ESG 2023

Navigating the ESG Evolution: Challenges and Opportunities

Nearly 20 years after the term was coined (in a report that the UN commissioned from an international law firm on the permissibility of investment funds integrating environmental, social and corporate governance concerns into their investment analysis), ESG continues to provoke debate and no little scepticism. In recent years, however, the global landscape of ESG initiatives has undergone a significant transformation. As the world grapples with pressing challenges such as climate change, pandemics and war, ESG criteria have emerged as a pivotal framework for assessing the ethical impact and sustainability practices of businesses worldwide.

This surge in ESG-consciousness is reshaping investment strategies, corporate policies and governmental regulation, heralding what many hope will be a new era of responsible capitalism that prioritises long-term sustainability over short-term gains. In this, the first-ever Chambers ESG Global Practice Guide, contributors in 20 jurisdictions spread across five continents delve into the latest developments in ESG to explore how these trends are influencing an increasingly interconnected global market ‒ and what future implications they may hold.

Reporting and regulatory obligations

New legislation and regulation, at both a national and supranational level, is not only making ESG compliance more important than ever ‒ it is also turning an obligation into a potential opportunity. The UN’s Sustainable Development Goals, together with the EU’s Sustainable Finance Disclosure Regulation, Taxonomy Regulation and Corporate Sustainability Reporting Directive, and a host of recently passed national legislation are forcing businesses to change their behaviour to meet regulatory standards while also incentivising them to gain a competitive advantage over rivals by attracting green investment and the business of ethical consumers.

The Nigerian contributors discuss how the Climate Change Act integrates climate change mitigation and adaptation into national plans, requiring private entities with more than 50 employees to implement carbon emission reduction measures and designate a climate change officer. Non-compliance can lead to fines and regulatory directives. Meanwhile, the Japan chapter focuses on how shareholder engagement ‒ particularly from NGOs ‒ is influencing ESG-related discussions and actions in Japan. Recent amendments to the Implementation Regulation of the Financial Instruments Exchange Act require certain sustainability-related disclosures, marking an important step in ESG disclosure regulation in the country.

Green finance goes mainstream: sustainability-linked bonds and carbon markets

In the Hong Kong chapter, the authors discuss the significant steps taken to promote green and sustainable finance in the region. Hong Kong became the first Asian signatory to the Green Bond Pledge in 2019, showcasing its commitment to eco-friendly infrastructure development, and the Hong Kong Monetary Authority (HKMA) introduced the Grant Scheme in 2021 to provide subsidies to eligible green and sustainable bond issuers, encouraging their growth. As of March 2023, more than 220 green and sustainable debt instruments worth over USD70 billion have benefited from the HKMA Grant Scheme.

The Ghana chapter explores, among other things, the role of carbon markets in combating climate change. Ghana is diligently establishing the necessary institutional frameworks for the effective implementation of such a carbon market. This includes the establishment of a dedicated Carbon Market Office tasked with executing policies and guidelines for mitigation activities. Simultaneously, the Ghana Carbon Registry (GCR) has been launched to collect, verify and monitor emissions data from various sources. Ghana has also successfully engaged in nature-based solutions for carbon dioxide removal, reaping both national and local benefits. It has entered into a five-year Emission Reduction Payment Agreement (ERPA) with the World Bank to reduce carbon emissions in forestry and land use sectors in exchange for USD50 million in performance-based payments and is involved in collaborative efforts to train farmers in sustainable agriculture methods.

Mind the gap! Is gender pay disparity receiving the attention it deserves?

While in most countries the gender pay gap has decreased in recent decades, worldwide, women still make 77 cents for every dollar earned by men. As a result, there is a lifetime of income inequality between men and women and more women are retiring into poverty.

National ESG initiatives and regulatory standards ‒ such as the Sustainable Taxonomy recently introduced in Mexico ‒ often include elements designed to further female employment by, for example, promoting equal pay standards, equal access to training and advancement, and minimum quotas for under-represented genders on boards. However, while legislation such as Directive (EU) 2022/2381 on improving the gender balance among directors of listed companies continues to have a meaningful effect, market pressure in the form of investor concern seems to be more focused on combating and mitigating climate change.

The risks of greenwashing

Another consistent theme in the chapters of this Guide is the prevalence and danger of “greenwashing”. This is the use of ecological and environmental claims to promote a sense of environmental responsibility even though a company’s product or behaviour do not accord with the green impression being given. The France chapter explores includes details of several legal tools designed to tackle greenwashing. The French Consumer Code, for example, prohibits commercial practices that mislead consumers regarding the ecological characteristics of a product, a service, or a company more generally and penalties incurred include fines of up to EUR300,000 for a natural person (or EUR1.5 million for a legal entity). The article also highlights that when facing ESG-related disputes, companies’ exposure is not only of a financial nature; it is also reputational.

Not every jurisdiction has such up-to-date consumer protection legislation. As pointed out in India – Path to Sustainable Governance, without proper verification mechanisms and in the absence of regulations in India that touch upon certain ESG aspects, companies can make false claims about their ESG practices and thereby mislead stakeholders. That being said, as stressed in India – ESG Compliance Framework, ensuring ESG compliance at a wider level in corporate India will go a long way to ensure the success of the country’s decarbonisation commitments.

Supply chain management: ESG credentials and reputational risk

First COVID-19 and then the war in Ukraine have exposed the risks of the widely distributed supply chains and “just in time” production models that appeared set to dominate global commerce, prompting a switch to “nearshoring” and domestic manufacturing as a result. Supply chains can be a source of reputational risk, but are also potentially an area where firms can make significant ESG progress. Scrutiny of supply chains will grow even more searching in 2023 as customers, investors and regulators seek to comprehend the entire life cycle of a product. Where once it was sufficient to report on the emissions for which a company was directly responsible, the global nature of Scope 2 and 3 disclosure required by legislation such as the EU’s Corporate Sustainability Reporting Directive will have an effect not just in EU member states but around the world, as pointed out in the Chile chapter.

The monitoring of emissions is, however, only one part of the supply chain puzzle. As the USA and Canada chapters explore, the global push for corporate compliance with anti-human trafficking requirements is growing.

Driven by investors and customers prioritising ESG factors in their decision-making, companies are now expected to have effective anti-human trafficking compliance programmes in place, particularly in supply chains and working environments. The threat of litigation has also prompted financial institutions and hotel chains to pay close attention to their practices, with recent high-profile lawsuits holding them accountable for human trafficking facilitated by their services.

Manufacturers are also grappling with increased enforcement related to their supply chains due to concerns over forced labour. By way of example, the Uyghur Forced Labor Protection Act in the USA prohibits imports made with forced labour from Xinjiang, China, thereby detaining products worth billions of dollars at the border. As with concerns over greenwashing, not only are there litigation risks and regulatory hurdles to clear ‒ there are also brand management considerations.

ESG is here to stay despite the cynicism

Different jurisdictions are embracing the changes outlined in this Guide with differing levels of enthusiasm, inevitably informed by the specific local context. The Czech Republic chapter explores an attitude gap between domestic industry and the wider world, a view that may be influenced by the fact that Czech industry is among the EU’s most energy-intensive sectors and has a historical reliance on cheap energy. Only 12% of Czech companies believe in limiting global temperature rise to 1.5°C and just 6% think the world will achieve zero emissions by 2050. In comparison, 65% and 69% of global companies hold these beliefs respectively.

There is some concern about how the disparate elements that constitute ESG do – and do not – relate to each other. There are arguments that the measure is incoherent and lumps together a range of unrelated or even contradictory elements. The closure of a coal mine is almost certainly an environmental boon even if it causes untold social damage to the society that was dependent on it for employment. However, the ESG criteria are not designed to homogenise these issues but rather to ensure that they are all considered in the decision-making process. The integration of ESG aspects is not about creating a perfect alignment; instead, it is about balancing these facets to achieve long-term sustainability.

To return to that hypothetical coal mine, the transition away from fossil fuels is both vital and inevitable. The holistic approach ESG aims to foster offers both a legislative/regulatory “push” and a market “pull” to retrain workers and to invest in cleaner, more sustainable industries, while strong corporate governance can ensure that the negative social impacts are mitigated through strategic planning and community support.