Navigating The Ever-changing World of ESG: It’s Now or Never

Law Bites – June 2022

Environmental, social and governance (ESG) has become an inextricable part of how companies do business. While the individual elements of ESG are intertwined, it is an incredibly daunting task for companies to adopt and implement effective ESG strategies as the expectations related to those elements are everchanging.

Consumer expectations have evolved greatly over the past few years. A recent World Economic Forum research found that 20% of consumers are willing to pay 10% extra for the same commodity if it comes from a company that is more in line with their ESG priorities. Investors gear toward businesses that adopt ESG strategies as such companies tend to be better able to identify growth opportunities and overcome unexpected challenges. Fund managers are also increasingly taking ESG factors into account along with financial disclosures. Approximately 71 sustainable funds that incorporated ESG factors into their investment strategies were launched last year in the U.S., according to funds researcher, Morningstar. Another 25 existing funds changed their investment strategies to become sustainable funds. In addition, ESG-oriented companies are often well placed to attract and retain a workforce that is vested in the companies’ overall values.

Nicola Loh, Partner, JTJB

Nicola Loh, Partner, JTJB

“Having a strong ESG proposition enables companies to identify and harness growth opportunities. If followed through, commonly seen benefits include lower operating costs, increased attractiveness to investors and customers and a business that is better built to withstand market risks and disruptions,” said Nicola Loh, Head of the Regulatory and Compliance practice at Singapore law firm, Joseph Tan Jude Benny LLP (JTJB).

Corporates are increasingly under pressure from regulators, investors and other stakeholders to make ESG-related disclosures. For example, companies listed on the Singapore Exchange are required to disclose their material ESG risks and opportunities based on core metrics that are mapped against reporting frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI).

The Monetary Authority of Singapore also issued the Guidelines on Environmental Risk Management in 2020 that sets out sound environmental risk management practices, including adopting suitable disclosure frameworks, for financial institutions in the asset management, banking and insurance sectors. These requirements enable investors to have a more complete assessment of the organisation’s management quality and resilience to environmental risks.

“As part of coming up with a comprehensive ESG strategy, companies not only need to factor into their strategy the local and foreign laws and regulations that are currently appliable to them but also those that may be relevant to the business. A clear and meaningful strategy can ease regulatory pressure and reduce legal risks that arise from non-compliance with ESG-related laws and regulations,” said Nicola.

To maintain their competitive edge, it is equally important for companies to meet the demands of their internal stakeholders. While many companies have acknowledged the importance of instilling diversity and inclusion in their corporate culture, there also needs to be a focus on employee well-being and embedding sustainability in the company’s purpose. To win the war for talent in a tight labour market, the ability to demonstrate a commitment to and progress in the ESG agenda can be the differentiating factor for companies that want to attract and retain the best people.

“Companies that integrate prioritised stakeholder considerations into their business decisions and take steps to manage ESG risks are well placed to enhance brand reputation, standout from their competitors and see an improvement in their financial performance over time,” said Nicola.

According to Shai Ganu, Managing Director at risk management, insurance brokerage and advisory firm Willis Towers Watson, there are several buckets of benefits that organisations stand to gain from when considering a business case for ESG implementation, one of which is the positive impact on company valuations. “Particularly for listed companies, we are seeing a little bit of sustainability premium in share prices,” he said. Another benefit is the lower cost of capital. Shai adds that banks are offering discounted interest charges for credit facilities or loans that are linked to ESG goals. Those ESG goals are not prescribed by lenders and companies are expected to set their own feasible and appropriate objectives. “Once the borrower achieves its own goals, they get access to cheaper debt at lower interest rates so the cost of capital decreases,” Shai also said. Shai and Nicola were co-speakers at a recent event that discussed the legal considerations, implications and best practices for ESG.

Across the board, companies are at varying stages of the ESG journey. Some companies including Siemens, American Airlines, Woolworths and Ford have made significant progress and pledges towards net zero carbon emission targets, fulfilling certain aspects of their ESG commitment. Regardless of what phase a company is in, increasing ESG literacy across the workforce starts with a top-down approach. At the board level, C-suites must focus on business benefits in the long run rather than the short term. While the short-term cost implication may be a pitfall for some companies that are starting on their ESG journey, the creation of long-term value derived from proper management of ESG risks often outweigh the cost – sustainably sourced raw materials and the implementation of structures for renewable energy generation may cost more initially but will, in the longer term, help combat rising raw-material costs and the true cost of carbon.

“A key step is to start the ESG journey is to obtain senior management buy-in as you will require resources and legal expertise in several aspects, including the structuring of contracts and policies to safeguard against ESG risks and the preparation of ESG disclosures,” said Nicola. According to Nicola, a good way to start the ESG journey is to build an ESG roadmap that sets out the company’s sustainability goals and the steps that the company plans to take to achieve the desired outcomes. “It is also important to engage stakeholders and conduct a thorough risk assessment before setting specific feasible and achievable goals and targets,” said Nicola.

This update is for general information only and is not intended to constitute legal advice. JTJB has made all reasonable efforts to ensure the information provided is accurate at the time of publication.