Emeritus Tetsuo Kitagawa of Aoyama Gakuin University and Tokyo Metropolitan University, the committee published its report on July 12, 2022, which laid out the current challenges and future directions for ESG data providers. The FSA, drawing on these insights and subsequent consultations, developed the Code as a set of voluntary guidelines designed on a "comply or explain" basis.

Under the new framework, evaluation organizations are encouraged to publicly endorse the Code of Conduct by posting their commitment on their websites and notifying the FSA. The idea is to promote transparency by allowing stakeholders to see which organizations are adhering to standardized ESG evaluation practices, and, just as importantly, to understand where deviations occur through clear, accessible explanations.

The FSA plans to publish a comprehensive status report on endorsements roughly six months after the initial release of the Code. An updated status, including additional endorsements and any revisions, is expected to follow about a year later. These updates will not only reflect the growing adoption of the guidelines but also serve as a barometer of industry commitment to responsible ESG data practices.

From a compliance and risk perspective, the Code of Conduct represents both an opportunity and a challenge. On one hand, adherence to a common set of principles can significantly reduce reputational and operational risks by ensuring that ESG evaluations are consistent, transparent, and reliable. On the other hand, the “comply or explain” approach places the onus on companies to not only follow the guidelines but also to articulate clearly, for the benefit of regulators and the public, why any deviations might exist.

“This voluntary framework is about building trust in ESG data. By encouraging providers to either comply fully with the guidelines or explain their deviations, the FSA is fostering an environment of transparency and accountability that benefits the entire market,” said one industry insider.

The move by the FSA is being watched closely by market participants worldwide. As regulatory frameworks evolve and investor demand for reliable ESG information grows, adherence to such voluntary codes may well become a competitive differentiator. Meanwhile, the regular updates from the FSA will provide a clearer picture of how widespread these practices are and whether additional measures are necessary to address any emerging gaps in ESG data evaluation.

As the industry continues to mature, the endorsement of the Code of Conduct by these 28 providers marks an important step forward in harmonizing ESG evaluation standards. For companies and investors alike, it offers a more predictable and transparent view of ESG performance—a crucial factor in an increasingly complex and fast-moving market.

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