Emerging Trends in APAC ESG Landscape: Challenges and First-mover Advantages
ESG Developments and the Overall Situation
Organizations throughout the world are under increasing pressure from all directions to include Environmental, Social, and Governance (ESG) metrics into their core business strategy and to enhance ESG transparency and performance as a result of the changing global risk climate. Continued supply chain disruptions, COVID-19 pandemic implications, digital transformation issues, climate risk, shifting ESG considerations/standards, and lawsuits have compounded this transition.
Our socioeconomic systems’ vulnerabilities have been further exposed by these shocks, underscoring the pressing need for companies to prioritize better ESG action beyond merely incorporating it as a marketing phrase in their reporting.
In today’s world, businesses need to have a broad and deep understanding of both key international trends and the local landscapes in which they operate. Handling complicated and multi-jurisdictional issues in particular, while staying ahead of changing ESG trends and the wider landscape, has been a struggle for many. The risk of cross-border litigation is increasing, and the placement of witnesses and evidence is a topic that is frequently debated.
ESG Legal Conflicts Across the Globe
Baker McKenzie’s The Year Ahead report for 2022, which predicts new trends in dispute resolution based on data from 600 in-house lawyers at large companies around the world, found that COVID remains the biggest external factor that causes disputes, while cybersecurity and ESG disputes pose the biggest risks to business.
Particularly within the ESG field, disputes over climate change have increased dramatically in recent years. More and more often, these cases are brought against corporations as well as government agencies. Key areas of dispute are commitments to reduce emissions, “greenwashing,” and who is to blame for bad climate effects.
On the societal front, discrimination issues in workplace disputes are gaining prominence. The social dimension of ESG has considerable overlap with governance-related problems, especially those involving the ethical behaviors of corporations.
Asia Pacific ESG Trends
Baker McKenzie’s Asia Pacific Business Renewal Series recently looked at “Advancing ESG in Asia Pacific.” They found that ESG and environmental issues are the seventh most important problem for businesses in APAC out of the top 14 problems. In APAC, a lot of regulators are enacting stricter ESG-related regulations. It was found that the top three ESG risks in APAC were:
- Investigation and application of regulations
- Newly-enacted laws
- Adapting consumer behavior
Global ESG Developments’ Impact on Asia-Pacific
Asia-centric organizations are not witnessing as many ESG challenges as companies in the US and Europe, and business leaders and internal attorneys are not under as much pressure to comply. But APAC is gaining some steam. Notable examples include legal cases in Japan opposing power plant and mine construction, claims in the Philippines about how human rights and climate change are related, and similar cases in the Pacific Island nations.
Over time, there is a good chance that the risk of ESG disputes will rise in all of APAC, not just Australia. This is because investors want ESG disclosures to be more complete and clear, which could lead to more regulatory investigations or even disputes. However, certain ESG issues are handled very differently in APAC than in the EU and the US. Because of this, the social part of ESG actions is still mostly voluntary on behalf of the companies implementing it.
Another important part of the ESG landscape in APAC is that there are different levels of commitment to sustainability and different ways that ESG regulations and governance work together. This can be traced back to economic uncertainty and differences in social and economic status across the region, as well as the way governments act and the way each economy is set up.
Specific ESG Trends by Industry
ESG factors vary depending on the sector, with businesses in the consumer goods and retail, energy, mining, and infrastructure sectors more likely to identify shifting consumer behavior as a major risk. An increasing number of shoppers take environmental, social, and governance (ESG) concerns into account while making purchases. Even businesses that don’t directly sell to consumers are starting to have their ESG performance and initiatives looked at as the need for supply chain transparency grows.
ESG Considerations in Supply Chain Transparency and Visibility
Many businesses in the APAC region know how important it is to include ESG in their supply chains. However, the geographical spread of supply chains in places where human rights and ESG issues are not easy to control or even see is a major concern for companies. This is a very big risk, especially when exporting to places like the EU that have stricter ESG rules.
Traditionally, supply chain disputes were mostly about product quality or payment issues. Now, however, the focus has shifted to companies that use forced or child labor, don’t follow health and safety rules, or break laws against modern slavery.
Consumers and regulators are putting more pressure on the supply chain because they want more information and more visibility across supply chains. They also want to know how the supply chain affects ESG factors. In the future, it will be expected that organizations will be held accountable for the behavior of their suppliers and subject to more stringent governance controls from their parent businesses placed on their foreign subsidiaries.
ESG Voluntary Actions
The need for more voluntary transparency from stakeholders is rising at the same time that mandated ESG reporting and other standards are being adopted and strengthened globally. One of the most important ESG trends we’re seeing in the APAC region is that companies are starting to realize that better ESG responses give them a competitive edge.
The following are some advantages of voluntary ESG action:
- Energy and resource efficiency
- New sustainability services and innovative products
- Capital and funding advantages
- Emerging new markets
- Resilience of the business and supply chain
- Attraction and retention of employees
ESG – A Look Forward
ESG-related litigation, liabilities, legislation, disclosures, and corporate strategies will all receive more attention in the future, as we anticipate a growth in this trend across APAC. In response, forward-thinking companies across the region will integrate ESG into their risk frameworks and corporate strategy. The search for opportunity in a still-developing ESG sector will be a major driving force in addition to risk minimization. We advise businesses in the region to start their ESG journey today to take advantage of the potential early adopter advantage.