South-east Asian companies sharpen internal lens as ESG disputes rise

COMPANIES across South-east Asia have increasingly become more circumspect when dealing with their environmental, social and governance (ESG) practices. Part of the motivation for such internal precaution is to avoid litigation, say industry experts.

Janice Tay, partner at Wong & Partners, said that to this end, more companies are holding internal investigations to review actions led by their board of directors and individual employees. She added that she views this development as “interesting”, as it displays a level of raised awareness.

“Everyone is being held accountable, not just companies. We’re seeing countries, companies, directors, being held accountable and really being put to scrutiny”, she noted. The outcome of such investigations, depending on the severity of the wrongdoings detected, can result in minor warnings or even a board reshuffle.

These mitigating measures also underscore a rising engagement among regional firms on ESG matters.

Elizabeth Wu, legal consultant with ClientEarth and visiting researcher with the Asia-Pacific Centre for Environmental Law, noted that there is heightened awareness among company directors on their duties and legal obligations in steering their firms to address climate-change issues.

An improved understanding of these demands on directors – be it in climate science and the financial risks or the legal obligations on an international and domestic level – has led to greater scrutiny of companies’ activities relating to climate change. This can lead to higher litigation risks.

While not as common as legal disputes in Europe and North America, most ESG-related disputes in South-east Asia happen in the climate-change space. However, as ESG encompasses so many aspects of a business, attention to related issues should not be limited to just companies involved in emissions-heavy industries, but businesses across the board as well. 

“The common narrative is that (ESG risk) probably has something to do with hazardous industries, toxic industries, carbon-intensive activities,” said Ashish Chugh, principal at Baker McKenzie Wong & Leow. “And that is certainly one aspect.”

But there are a diverse number of ways in which companies can be implicated by ESG standards, beyond the “E”. Issues falling under the social aspect include labour rights, health and safety, data protection, as well as diversity and inclusion.

“Generally, human rights laws are incorporated as part of the contractual obligations of the suppliers, which opens up these suppliers to human rights impact assessments,” said Katie Chung, partner in international disputes and arbitration at Norton Rose Fulbright.

Under the governance pillar, issues include leadership and corporate shareholder rights, ethics and transparency, as well as corruption. Although not many such cases have gone to court, disputes common in Singapore are related to greenwashing and inadequate disclosure. These disputes are mostly driven by activist investors or observers and regulators, who are eager to push for accountability among companies.

“Regulatory action is also likely to rise in this area, as governments will be under pressure to police ESG concerns or… face litigation themselves,” said Paul Tan, partner of Gibson Dunn in Asia.

ESG-related regulations are certainly growing. For instance, the Monetary Authority of Singapore has released new disclosure and reporting guidelines. These require retail ESG funds to adequately disclose relevant ESG criteria used, and to have at least two-thirds of their net asset value invested according to their investment strategy.

While the guidelines fill a gap in ESG labelling and reporting regulations in Singapore, they do not introduce any standardised ESG metrics, said Norton Rose Fulbright’s Chung. Instead, they leave it up to the fund to choose its own relevant methodology.

“Broadly speaking, legislation cannot possibly solve all ESG issues… Most legislation will either try to set specific targets which are easier to enforce, but likely to be under-inclusive in terms of truly solving the problem”, Tan explained. 

Baker McKenzie Wong & Leow’s Chugh urged companies to take ESG issues seriously, and manage the related risks they could face. In this regard, companies should ensure they have a robust and effective governance structure and compliance system, as well as clear guidelines when making statements open for public scrutiny.

To do so, a company must first identify the unique risks they face – some risks may be “less obvious” than others – and find an appropriate remedy, Chugh added.

Businesses need to understand – and keep abreast of – the ESG landscape in their respective markets where they operate, said Denise Fung, litigation, arbitration and investigations partner at Linklaters. This includes being aware of market trends, new regulatory standards, and how that impacts a company’s risk profile.

Rather than taking a one-size-fits-all approach, experts urge companies to consider a large suite of different options that address their specific needs, although this may be a costlier exercise. The upsides, however, are clear.

“There’s a very strong motivation and good objective… we’re trying to change the way we deal with ESG-related issues. That’s something that holds promise,” said Chugh.