Ayumi Fukuhara July 20 2022 Progress made in human rights due diligence Nagashima Ohno & Tsunematsu | Employment & Immigration - Japan Ayumi Fukuhara Employment & Immigration IntroductionMETI guidelines for human rights due diligenceRevision of Corporate Governance CodeCollaboration with ILOCommentIntroductionEnvironmental, social and governance (ESG) standards are facing more attention from various stakeholders, including regulators, investors and consumers. Above all, the issue of human rights, which falls under the "S" in ESG, has increased the need for due diligence in recent years. In 2021, the Ministry of Economy, Trade and Industry (METI) and the Ministry of Foreign Affairs (MOFA) conducted a survey on human rights due diligence in companies and found that half of Japan's publicly traded companies do not carry out such investigations, with 30% of those companies adding that they did not know how to conduct them. As the survey was limited to listed companies and the response rate was low, it is likely that many more Japanese companies do not conduct due diligence. However, with the upcoming guidelines (as described below) and European legislation, Japanese companies will be increasingly required to perform human rights due diligence.METI guidelines for human rights due diligenceIn March 2022, the METI established the Study Group on Guidelines for Respecting Human Rights in the Supply Chain to produce Japan's first guidelines for human rights due diligence. By creating these guidelines, Japan hopes to close the gap with the United States and Europe, which are already responding to concerns in this area. The guidelines will not be mandatory but will likely include recommendations on how companies should:identify and assess risks;track and disclose their findings; anddesign grievance mechanisms for stakeholders should be designed.The targeted release date is Summer 2022.Revision of Corporate Governance CodeThe Corporate Governance Code, which was established by the Tokyo Stock Exchange for listed companies, was revised in 2021 and requires corporate boards to deal with sustainability issues, including "climate change and other global environmental issues, respect for human rights, fair and appropriate treatment in the workforce, fair and reasonable transactions with suppliers" and other matters. It states that these are all important management issues that can lead to profit opportunities, as well as risk mitigation.Further, companies that will be listed in the "prime" market are required to meet a higher standard of disclosure. The revised code states that those companies should enhance the quality and quantity of their disclosure in relation to sustainability based on the recommendations of the Task Force on Climate-related Financial Disclosures or its equivalent.Collaboration with ILOAccording to the media reports, the METI has recently requested the International Labour Organization (ILO) to dispatch experts to production sites in Asian countries to examine the human rights risks of Japanese companies' overseas business partners and encourage improvements. According to the announcement, ILO experts have started going to production sites in Bangladesh, Vietnam and Cambodia since April 2022 to check the status of human rights considerations for employees and compliance with labour standards laws, as well as other laws and regulations.CommentWhen conducting human rights due diligence in Japanese companies, it is important to understand the human rights risks that are unique to Japan. First, the supply chain of Japanese companies has traditionally been characterised by:multiple layers of subcontractors in the supply chain;low visibility of the supply chain; andlittle substitution of procurement and production sites in the supply chain.Second, some companies depend on China and the countries that comprise the Association of Southeast Asian Nations to procure raw materials and components.The textile industry is generally considered as one of the high-risk sectors for human rights, as it has built long supply chains that range from manufacturing raw threads and textiles to planning and manufacturing final products, and distributing and selling them. The METI established the sector-specific Study Group on Sustainability of Textile and Apparel Industry, which published a report in 2021. The report highlighted problems relating to technical trainees, improving supply chain structure and formulating guidelines on environmental design. Further, the Japan Textile Industry Federation is also discussing the preparation of sector-specific guidelines for human rights due diligence. Future developments should be closely monitored.For further information on this topic please contact Ayumi Fukuhara at Nagashima Ohno & Tsunematsu by telephone (+81 3 6889 7000) or email (a[email protected]). The Nagashima Ohno & Tsunematsu website can be accessed at www.noandt.com.