The two most important topics for boardrooms in 2023 are supply chain management and environmental, social, and governance (ESG) challenges.
These are areas of concern in Asia for companies who run global supply chains with a view toward ESG policy; they raise legal questions and demand action in particular jurisdictions like India, China, and Singapore.
Importantly, lawyers in the region can help their clients create a strong, believable, and solid sustainability story in a legislative and macroeconomic context that is continuously changing in Asia.
All organizations, whether in Asia or elsewhere, should consider including a “chief sustainability advocate” on their multidisciplinary sustainability team who uses their advocacy expertise.
ESG and supply chain issues are high in boardrooms in India. Many of these risks would be in India as a hub for global supply chains, but the reporting obligations and potential prosecution would be in Europe or the US. This might cause issues with disclosure requirements and ESG regulations for companies with subsidiaries in India.
International companies with a subsidy or sourcing operation in India must have their contractual disclosure arrangements with the supply chain partners in India because India does not have disclosure standards on ESG equal to those in Europe or the US.
The obligations outside India are often the focus of in-house attorneys in Europe and the US. However, India has a comprehensive collection of laws and regulations that are not explicitly labeled ESG but are nonetheless ESG-related, with solid regulatory frameworks around environmental violations, social justice, and governance-related issues.
Focus on India
Businesses must concentrate on India’s requirements rather than those in Europe and the US. Regulators in Europe considered what was known and how this was mitigated. ESG regulations focus on self-disclosure and mitigation strategies that can provide flexibility in the event of a supply chain incident. The emphasis in India is on compliance. In Europe, the appropriate disclosure steps might lead to a warning or prosecution agreement, but India has no equivalent regime.
There are “hot spots” when conducting supply chain audits in India if there are human rights, environmental and governance risks. The modernization of India’s labor laws on minimum salaries, social security expansion, better health and safety standards, trade union recognition, job security, and welfare for fixed-term employment will be a primary emphasis for international companies doing business there.
Additionally, stricter disclosure regulations are being implemented. The Securities and Exchange Board of India is enforcing new rules that require the top-ranked listed entities by market capitalization to submit business responsibility and sustainability reports in addition to their annual reports. Indian courts and tribunals are prepared to hold senior executives personally accountable for sector-specific and general criminal law violations.
China’s ESG ascent
The idea of ESG first surfaced in China almost ten years ago as a sustainable China development model, and large banks, financial funds, regulators, and subsidiaries of international companies conducting business in China continue to show an interest in ESG supply chain compliance.
Five major regulatory policies are included. All the policies are merely suggestions and are not required, except for the fourth, which requires public corporations to disclose information. A leading ESG survey conducted by a management school found that the majority of Chinese companies believe governance above is more important than social impact and environmental issues are last.
However, in 2023, 50% of the organizations surveyed want to include ESG in their business strategies. Shortage of national ESG advice, a lack of ESG professionals in the market, and, where there needs to be more understanding of the topic, a lack of management support are the main challenges.
There are many risks in China’s supply chains that are also present in other markets, such as pollution, a lack of raw resources, health and safety concerns, and worker shortages brought on by the country’s “zero Covid” policy, as well as corruption and bribery.
Chinese companies are reacting to the risk, with 52% of respondents in a Guanghua survey requesting more transparency from suppliers. According to the report, business ethics and environmental effect have surpassed reputation ranking as the most significant factor when selecting suppliers in China.
Singapore is Asia’s leading financial center, ranking third behind New York and London. Regarding regulatory compliance and ESG disclosures, Singapore is far from an “islander,” relying on internationally recognized and widely utilized standards and frameworks.
Since June 2016, listed firms have been required by the regulator to provide sustainability information on compliance or explain basis. However, this is expected to change and become more stringent. With the start of 2023, the disclosure requirement has progressed to mandatory disclosure.
Although sustainability disclosure is not legally required for other organizations, such as small and medium-sized enterprises (SMEs), studies have shown that most companies believe in implementing sustainability disclosure into their operations.
Up to 60% of SMEs surveyed in a local study by a Singapore bank in April 2022 believed in incorporating sustainability into their businesses. They acknowledged the growing investor interest in sustainability efforts and that this could add value to portfolios of intangible assets, such as those centered around brand and reputation.