The ESG dilemma: Balancing real progress with investor scepticism 

THE growing prominence of environmental, social and governance (ESG) considerations in Singapore’s corporate landscape has been met with both enthusiasm and scepticism. While the government has implemented various initiatives to promote sustainable business practices, there has been some pushback against the ESG agenda, driven by concerns over operational challenges, measurement difficulties and the risk of greenwashing.

A recent landmark case at the International Tribunal for the Law of the Sea (Itlos) on May 21, 2024, has brought these issues to the forefront. Itlos classified greenhouse gas (GHG) emissions as a form of marine pollution under the United Nations Convention on the Law of the Sea (Unclos).

This is a groundbreaking recognition linking atmospheric pollution directly to marine health​.

States must take necessary measures to prevent, reduce, and control marine pollution caused by GHG emissions. This includes implementing stricter regulations and mitigation strategies to address ocean warming, acidification and sea level rise​. The ruling extends states’ obligations beyond the Paris Agreement, emphasising the need for additional actions to fulfil their duties under Unclos.

The Itlos decision classifying GHG emissions as marine pollution impacts states directly.

As states align with climate goals, stricter environmental regulations may emerge. These developments may have significant implications for companies, particularly those in high-emission sectors such as manufacturing, shipping and energy. Companies may need to adopt more rigorous measures to prevent, reduce and control their emissions, which may involve substantial investments in cleaner technologies and renewable energy sources.

Additionally, companies may need to improve their environmental reporting, providing detailed disclosures on their emissions and the steps they are taking to mitigate their environmental impact.

Although non-binding, Itlos opinions are highly persuasive. States and international organisations often consider these opinions when formulating policies and regulations.​ An Itlos ruling increases diplomatic and legal pressure on states to comply. Non-compliance can lead to reputational damage and affect international relations.

This ruling has intensified the pressure on companies to adopt ESG principles, but it has also highlighted the complexities and challenges involved in doing so. Many companies, particularly small and medium-sized enterprises (SMEs), are grappling with the costs and operational hurdles associated with meeting ESG standards.

According to a December 2023 report by Deloitte, Scope 3 emissions can account for up to 88 per cent of a company’s total emissions, requiring extensive data collection across the entire value chain. But, the lack of standardised metrics and reporting frameworks in Scope 3 emissions has further compounded these difficulties, making it challenging to assess the true impact of ESG initiatives.

Moreover, there is a growing concern that the ESG agenda has become a bandwagon that companies are jumping on without fully understanding the implications or making meaningful changes to their operations. The risk of greenwashing, where companies make misleading or unsubstantiated claims about their environmental and social performance, has led to increased scepticism among investors and stakeholders.

This scepticism is not unfounded. A 2022 survey of sustainability reporting by KPMG highlighted significant trends in ESG reporting. The study indicated that since 2017, there has been progress in companies recognising climate change as a business risk. However, fewer than half report on social and governance risks, often lacking quantifiable financial impacts.

Only one-third of the top 100 global companies by revenue have a board member responsible for sustainability, and just 40 per cent of the world’s top 250 Fortune 500 companies link executive compensation to sustainability outcomes.

They also observed that many disclosures remain narrative-driven, rather than focusing on quantitative or financial impacts. This gap contributes to investor scepticism and concerns about greenwashing, highlighting the need for more robust ESG practices.

In light of these challenges, there has been a noticeable shift in the approach taken by Singapore companies towards ESG integration.

Rather than simply jumping on the bandwagon, many firms are now taking a more careful and considered approach, weighing the costs and benefits of different ESG strategies, and seeking to align their efforts with their core business objectives.

This shift is reflected in the growing emphasis on materiality in ESG reporting. Companies are increasingly focusing on identifying and prioritising the ESG issues that are most relevant and impactful to their operations and stakeholders, rather than trying to address every aspect of sustainability. This allows them to allocate resources more effectively, and ensures that their ESG efforts are integrated into their overall business strategy.

However, the path to effective ESG integration remains fraught with challenges.

The global economic turmoil caused by the Covid-19 pandemic has put immense pressure on companies to prioritise short-term financial survival over long-term sustainability goals. Some companies have criticised mandatory climate reporting requirements as overly burdensome, thus highlighting the ongoing tension between regulatory imperatives and business realities.

Moreover, the emergence of the Taskforce on Nature-related Financial Disclosures (TNFD) framework introduces additional layers of complexity due to its broader scope.

Unlike the Task Force on Climate-related Financial Disclosures (TCFD) framework, which focuses primarily on carbon and climate-related risks, TNFD addresses multiple dimensions of nature, including biodiversity, water and ecosystem services, each with unique characteristics and geographic specificities.

One of the significant complexities of TNFD reporting is the concept of “double materiality”, which examines both how nature impacts a company’s operations and how a company’s activities affect nature. This dual perspective is more intricate than the TCFD’s single focus on financial materiality.

Despite these challenges, there are reasons for optimism. The growing investor demand for ESG-focused investments, coupled with the increasing recognition of the business case for sustainability, is creating powerful incentives for companies to adopt more responsible and transparent practices.

The Singapore government’s continued support for sustainable finance and green technologies, as evidenced by the SG Green Plan 2030, is also helping to create an enabling environment for ESG innovation and growth.

Ultimately, the key to overcoming the challenges and realising the potential of ESG integration lies in fostering a culture of collaboration, transparency and continuous improvement.

Companies must be willing to engage openly and honestly with their stakeholders, learn from their peers and partners, and embrace a long-term, holistic approach to sustainability that goes beyond mere compliance or box ticking.

By taking a more careful, considered, and strategic approach to ESG integration, Singapore companies can navigate the complex and evolving sustainability landscape, balancing the imperatives of environmental and social responsibility with the realities of business success.

The writer is a lecturer, School of Law, at the Singapore University of Social Sciences and an of counsel at RHTLaw Asia. He is also a PhD candidate based in C-EENRG at the University of Cambridge, exploring corporate legal liability for ESG issues.