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ESG Trends and the Big Picture
The risk environment globally is shifting, and organisations around the world are facing increased pressure on all fronts to integrate Environmental, Social, and Governance (ESG) measures into their core business strategies and improve ESG transparency and performance. This shift has been exacerbated by factors such as continued supply chain disruptions, ongoing impacts from the COVID-19 pandemic, challenges arising from digital transformation, climate risk, evolving ESG considerations/standards and litigation.
These disruptions have served to further expose the vulnerabilities in our socio-economic systems, highlighting the urgent need for businesses to prioritise stronger ESG action beyond including it as a marketing buzzword in their reporting.
Businesses in today’s world require both a broad and deep understanding of key international trends and the local landscapes in which they operate. Managing complex and multijurisdictional considerations in particular, while keeping ahead of evolving ESG trends and the broader landscape, has been a challenge to many with the risk of cross-border litigation increasing and the location and availability of witnesses and evidence being a commonly discussed topic.
ESG Disputes Around the World
Baker McKenzie’s The Year Ahead report for 2022, which forecasts emerging trends in dispute resolution and collated data from 600 in-house lawyers from large companies around the world, found that COVID remains the biggest external factor driving disputes, while cybersecurity and ESG disputes present the greatest risks to business.
Within the ESG space, climate change disputes in particular have seen an unprecedented rise, with over 2,000 ongoing or concluded climate change cases around the world (more than double the number in 2015), according to the Grantham Research Institute on Climate Change and the Environment. Increasingly, these are brought against corporations in addition to government entities. Key areas being contested include emissions reduction commitments, greenwashing, and attribution of responsibility for adverse climate impacts.
On the social front, there is increasing focus on discrimination issues in employment disputes. Recent years have also seen the introduction and implementation of modern slavery, human rights and supply chain due diligence legislation around the world, which present a legal requirement for companies to assess the risk of modern slavery across their supply chains. Governance-related disputes also remain a high priority, particularly around the ethical practices of companies, which have a significant overlap with the social dimension of ESG.
ESG Trends in Asia Pacific
Baker McKenzie’s Asia Pacific Business Renewal Series recently explored Advancing ESG in Asia Pacific, and found that ESG and environmental issues rank seventh out of the top 14 concerns facing businesses in APAC. A number of regulators across APAC are introducing more stringent ESG related requirements. The top three ESG risks in APAC were found to be:
- Regulatory enforcement and investigation
- New regulations
- Changing buyer behaviour
Image: ESG disclosure trends across APAC. Source: Bloomberg Professional Services)
Key ESG trends and developments in the APAC region include:
- Hong Kong: Revised Corporate Governance Code and Listing Rules to enhance corporate governance and diversity practices. Established a “Green and Sustainable Finance Cross-Agency Steering Group” to coordinate the ESG regulatory framework for the finance sector.
- Singapore: Singapore Exchange (SGX) recently introduced mandatory climate and board diversity disclosures and published a list of 27 core ESG metrics to help listed companies align their disclosures with international standards, as well as setting up a sustainability reporting advisory committee to look at a potential reporting regime for all Singapore companies – private as well as public.
- Malaysia: Revised Malaysia Code on Corporate Governance to introduce diversity and sustainability guidelines. Regulations aligned with the Taskforce on Climate-Related Financial Disclosures (TCFD).
- South Korea: Plan to introduce mandatory ESG disclosures for listed companies with assets exceeding KRW 2 trn (USD 1.5 bn) from 2025.
- Taiwan and Japan: Introduced sustainability reporting and stewardship codes.
- China: Environmental Information Disclosure Guidelines for Financial Institutions, ambition is to have emissions peak before 2030, carbon neutrality before 2060, and publishing Green Investment Principles (GIP).
- 27 financial institutions have signed up to the GIP, including ones from Japan, Hong Kong and Singapore
- India: Securities and Exchange Board of India has been having ongoing consultations on ESG regulations, and a bill to establish a national carbon market has passed the lower house of the Parliament.
- Australia: Australian Securities and Investments Commission has increased monitoring efforts on climate-related financial disclosures and the Australian Prudential Regulation Authority is in the process of finalising guidance around investments in relation to climate risk.
- USA: Indirectly relevant to APAC is the Uyghur Forced Labour Prevention Act which came into force 21 June 2022 and obliges importers to provide evidence that inbound products do not involve slavery in Xinjiang, China.
- Europe: Indirectly relevant to APAC is the EU Due Diligence Act which is under negotiation now and would require detailed human rights and environmental due diligence down through supply chains to source, which will affect supply chains throughout APAC.
ESG trends in APAC have also shown an increased focus on responsible investment, not only limited to financial institutions but also to pension funds and corporate and institutional investors. A 2021 study by the NYU Stern Center for Sustainable Business and Rockefeller Asset Management assessed the relationship between ESG and financial performance across more than 1,000 individual studies. It found that although ESG disclosure on its own does not drive financial performance, ESG integration seems to perform better than negative screening approaches, providing downside protection especially over longer time horizons. Managing for a low carbon future further improves financial performance.
Influence of Global ESG Trends on APAC
Compared to jurisdictions such as the United States and Europe, Asia-centric companies are not seeing as big a surge of ESG disputes as yet, and business leaders and internal lawyers are not yet feeling similar levels of pressure regarding ESG compliance. However, APAC is seeing some momentum, with notable examples of legal proceedings involving opposition to power plant and mine construction in Japan, claims in the Philippines with intersections between human rights and climate change, and similarly in the Pacific Island nations. Australia is seeing disputes more similar to the EU and the US, with a broader mix of cases including some against company directors brought by activist investors and shareholders and claims against pension funds for failing to divest away from climate change-related risks.
It is likely that over time there will be a shift to increasing risk of ESG disputes across APAC– and not just Australia, as investors expect fuller and more transparent reporting on ESG disclosures resulting in more regulatory investigations or even disputes. However, the approach to specific ESG issues in APAC is quite different from the EU and the US. For example, human rights and social-related norms vary considerably across APAC and so the standards against which companies will be measured is currently uncertain. As a result, the social aspect still remains largely voluntary for companies implementing ESG actions.
Another key feature of the ESG landscape in APAC remains the variations in levels of commitment to sustainability and cohesiveness of ESG regulations and governance. This can be attributed to economic uncertainty and socio-economic disparities across the region, as well as government attitudes and the composition of each economy.
Sector-specific ESG Trends
Nuances in ESG drivers are also seen on a sectoral level, with companies in the Consumer Goods and Retail, and Energy, Mining and Infrastructure sectors being more likely to cite changing buyer behaviours as a key risk. Consumers across markets are becoming increasingly conscious of ESG issues and factor these into their purchasing decisions. Even businesses that do not directly face consumer markets have started seeing their ESG performance and initiatives scrutinised as pressure for supply chain transparency increases.
Focus on ESG in Supply Chain Visibility and Transparency
While many businesses in the APAC region recognise the importance of embedding ESG within their supply chains, a key concern for companies is the geographic spread of supply chains in areas where human rights and ESG issues are not typically easy to control, or even to gain visibility over. This presents a huge risk, particularly when exporting to jurisdictions with higher ESG requirements such as the EU.
Where traditional supply chain disputes largely revolved around product quality or payment issues, the trend in disputes in this area has now shifted to companies engaged in forced or child labour, health and safety violations, and breaches of modern slavery legislation.
Consumer and regulatory pressures are increasing with the desire for more information and greater visibility across supply chains, as well as ESG impacts throughout the supply chain. Eventually, visibility and transparent disclosures on impacts right down to source will be expected, making organisations accountable for supplier conduct and greater governance controls from parent companies placed on foreign subsidiaries.
While contractual provisions are an important mitigating action for ESG claims based on weak links in supply chains, a clause in supplier contracts will not be sufficient protection if suppliers are caught engaging in activities such as money laundering or bribery for example. Supplier codes of conduct, active supplier engagement, risk-based supply chain assessments, and regular follow-ups are becoming the norm to assess and identify human rights risks in supply chains. Various legislation such as the Australian Modern Slavery Act 2018 (Cth) and the German Act on Corporate Due Diligence in Supply Chains (in force from January 2023) obligate organisations to be responsible for their supply chains up to source, extending beyond the focal organisation’s ability to contractually protect itself. As a result we are seeing companies’ increasing engagement and transparency up the tiers of their supply chains, using tools such as supplier assessment questionnaires to mitigate risk.
Voluntary ESG Action
Even as mandatory ESG reporting and other obligations are being introduced and strengthened around the world, stakeholder demands for greater transparency on a voluntary basis are also increasing. One of the key ESG trends we are seeing in the APAC region is that companies are starting to realise that stronger ESG responses present a competitive advantage.
Not all organisations are increasing their ESG disclosures due to risk of litigation or to meet compliance obligations; we are increasingly seeing clients in Australia and around APAC investing capital in ESG initiatives because of the opportunities this presents. Companies of all sizes are more frequently seeking to proactively develop and implement ESG strategies and publish reports before being mandated to do so, in response to stakeholder priorities and market trends.
Some of the benefits of voluntary ESG action include:
- Resource and energy efficiencies
- New sustainability services and innovative products
- Capital and financing advantage
- Exploring new markets
- Business and supply chain resilience
- Employee attraction and retention
ESG – Looking Forward
We foresee an increased focus on ESG issues across APAC and expect this trend to accelerate in coming years, including for ESG-related litigation, liability, regulations, disclosures, and corporate strategies. In response, future-forward organisations across the region will increasingly embed ESG considerations into their risk frameworks and corporate strategies. Risk mitigation will not be the only driving force, but also the pursuit of opportunity in a still-nascent ESG market. There is likely to be an early-mover advantage for sustainability-focused organisations across the region and we recommend beginning the ESG journey now.
Co-authored with Richard Allen, Principal Baker McKenzie