Intensifying climate disasters along with stark warnings by global scientists in recent years have illustrated a perilous future for the planet if inaction continues. Hurricanes, floods, heatwaves, and wildfires are wreaking havoc in advanced and developing economies alike, even though poorer countries often bear more of the brunt.
For corporations, the heightening risks mean ESG (environmental, social and governance) considerations are no longer a nice-to-have afterthought, but a core component of corporate development strategy. In Asia, where two of the world’s top three polluters are located, a full dash towards green initiatives has thus ensued.
But look behind the slogans, and a framework of scattered and shoddy implementation comes into view. In particular, companies in Asia have been struggling to identify a cohesive approach to ensure ESG compliance compared to businesses in Europe and North America, according to a recent survey from Hogan Lovells.
Of the 600 multinational companies surveyed, including many in Greater China, Singapore, and Indonesia, only 42 percent had a mature ESG program, with 77 percent reporting difficulty embedding ESG into existing risk practices.
The report also noted that compliance professionals in Hong Kong-based businesses signalled concern about a lack of engagement, while those in Japanese firms bemoaned insufficient ESG knowledge and skills.
Antonia Croke, a Hong Kong-based litigation partner at Hogan Lovells, says it’s not the lack of will that is thwarting corporate executives’ efforts to stimulate and measure engagement across different Asian jurisdictions.
“There are factors in play here such as different legal landscapes, language barriers in terms of training staff on compliance matters and cultural issues, which may be reflected in a perceived lack of engagement,” says Croke.
“The region is also hugely diverse in terms of its economies, jurisdictions and varied regulatory scrutiny, which poses additional challenges to companies looking to embed ESG into their existing risk practices.”
As a result of these complexities, developing countries, which constitute most of Asia, need more time to craft their own ESG assessment frameworks, as existing evaluation systems adopted by international institutions tend to fail in accommodating the local context.
On top of that, global market volatility and sagging returns have already diminished the investment appetite for ESG products at a time when markets in Asia are still testing regulatory effectiveness.
Emerging markets that are of special concern in terms of ESG compliance include India and Indonesia, both of which are heavily dependent on coal, and hotbeds for land disputes whenever efforts to protect biodiversity are attempted.
Croke points out that the specific economic advantages of some Asian markets could actually jeopardise their ESG approaches. For example, “more than a third of all global rice production comes from a few countries, such as Thailand, Vietnam, the Philippines, Myanmar, and Indonesia. These countries are gradually adopting sustainable farming practices but are at the start of their journey,” explains Croke.
Additionally, there is the challenge of ESG risks in value chains. In the Hogan Lovells report, Nick Williams, investigations, and fraud partner in Singapore, highlighted the low corporate awareness of ESG risks posed by third parties, risks ranging from “greenwashing” – or deceptive green marketing - to human rights violations.
“Where responsibility for licenses, permits, contracts, oversight or supervision lie with a third party, the actions of a supplier could legally bind the organisation on whose behalf they act,” wrote Williams.
Croke says a lot of Asia-based companies only started thinking about ESG “when required to do so if it is presented to them as part of a third-party sourcing requirement.”
That could prove the Achilles’ heel of Asia’s surging technology sector, which is spearheaded by semiconductor manufacturing, a carbon-intensive activity.
“This obviously poses a third-party risk to companies that use microchips in their products,” says Croke, citing the survey findings that 96 percent of compliance leaders think that third-party relationships pose some degree of risk to their business with regards to ESG.
As Hong Kong, Taiwan and Japan join other Asian jurisdictions in reopening, Croke is hopeful that corporate regional management will visit local offices to highlight the importance of ESG adoption and integrate it into work practices.
In the financial sphere, Croke under-scores the importance of mandatory ESG disclosures in public markets, which she believes may cover private markets in the future. “You will continue to see the adoption of ESG integration into financial reporting and standards,” adds Croke.
Despite the uncertain global economic outlook, Croke expects an actual uptake of ESG investing “such as that which has happened in China in recent years with the impetus coming from international investors.”