A WHITE PAPER ON ESG AND THE LAW | June 2023
Building a case for climate action
The terms ESG (a shorthand for "Environmental, Social and Governance"), sustainability and decarbonisation are everywhere - but how are these terms used, are they used correctly and why is this important? How does the decarbonisation or net zero journey start? This paper tries to answer these questions informed by responses from stakeholders.
Climate change, as evidenced by extreme events such as heatwaves, droughts and floods, left its mark on every continent in 2022, and has already affected billions of people worldwide. Climate risks are expected to be a core focus of global risk perceptions in the coming decade1 - and for which people are thought to be least prepared.
Countries accounting for 88% of global greenhouse gas emissions have set decarbonisation targets in line with the Paris Agreement2. The Asia-Pacific region plays a critical role in this global endeavour, given its population and geographical expanse. Concerted commitment to decelerate climate change is critical in Asia-Pacific as the region is one of the world's most vulnerable to climate change impacts - from devastating floods in Pakistan to heatwaves that ruined crops, dried up rivers threatening hydroelectric power supplies in China. More than 70% of the countries in Asia- Pacific3 have set net-zero or carbon neutrality targets, including the region's largest economies: China, Japan, India and South Korea.
Commitment to climate action is not a new phenomenon in business practice, having been bracketed under the umbrella term ESG matters for a number of years.
Legal risks are lurking in the complex web of disclosure requirements and sustainability standards. The ESG label - applied to all manner of E, S and G principles - is a particularly thorny area, especially if you are an investor or company that wants to take your ESG integration seriously. Companies have used ESG as an umbrella term to demonstrate their commitment to some broadly defined ethical values, either as a marketing effort to improve the social credit of their business, or as a metric by which to hold companies to account. However, there is no consistent understanding of what ESG means to each business or how it interplays with current and future policies, regulations and laws. Overstated claims around ESG, or greenwashing, have already been the subject of enforcement actions in the US and Europe. Businesses must move beyond vague statements about disparate ESG initiatives and take concrete steps to transition to a more sustainable development path. They must also realise that with shifting regulatory, consumer and technology landscapes, ESG and sustainability will increasingly impact the company's bottom line. The shift from simple compliance with existing regulation to fulfilment of real ambitions will be a challenge for many businesses.
With regulators and stakeholders demanding more disclosures on ESG and action on sustainability, businesses and investors in Asia are facing new challenges. In particular, the rising tide of global regulation is forcing international corporations to rethink their entire business process, including understanding and complying with local legislation in the markets where they operate, whilst still meeting international standards in order to remain part of the global value chain. These obligations are increasing.
For example, the Task Force on Climate-related Financial Disclosures (TCFD), introduced in 2017, has since provided a global disclosure framework for companies to report on their governance, strategy, risk management and metrics for managing climate-related financial risks and opportunities. Companies in Asia Pacific are seen to have markedly adopted the TCFD framework and stepped up their reporting of how climate change impacts their business. The recommendations of the newly established International Sustainability Standards Board (ISSB)4 are also a significant milestone in the market, as they will provide a global baseline for how companies should disclose sustainability and climate-related information and the impact on their operations.
Evolving ESG and climate disclosure standards: More paperwork or a map to clarity?
Major stock exchanges in Asia, including Hong Kong, Japan and Singapore, have already announced their intention to adopt the ISSB standards for listed issuers. These include disclosures related to physical climate risks posed by extreme weather events or chronic change in weather patterns, as well as transition risks and opportunities brought by climate-related regulatory, technology and market environment. They do not as yet include disclosure of how businesses plan to contribute to the Paris Agreement's goal of maintaining global temperatures within 1.5 degrees centigrade above pre-industrial levels. However, proposed legislation in the European Union - which will likely have an effect on any company doing business within and with the EU - will seek to do so5.
Across Asia, policymakers have made it clear that decarbonisation and sustainability will be central to the future of the region's economy. Supra-national bodies and governments at both national and local levels are seen to be enacting policies intended to direct industry activities and capital flows towards the transition to a low-carbon economy.
Whilst there are risks to this transition, there are also opportunities. Global renewable energy alone surged past US$1 trillion in 20226 , and impact investing as a category of investment accounts for another US$1 trillion7 . With such growing momentum for making profit whilst providing solutions to social and environmental problems, are businesses, investors and financiers taking adequate actions to mitigate the risks and harness the opportunities in the transition to a low-carbon economy?
From understanding the myriad of regulations and how they apply, to helping clients strengthen their ESG-aligned governance structure, to negotiating deals where both risks and incentives of sustainability considerations are integrated, lawyers have a critical role to play.
Everyone goes after the companies or the bonds that will give you financial gain. To overlay this lens [of ESG], it would generally limit the options - Asset Manager
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1 World Economic Forum (2023). Global Risks Report 2023.
2 The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at the UN Climate Change Conference (COP21) in 2015 and entered into force in 2016. The Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C. The Paris Agreement also embraces "just transition" as a policy direction, in an effort to make sure no workers get left behind in the transition to a low carbon economy.
3 Count of countries in the Asia-Pacific region is based on the number of Asia-Pacific Member States of the United Nations.
Established in November 2019, the International Sustainability Standards Board (ISSB) is an independent, private-sector body that develops and approves IFRS Sustainability Disclosure Standards (IFRS SDS). The ISSB operates under the oversight of the IFRS Foundation.
5 The Corporate Sustainability Due Diligence Directive (CSDDD) was approved by the European Parliament on 1 June 2023. Amongst other things, it requires relevant entities to produce transition to low carbon plans to align their business models and corporate strategies with the Paris Agreement goal of limiting global warming to 1.5 degrees centigrade above pre-industrial levels.
6 Global Low-Carbon Energy Technology Investment Surges Past $1 Trillion for the First Time | BloombergNEF (bnef.com)
7 GIINsight: Sizing the Impact Investing Market 2022 | The GIIN
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.