On May 26 2021, in the landmark case of Royal Shell Dutch v Milieudefensie et al., the Dutch court ordered Royal Shell Dutch to reduce its global carbon emissions by 45% by 2030, in alignment with the Paris Climate Agreement. This recent decision has cited organisations’ corporate responsibility to combat climate change. Similarly, in Malaysia, legal complications have arisen in the palm oil industry, with the U.S. Customs and Border Protection (CBP) detaining products from Sime Darby Plantation over allegations of forced labour over allegations of forced labour, highlighting social responsibility concerns.
In recent years, Environmental, Social, and Governance (ESG) considerations have shifted from being optional to becoming essential for organisations worldwide. Consumers, Investors, regulators, and other relevant stakeholders now hold companies accountable for their environmental impact, social responsibility, and governance structures. ESG factors were once seen by corporate lawyers, compliance officers and other gatekeepers as being outside the traditional scope of legal risk management. However, with society’s evolving corporate standards and expectations, these considerations are becoming increasingly integral to the legal mandate, which require proactive engagement to mitigate legal risks. In today’s evolving landscape, businesses and legal professionals must take active steps in regulating these complexities to ensure sustainable and ethical practices.
The Rise of ESG: A Global Trend
To stay viable, it is crucial to understand the significance and impact that the acronym carries. What is ESG? ESG stands for Environmental, Social, and Governance, a non-financial performance indicator encompassing sustainability, ethics, and corporate behaviour to ensure accountability. Environmental factors assess an organisation’s impact on the environment and the risks and opportunities posed by environmental issues like climate change and resource protection. Meanwhile, social factors address how a company treats various stakeholders, including employees, investors, suppliers, customers, and the community. Governance factors focus on how a company manages itself, emphasising internal controls and practices that ensure compliance with regulations, industry standards, and corporate policies. Adherence to ESG practices supports broader sustainability efforts which position companies for long-term success through responsible corporate management and business strategies.
The concept of Environmental, Social and Governance has evolved over the past few decades, gaining prominence as global challenges increasingly demand responsible business practice. ESG’s roots can be traced back to the 1960s in response to the mood of philanthropy where the era witnessed political movements such as black power, women’s rights, and opposition to the Vietnam War, when concerns about corporate social responsibility first emerged. However, it was until the early 2000s that ESG became a defining criterion for investors, particularly when the UN Global Initiative released a report titled ‘Who Care Wins’ which officially introduced ESG. Followed by the launch of the UN Principles of Responsible Investment (UNPRI) in 2006, the world has since then adopted ethical practices of business.
Since then, the development of international frameworks have further solidified ESG’s role in global corporate behaviour. In 2015, the United Nations introduced the 17 Sustainable Development Goals (SDGs), which emphasises global priorities and sets out a reference point for aligning corporate strategies with social and environmental priorities. Additionally, countries worldwide committed to the Paris Agreement, which sets out the collective effort to climate actions. These frameworks have influenced legal and regulatory changes worldwide, pushing governments to enact laws that promote sustainable development and corporate responsibility.
Is Malaysia Keeping Pace with Global ESG Trends?
Malaysia has been committed to ESG principles since the 1970s, starting with the enactment of the Environmental Quality Act 1974. As a founding member of ASEAN, Malaysia has worked to promote environmental cooperation within the region, as seen in initiatives like the ASEAN Senior Officials on Environment (ASOEN) and the ASEAN Centre for Biodiversity. In 2015, ASEAN leaders adopted the ASCC Blueprint 2025, which aims for sustainable, resilient development, focusing on climate change, biodiversity conservation, and sustainable cities.
Legal Implications of ESG
The legal landscape surrounding ESG has significantly evolved to promote compliance and help businesses mitigate risks. In 2005, a report commissioned by the United Nations Environment Programme Finance Initiatives concluded that integrating ESG issues into investment analysis was not only permissible but arguably part of a company’s fiduciary duty. This view was reinforced by the UN Global Compact's 2015 publication, “Fiduciary Duty in the 21st Century”, which highlighted that neglecting ESG factors in long-term investment analysis constitutes a breach of fiduciary responsibility.
Globally, environmental laws have been strengthened in response to the climate crisis and the UN’s sustainability agenda. In Malaysia, the Environmental Quality Act 1974 (EQA 1974) and subsequent amendments serve as the cornerstone of environmental regulation, overseeing emissions, waste management, and resource use through a licensing system. The Act empowers authorities to ensure environmental protection and enforce compliance.
Social aspects of ESG are also addressed through various legislative frameworks, including Malaysia’s Consumer Protection Act 1999, which safeguards consumers against unfair practices. Furthermore, under Section 213(1) of the Companies Act 2016, directors are required to act in the best interests of their companies, which could increasingly encompass ESG considerations. Employee protection is robustly covered by laws such as the Employment Act 1955, Occupational Safety and Health Act 1994, and the Anti-Sexual Harassment Act 2022.
In terms of governance, Malaysia has passed a primary legislation aimed at corporate accountability. The Companies Act 2016 in Malaysia regulates governance and encourages best practices through a ‘comply or explain’ model. Further, key legislations such as the Companies Commission of Malaysia Act 2001, Whistleblower Protection Act 2010 and the Malaysian Anti-Corruption Commission Act 2009 further strengthen governance by holding companies and their leadership accountable for ethical and transparent operations.
Notably, the risks of non-compliance are both significant and costly. The prime example is Top Glove, the world’s biggest rubber glove manufacturer, which saw its share prices plummet and faced import bans from the US after being discovered to have engaged in forced labour.
How ESG is Reshaping Corporate Legal Practice
For all the above reasons, law firms and corporate legal departments are now facing increasing pressure to adapt to the rapid rise of ESG initiatives, making ESG a critical aspect of legal practice today. Lawyers and in-house counsels are now expected to anticipate ESG risks and opportunities to ensure that companies remain ahead of emerging challenges. They are actively involved in shaping corporate governance in helping businesses achieve their sustainability and ESG objectives, thus influencing corporate decisions such as mergers and acquisitions and corporate policies
While the risks associated with ESG mainly stem from global issues and stakeholder expectations, rather than purely regulatory or commercial considerations, they still pose significant threats. Therefore, legal practitioners are to provide input in the development of strong ESG policies and procedures, which shape corporate culture and decision-making. Legal departments, working closely with HR, can encourage responsible business practices and ensure employees are aligned with the company's sustainability goals. For example, by enhancing the component of ongoing due diligence by creating effective grievance mechanisms as part of the stakeholders engagement.
In addition to providing strategic guidance, the roles of legal practitioners are crucial in addressing challenges that could impact a company’s financial health or reputation, especially when regulatory action or litigation arises. Law firms offering integrated ESG advisory services focus on key areas such as environmental liability, carbon trading, human rights, and sustainable finance. These issues are interconnected and reflect the growing complexity of ESG in corporate risk assessment and management, which makes legal expertise essential to navigating this evolving landscape.
What Can We Learn from Others?
Looking globally, regulations such as the EU Deforestation Regulation, which restricts imports like palm oil unless verified as deforestation-free, and the Corporate Sustainability Reporting Directive, requiring companies to report environmental and social impacts, offer valuable lessons. These global frameworks highlight the growing importance of stringent ESG compliance for businesses to remain competitive internationally.
Malaysia can draw key lessons from these standards by strengthening its ESG regulations, particularly in industries like agriculture and manufacturing, and enhancing corporate transparency to meet international expectations. This will help Malaysian businesses maintain market access and align with global sustainability trends
The Future of ESG in the Legal Profession
In conclusion, ESG is far from just a passing trend. It is a strong force that is continuously changing how companies run and how legal firms counsel their customers. Nonetheless, while such initiatives are praiseworthy, there are risks associated with this new domain. Therefore, companies should exercise utmost prudence in order to reduce the legal risks associated with their ESG practices.
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