Directorship in a shifting ESG landscape

Boards are often required to navigate ESG considerations throughout the decision-making process. While the precise contours of the ESG landscape may vary considerably between regions, the shifts in ideology towards sustainable business practices are part of a wider global trend.

The intensifying regulation of the space, coupled with broader adjustments in mindsets, is propelling a wave of change that continues to sweep across the world. Board members must keep abreast of developments and adapt to the changing terrain.

The global transformation

The threat of climate change lies at the heart of this transformation. Whole cities and communities are ravaged by extreme weather events. Sectors like agriculture, sensitive to environmental shifts, face the continued onslaught of predictably unpredictable weather. Such erratic weather patterns lead to price fluctuations and disruptions in supply chains.

Companies most exposed to climate risks need to be agile in addressing the complexities of the threat. Directors have to assess the climate-related risks in the geographies where they operate.

With many countries solidifying their commitment toward a common net-zero goal, governments are tightening legislation to help them make good on their decarbonisation ambitions. This will pose new legal considerations for companies, with non-compliance potentially materialising in palpable financial impact.

Corporate governance regimes are also being strengthened in several jurisdictions. This promotes greater compliance, accountability and discipline. The enhancements seek to complement the existing legal infrastructure, forming the cement between the "E" and "S" in ESG.

Simultaneously, new doors open, presenting fresh economic prospects. The convergence of risk and reward in this sphere requires that businesses proactively structure their legal frameworks for continued commercial viability in the new dynamic. Corporates will now have to insulate themselves against emergent risks while seizing opportunities on the horizon.

Stakeholder engagement

Boards are at the helm to ensure proper carriage of their companies' environmental and social initiatives. They often have to embed ESG considerations into their decision-making processes to take in the divergent interests of a broad set of stakeholders, including suppliers, customers, employees and local communities. These stakeholders increasingly expect directors to integrate sustainability into the company's strategic planning, risk management processes and investments.

Supply chain issues, driven by what is sometimes referred to as modern slavery laws, are another aspect of the increasing connection. Workforce engagement and employment norms have similarly taken on new dimensions, particularly in the post-pandemic era. Sustainability is hence no longer simply a moral imperative but is fast becoming a core business strategy.

Regulatory changes in Singapore

Against this backdrop, Singapore has been at the forefront of steering ESG policies and initiatives. Directors of Singapore companies too must stay attuned to the evolution both domestically and internationally.

Some aspects of the environmental regulatory framework that Singapore directors should monitor include:

• Sustainability reporting. The Singapore Exchange has rolled out the first phase of mandatory sustainability reporting, starting with listed issuers in specific sectors. This obligation will expand to cover other carbon intensive industries next year. Other listed issuers will continue to report on a "comply or explain" basis, but this too may fold into a mandatory reporting regime in the future. This calls for boards to work with experts and experienced legal teams to ensure accurate, transparent and meaningful disclosure. Neither the extreme of "greenwashing" or "greenhushing" are desirable.
• Carbon pricing. Singapore has also implemented a phased carbon pricing approach, imposing a carbon tax that will rise over time. Companies exceeding emission limits will face the tax, encouraging them to explore cost control measures and trading opportunities especially while the carbon trading market is in its nascent stage. Transition credits and investment in low carbon technology go hand-in-hand as new industries continue to leverage on this growing area.
• Sustainable financing. As part of the government's aim to develop a robust green finance ecosystem, the Monetary Authority of Singapore issued Guidelines on Environmental Risk Management (Banks) in 2020. These guidelines essentially require enhanced scrutiny from an environmental perspective when banks extend credit or underwrite capital market transactions. In turn, companies seeking financing should consider how best to mitigate their environmental risks.

Transition financing and blended financing opportunities also form part of the suite of options that company boards can explore. Directors looking to tap on green financing, should be equipped to operate effectively within their boundaries. Challenges in financing often remain and boards must grapple with the challenge since financial considerations continue to be the centrepiece in the ongoing energy transition. The question that however often remains is when renewable technology will reach scaleable levels.

ESG-related disputes: An unseen risk?

The rising tide of ESG related disputes and regulatory actions also has financial implications for businesses, communities and governments.

For instance, there is the landmark decision rendered this April in favour of the Verein KlimaSeniorinnen Schweiz - this climate lawsuit was brought against the Swiss government by a group of senior Swiss citizens. The European Court of Human Rights ruled that the Swiss government had violated the human rights of its citizens by inadequately battling climate change. The decision binds the signatories to the European Convention on Human Rights, setting a powerful precedent for future climate-related claims.

Actions brought against companies, including the claims brought against Shell in the Netherlands and in the UK, also point to the increasing risk of climate change litigation. In 2021, the Dutch District Court ordered Royal Dutch Shell to reduce emissions, triggering an appeal by the company.

The UK Courts however decided in Shell's favour in a separate case brought by ClientEarth against the energy giant, bringing an early end to allegations that the company was in breach of duties by allegedly failing to take certain actions against climate change.

In another case around the same time, the UK Courts took a broadly similar approach - not allowing claims to proceed against the corporate trustee of a superannuation scheme for alleged breaches of duty, in the light of the scheme's fossil fuel investments.

Claims such as these arise from expectations by activists, institutional investors and others, who seek to catalyse change. Many emanate from transactions, contracts and obligations which have been specifically undertaken, while others have even arisen in their absence.

In Singapore, communities affected by mining activity abroad brought a representative action against PNG Sustainable Development Program Ltd, a Singapore-incorporated company. Amongst others, the claimants alleged that the company was under a duty to alleviate the environmental damage caused by the Ok Tedi Mine. The Singapore Courts held that no such duty had arisen, ultimately striking out the claim for the transfer of the company's US$1.5 billion (S$2 billion) fund.

While claimants have been unsuccessful on many occasions, the spike in ESG-related disputes brings to the fore the need to manage associated litigation risks. Disputes relating to the social component in ESG, with changing workplace cultures and employment laws both in Singapore and elsewhere, have altered the risk complexion of doing business in the region.

Directors' changing roles and responsibilities

Directors' roles and responsibilities must continue to evolve in response to regulatory trends, ESG considerations and climate risks. In Singapore, directors are vested with the primary responsibility of acting in the company's best interest. In today's business world, their obligations are now layered with additional complexity.

While there remains an expectation on directors to deliver financial results, the equation is broadened when wider concepts of corporate responsibility are integrated.

The infusion of ESG factors into corporate governance represents a paradigm shift in the more traditional role of directors. This requires a balanced business approach that accommodates financial objectives alongside wider societal and environmental considerations. It is here in the boardroom, where change must continue and hopefully where profit meets purpose.

An earlier version of this article was first published in the Q4 2024 issue of the SID Directors Bulletin published by the Singapore Institute of Directors and was re-published in The Business Times. Mark led the Dentons Rodyk team which acted for PNG Sustainable Development Program Ltd.

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