What does ESG mean for a director?

Planks are often necessary to take environmental, social and governance considerations into account during the decision-making process. While the precise contours of the ESG landscape can vary significantly from region to region, shifts in ideology toward sustainable business practices are part of a broader global trend.

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

The global transformation

The threat of climate change is at the heart of this transformation. Entire cities and communities are ravaged by extreme weather events. Sectors such as agriculture, which are sensitive to environmental changes, 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 must be agile in addressing the complexity of the threat. Directors must assess climate-related risks in the regions where they operate.

As many countries consolidate their commitment to a common net zero target, governments are tightening legislation to help them achieve their decarbonization ambitions. This will bring new legal considerations for businesses, with non-compliance potentially leading to tangible financial consequences.

Corporate governance regimes are also being strengthened in various jurisdictions. This promotes greater compliance, responsibility and discipline. The improvements are intended to complement the existing legal infrastructure and form the cement between the ‘E’ and ‘S’ in ESG.

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At the same time, new doors are opening, offering new economic perspectives. The convergence of risk and reward in this area requires companies to proactively structure their legal frameworks for continued commercial viability in the new dynamics. Companies will now need to insulate themselves against emerging risks while seizing the opportunities on the horizon.

ESG-related disputes: an invisible risk?

The rising tide of ESG-related litigation and regulatory action also has financial implications for companies, communities and governments.

For example, there is the historic decision taken in April in favor of the Verein KlimaSeniorinnen Schweiz – this climate lawsuit was filed by a group of Swiss seniors against the Swiss government.

The European Court of Human Rights ruled that the Swiss government had violated the human rights of its citizens by failing to adequately combat climate change. The decision binds the signatories of the European Convention on Human Rights and sets a strong precedent for future climate-related claims.

The lawsuits against companies, including the claims against Shell in the Netherlands and Great Britain, also point to the increasing risk of lawsuits over climate change. In 2021, the Dutch court ordered Royal Dutch Shell to reduce emissions, prompting an appeal by the company.

However, the British courts ruled in Shell’s favor in a separate case brought by ClientEarth against the energy giant, bringing an early end to allegations that the company had breached its duties by failing to take certain action on climate change.

In another case around the same time, the British courts took a broadly similar approach, disallowing claims to be brought against the trustee of a pension scheme for alleged breaches of duty, in light of the scheme’s fossil fuel investments .

Claims like these arise from expectations of activists, institutional investors and others seeking to catalyze change. Many arise from transactions, contracts and obligations specifically entered into, while others arose even in their absence.

In Singapore, communities affected by mining activities abroad have filed a representative action against the PNG Sustainable Development Program, a Singapore-incorporated company. The plaintiffs alleged, among other things, that the company was obliged to alleviate the environmental damage caused by the Ok Tedi mine.

The Singapore courts found that there was no such duty and ultimately rejected the claim for the transfer of the company’s $1.5 billion fund.

While plaintiffs have been unsuccessful on many occasions, the spike in ESG-related litigation brings to the fore the need to manage associated litigation risks. Disputes surrounding the social component of ESG, with changing workplace cultures and labor laws, both in Singapore and elsewhere, have changed the risks of doing business in the region.

Stakeholder involvement

Directors are at the helm to ensure proper implementation of their companies’ environmental and social initiatives. They often need to embed ESG considerations into their decision-making processes, to take into account the diverse interests of a wide range of stakeholders, including suppliers, customers, employees and local communities.

These stakeholders increasingly expect executives to integrate sustainability into the company’s strategic planning, risk management processes and investments.

Supply chain problems caused by what are sometimes called modern slavery laws are another aspect of the increasing disconnect. Employee engagement and labor standards have also taken on new dimensions, especially in the post-pandemic era. Sustainability is therefore no longer simply a moral obligation, but is quickly becoming a core strategy of the company.

Regulatory changes in Singapore

Against this backdrop, Singapore is leading the way in driving ESG policies and initiatives. Directors of companies in Singapore must also stay abreast of developments, both nationally and internationally.

Some aspects of the environmental regulatory framework that directors in Singapore must oversee 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 be extended to other carbon-intensive industries next year. Other listed issuers will continue to report on a ‘comply or explain’ basis, but this may also lead to a mandatory reporting regime in the future. This requires boards of directors to work with experts and experienced legal teams to ensure accurate, transparent and meaningful disclosure. Neither the extreme of greenwashing nor greenhushing is desirable.
Carbon Pricing: Singapore has also implemented a phased approach to carbon pricing, imposing a carbon tax that will increase over time. Companies that exceed emissions limits will face the tax, encouraging them to explore cost containment measures and trading options, especially while the carbon trading market is still in its infancy. Transition credits and investments in low-carbon technology go hand in hand as new industries continue to tap into this growing area.
Sustainable Finance: As part of the government’s goal to develop a robust green finance ecosystem, the Monetary Authority of Singapore issued Environmental Risk Management (Banking) Guidelines in 2020. These guidelines essentially require enhanced supervision from an environmental perspective when banks extend or extend loans. capital market transactions. In turn, companies seeking financing must consider how best to mitigate their environmental risks.

Transition finance and blended finance options are also part of the range of options that corporate boards can explore. Executives looking to tap into green finance must be equipped to operate effectively within their boundaries.

Financing challenges often remain, and boards must grapple with this challenge as financial considerations remain central to the ongoing energy transition. However, the question that often remains is when renewable technology will reach a scalable level.

The changing roles and responsibilities of directors

Directors’ roles and responsibilities must continue to evolve in response to regulatory trends, ESG considerations and climate risks. In Singapore, directors have the primary responsibility to act in the best interests of the company. In today’s business world, their obligations are now layered with added complexity.

While directors are still expected to deliver financial results, the equation widens when broader 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 takes into account financial objectives alongside broader social and environmental considerations. It is here in the boardroom where change must continue and where profit and purpose hopefully meet.

The writer is a lawyer and co-leads the commercial litigation practice of Dentons Rodyk. He was also counsel for PNG Sustainable Development Program Ltd in the action against the company. An earlier version of this article was first published in Q4 2024 SID director’s bulletin published by the Singapore Institute of Directors.