Policy Briefing — Japan Stewardship Code Revision

Executive briefing: Japan’s Council of Experts on the Stewardship Code, overseen by the Financial Services Agency (FSA), issued the second revision of Japan’s Stewardship Code on 24 March 2020. The new text elevates sustainability as an element of fiduciary duty, sharpens disclosure and voting expectations, and clarifies how asset owners should monitor external managers. Signatories—including domestic trust banks, asset managers, pension funds, insurance companies, and foreign institutional investors—are expected to re-align stewardship statements, engagement programmes, and reporting.

Revision overview and context

The code retains seven high-level principles but expands guidance to reflect lessons learned since the 2014 launch and the 2017 revision. The preamble now states that considering sustainability, including environmental, social, and governance (ESG) factors, is consistent with increasing corporate value and sustainable growth. It also emphasises the “comply or explain” approach, asking each signatory to publish revised stewardship policies and progress reports so beneficiaries can judge adherence to the principles.

The Council highlighted gaps the revision seeks to close: patchy ESG integration across portfolios, uneven reporting on how voting decisions support engagement objectives, limited oversight of proxy advisors, and insufficient detail in asset owners’ monitoring of delegated managers. Aligning with the revised guidance is intended to produce more consistent stewardship outcomes and better transparency for beneficiaries and investee companies.

Key changes in the 2020 revision

• Sustainability and ESG. Signatories must explain how they incorporate sustainability considerations “consistent with their investment management strategies,” covering climate risk, human capital, and governance quality.(FSA 2020 Stewardship Code)
• Stronger asset-owner oversight. Pension funds, insurers, and other asset owners are asked to set clear mandates for external managers, evaluate stewardship outcomes, and request improvements where engagement or voting does not meet expectations.(FSA news release)
• Granular voting disclosure. Investors are encouraged to publish vote-by-vote records for each investee company and agenda item, accompanied by rationales for key or exceptional votes, so beneficiaries can see how voting advances stewardship goals.(FSA news release)
• Proxy advisor accountability. Institutions that rely on proxy advisors should disclose how they assess advisers’ policies, manage conflicts of interest, and ensure recommendations align with the investor’s own stewardship responsibilities.(FSA 2020 Stewardship Code)
• Collective engagement. The guidance recognises collective dialogue as a legitimate escalation path when individual engagement stalls, provided investors manage confidentiality and competition-law considerations.
• Resourcing and training. A new emphasis on organisational structure calls for stewardship leads, ESG analysts, and portfolio managers to coordinate, with training that links financial analysis and sustainability risk.

Stewardship expectations by role

Investor duties and governance controls

Asset managers must formalise conflict-of-interest controls, including separation of stewardship and sales functions when voting on corporate pension clients’ holdings, and internal checks before following proxy advisor recommendations. They should maintain engagement logs, topic-specific objectives (such as board independence thresholds or greenhouse-gas reduction plans), and escalation triggers. Performance reviews of portfolio managers and stewardship staff should consider long-term engagement outcomes, not just short-term returns.

Asset owners are expected to set stewardship objectives in investment policy statements, request detailed reporting from external managers, and verify that engagement priorities reflect beneficiaries’ risk appetite. Mandates should specify expectations for ESG data use, voting frameworks, and disclosure frequency. Where asset owners vote directly, they should publish policies for handling conflicted situations (for example, corporate pension funds voting in group companies) and outline how stewardship aligns with beneficiaries’ long-term interests.

Signatories delegating proxy voting should retain ultimate responsibility: they must approve adviser selection criteria, review the treatment of Japanese market practices such as cross-shareholdings, and require advisers to disclose how local corporate governance norms influence recommendations. Independent oversight—such as stewardship committees with external members—can bolster accountability.

Engagement priorities and escalation

The 2020 guidance expects investors to broaden engagement beyond financial metrics. Priority themes include business portfolio discipline, capital allocation policies, board diversity and refreshment, climate transition plans, supply-chain resilience, and cyber governance. Engagement teams are encouraged to present evidence-backed asks—for example, requesting ROE or cost-of-capital targets, scenario analysis aligned with the Task Force on Climate-related Financial Disclosures (TCFD), or disclosure of director skill matrices.

Escalation options range from intensified dialogue and written feedback to voting against directors or supporting shareholder proposals. When collective engagement is warranted, investors should document how they select partners, share information responsibly, and avoid acting in concert on takeover decisions. For sectors facing acute transition risk—such as power utilities, autos, and heavy industry—investors can link engagement milestones to stewardship reporting cycles and disclose progress at least annually.

Reporting, transparency, and data quality

Annual stewardship reports should explain how engagements influenced company behaviour, not merely count meetings. The FSA encourages investors to disclose key performance indicators (KPIs) such as proportion of engagements tied to climate or governance themes, percentage of votes cast against management with rationale, and cases where engagement led to tangible outcomes (e.g., new independent director appointments or adoption of transition plans).(FSA 2020 Stewardship Code)

Investors must also address data quality: describing ESG data sources, validation steps, and how discrepancies between company disclosures and third-party datasets are resolved. Asset owners should ask managers to provide portfolio-level stewardship dashboards, including holdings coverage, unresolved engagements, and next-step plans. Where possible, summaries should be available in both Japanese and English to serve global stakeholders.

Implementation planning

Implementation timeline and adoption checkpoints

The Council asked existing signatories to revisit their stewardship statements promptly after the 24 March 2020 publication and disclose how they comply or explain deviations, enabling beneficiaries to compare practices.(FSA news release) New applicants are expected to align with the revised principles before submitting acceptance letters to the FSA Secretariat. Annual stewardship reports should incorporate the new expectations starting with fiscal years ending after the revision, including vote-by-vote disclosures and evidence of ESG integration.

Operational teams can phase implementation over the first year: (1) map existing policies to the revised principles; (2) upgrade engagement playbooks, proxy voting guidelines, and service-provider oversight; (3) deploy training and data pipelines; and (4) publish refreshed stewardship statements with clear KPIs. Boards or investment committees should receive progress updates at least quarterly during the transition.

Action steps for Zeph Tech stakeholders

Product and data teams supporting asset managers should ensure coverage of Japanese issuer fundamentals, cross-shareholding structures, and TCFD-aligned climate data so stewardship analysts can evidence engagement asks. Engineering can prioritise features that capture engagement objectives, milestones, and vote rationales at the resolution level to satisfy disclosure expectations. Client-facing teams can prepare briefing materials summarising the code’s ESG emphasis, per-agenda voting disclosure requirement, and proxy advisor oversight standards for Japanese mandates.

Compliance teams should review conflict-of-interest policies—especially where group companies manage pension assets—and document pre-approval steps for following proxy advisor recommendations. Internal audit can schedule post-season reviews of voting files and engagement logs to verify alignment with the revised code. When supporting global investors, localisation of materials and awareness of Japanese legal constraints on collective engagement will reduce implementation friction.

Follow-up: Ongoing Council monitoring of stewardship statements and vote disclosures will continue; investors that fall short of the revised expectations may face beneficiary pressure or heightened scrutiny in future FSA progress reviews.

Sources

• Japan Stewardship Code (2020 revision) — Financial Services Agency, Japan; official text of the second revised Principles for Responsible Institutional Investors “Japan’s Stewardship Code”.
• FSA news release on revised Stewardship Code — Financial Services Agency, Japan; announcement summarising the enhancements, including sustainability integration, vote-by-vote disclosure, and stronger asset-owner oversight expectations.