The new reputational risk Japan can’t ignore

Japan has long been viewed as one of the most stable and responsible business environments in the world. Its companies are known for reliability, good governance, and strong environmental management. Yet a new wave of business conduct risk – linked to supply chains, labor practices, and regulatory scrutiny – could start to challenge that reputation.

# From environmental strength to emerging vulnerabilities

Japan’s environmental record continues to outperform global peers. Compared with the US or EU, Japan faces relatively low environmental risk exposure and enjoys a more balanced overall risk profile. As other markets tighten due diligence and accountability standards, Japan, too, is moving away from long-standing reliance on voluntary corporate practices. The new sustainability disclosure standards from the Sustainability Standards Board of Japan align closely with those of the International Sustainability Standards Board.

# Sustainable business conduct profile: Japan vs peers

Share of incidents by risk group | Fiscal year Aug 2021 - 2025

However, Japan’s sustainable business conduct profile suggests emerging social and governance risks. As global due diligence and sustainability regulations expand, issues such as human rights and supply chain transparency are increasingly critical. Japanese companies with operations or clients in regions like the EU will need to comply with standards such as the Corporate Sustainability Due Diligence Directive (CSDDD), regardless of domestic laws. These governance issues are now central to investors’, regulators’, and the public’s evaluation of corporate integrity.

# Chains of accountability

Supply chain transparency is becoming a pressure point. Retail is by far the most exposed sector to supply chain risk. A recent RepRisk report on one particularly significant segment of the retail sector – fashion – found that human rights violations and poor working conditions account for the majority of reported risk incidents. At the same time, environmental and land-use issues are creeping deeper into Japan’s supply chain exposure, particularly as biodiversity concerns intersect with trade and finance.

Meanwhile, RepRisk data shows a clear link between biodiversity risk and misleading sustainability claims. In Japan, greenwashing-related incidents doubled in 2024 following the introduction of the Financial Services Agency’s anti-greenwashing guidelines. This sharp rise is not necessarily reflective of worse corporate behavior but rather of growing regulatory and investor scrutiny – and a lower tolerance for reputational lapses.

# Greenwashing as a share of risk incidents by country

# Human rights under the lens

Japan is also seeing an increase in social and labor risks. Human rights abuse now tops Japan’s domestic risk chart, rising four percentage points since 2021. As investors and regulators acknowledge the interconnected nature of global supply chains, poor labor conditions and discriminatory practices are seen as growing threats to both corporate performance and social stability.

Companies face growing pressure to demonstrate credible human rights practices, yet many fall short of their public commitments to ethical sourcing and responsible labor standards. This gap between rhetoric and reality has fueled rising concerns over social washing, as firms continue to market themselves as socially responsible while lacking visibility into complex supply chains where labor abuses often remain hidden and unaddressed.

Japan’s government has introduced voluntary Guidelines on Respecting Human Rights in Responsible Supply Chains that apply to both domestic and overseas operations. These call for companies to identify, assess, prevent, and mitigate human rights impacts, and to disclose their actions. However, voluntary measures may not be enough as trading partners – especially in Europe, but also in countries like Singapore and Australia – move toward binding legislation on human rights and due diligence.

# Japan's risk progression over past 5 years

Risk divergence between Aug 2021 -> Aug 2025

# Reputation as resilience

It’s clear that Japan’s strong environmental performance alone will not insulate companies from reputational damage. Future resilience depends on how transparently and responsibly businesses manage their global footprints. Business conduct risk has become strategic risk, and the cost of inaction is rising fast.

In the coming years, Japan is expected to align more closely with EU sustainability standards and advance toward binding sustainability and human rights legislation. Companies that move early – embedding due diligence, real-time monitoring, and transparency into their operations – will not only meet compliance demands but will help define the next chapter of responsible business in Japan.

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