Asia businesses face increasing ESG liability risks

October 22, 2021 11:00
In Hong Kong ,the Green and Sustainable Finance Cross-Agency Steering Group would be taking steps towards mandating climate-related disclosures by 2025. Image: HK government

Headlines on climate change, ethical supply chains and large-scale corporate fraud continue to keep Environmental, Social, and Governance (ESG) issues in the spotlight across the world, including in Asia. As interest in ESG opportunities increases, businesses should also be aware of the attendant risks that can arise.

Increasing regulatory focus on ESG

Regulators and exchanges in Asia are picking up the pace in introducing prescriptive regulation and guidance to tackle perceived deficiencies in risk management and disclosure regarding ESG matters.

In Hong Kong SAR, the market has seen regulators’ ambitions for the jurisdiction to be a hub for green and sustainable finance crystallise into several targeted initiatives. These include new disclosure regulations – in the form of updates to the Fund Manager Code of Conduct – to statements of commitment to international standards, most recently, that the Green and Sustainable Finance Cross-Agency Steering Group would be taking steps towards mandating climate-related disclosures aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) framework by 2025.

Recent proposals from the Singapore Stock Exchange also mandate disclosures in line with TCFD recommendations for some sectors from 2023, and the Monetary Authority of Singapore (MAS) already expects all banks, insurers, and asset managers to make these disclosures from June 2022. The MAS also plans to issue a consultation later this year focusing on how to transition these expectations into legally binding requirements, against a single, internationally aligned standard.

Disclosure obligations of listed companies have also received renewed focus in mainland China: in June, the China Securities Regulatory Commission issued amendments to the disclosure rules which require listed companies to consolidate environmental and social information in their annual reports. The China Ministry of Ecology and Environment has also issued the Reform Plan of the Environmental Information Disclosure System which aims to establish a mandatory environmental information disclosure system by 2025 to cover heavy polluters, including listed companies and bond issuers with poor environmental protection records.

These all signal an increasingly complex regulatory environment for businesses operating in Asia in the years ahead.
Cross-border ESG standards gain momentum

Beyond complying with requirements in the “home” jurisdiction, organisations that operate in a cross-border environment will need to consider different and potentially conflicting requirements imposed by other jurisdictions in which they conduct business.

Regulators have acknowledged the importance of consistent if not identical standards across jurisdictions. In this respect, the work of the International Organisation of Securities Commission’s proposed Sustainability Standards Board to set globally consistent climate disclosure standards has the support of many Asian regulators and will be one to watch, having announced an ambitious target date of June 2022 to publish a global baseline disclosure standard.

As complete convergence is unlikely in the short term, businesses will need to be aware of, and navigate, potential differences in standards across markets.

Green washing and mis-selling

As ESG issues become increasingly important to investors, there is the concomitant worry that companies are taking advantage of this interest by selling their products as being “green” or “ESG compliant” while not actually delivering on the proposition – that is, “green washing”. Investors and regulators across the region, including in Hong Kong, Taiwan and Japan have signalled their concerns that green washing poses a significant challenge to true sustainable investing.

The experience in Europe and the US demonstrates that the lack of a formal taxonomy against which “green” products might be measured is unlikely to be a bar to enforcement actions. Recent high profile regulatory investigations into ESG mis-selling by both the Securities and Exchange Commission in the US and Federal Financial Supervisory Authority in Germany have been highlighted as a “serious wake-up call” by ShareAction, a responsible investment charity. As further confirmation of the potential risks, it is relevant to note recent instances in both the US and Australia where companies have toned down sustainability claims in advance of their initial public offerings.

Failure to consider ESG as a breach of directors’ duties

Overstating ESG credentials potentially gives rise to risks not only for a company but also its leaders. The board of directors and senior management of listed companies have collective and individual responsibility to exercise due skill, care and diligence in their management of said companies. This duty can extend to considering ESG-related risks and opportunities in business decisions.

In April 2021, in collaboration with the National University of Singapore, the Commonwealth Climate and Law Initiative released a whitepaper covering directors’ liabilities in relation to climate-related risks under Singapore law. The white paper and a legal opinion commissioned by the initiative opined that directors may be liable under Singapore law for breaching their duties to act in the best interests of the company if they fail to take into account climate-related risks in their decision-making process.

Public law challenges to government and corporate decisions

Recent years have also seen non-governmental organisations (NGOs), activists and other stakeholders take up challenges to both government and corporate decisions to build, facilitate or approve projects perceived as “ESG-deficient”. A series of court decisions in Europe in 2021 confirm activists’ ability to use human rights and intergenerational equity arguments to real effect. While we have yet to see similar challenges in Asia, the success of the arguments deployed and the increased activity by NGOs in the region are indications of the potential for ESG-based challenges going forward.

Looking ahead

As ESG investment becomes mainstream, the need for companies to strengthen their ESG credentials and disclosures has never been higher.

Getting ahead of the curve is the best defence: corporates and financial institutions in Asia should proactively develop a holistic and comprehensive view of the ESG risks and emerging threats to their business, or risk change being brought about by third party stakeholder actions.

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