A spotlight on enforcement and litigation risks
In brief
ESG is increasingly of prioritised concern to companies and organisations due to a growing number of legislations and regulations as well as awareness of ESG issues. Across jurisdictions, we see a rising trend towards more active ESG enforcement and litigation. In our The Year Ahead: Global Disputes Forecast 2024,1 nearly three-quarters (73%) of the respondents said that environmental, social and governance (ESG) disputes presented as the top risks to their organisations in the coming year.
Sweeping changes to legislation and the establishment of ESG-specific taskforces underline the importance of ESG to governments around the world. Not only do companies have to comply with new and upcoming legislation in the rapidly evolving ESG landscape, but they are also expected to place greater emphasis on corporate governance, put in place good systems and controls, and forge an organisational culture conducive to tackling ESG issues in the long run. Indeed, it is no surprise that ESG-related violations will be the focus of regulatory oversight and supervision.
In this client alert, we provide a high-level overview of the key trends and developments in ESG enforcement and litigation in Singapore in three areas: greenwashing, employment law and anti-money laundering (AML).
“E”: Greenwashing and climate-related financial disclosures
In relation to environmental concerns, there is an increasing number of regulations that impose corporate disclosure obligations on climate-related risks. One development to watch is the US SEC’s climate disclosure rule proposal in March 2022. As we await the final rules, we can expect a range of both quantitative and qualitative metrics to be disclosed, including many directed at corporate governance and oversight of climate-related risks. These rules will place more onerous obligations on the boardroom to consider climate issues more thoroughly.
With these increasingly onerous disclosure obligations, the need to guard against “greenwashing” will become an issue that companies must address carefully moving forward. Companies must be sure to scrutinise the accuracy and credibility of any green statement made, be transparent about how green objectives are integrated into their products, ensure consistency between the company’s green image and its internal actions as well as actions in relation to third parties, monitor and ensure compliance with the changing regulatory landscape, as well as being cognisant of the legal and fiduciary duties owed to various stakeholders.2
Across jurisdictions, there has been an increasing number of regulatory and legal actions taken against various corporations across industries. In Singapore, in July 2022, the Monetary Authority of Singapore (MAS) issued a circular on the Disclosure and Reporting Guidelines for Retail ESG Funds, which imposes various disclosure obligations on fund managers who manage retail ESG funds. This includes the disclosure of the fund’s ESG focus, criteria, methodologies and metrics, as well as the description of the sustainable investing strategy adopted by the fund to achieve its ESG focus.
In April 2023, MAS also launched the Finance for Net Zero (FiNZ) Action Plan, which expands the scope of MAS’ Green Finance Action Plan launched in 2019 to include transition finance. This will involve working with the Singapore Exchange (SGX) and other government agencies to set out a roadmap for key financial institutions (FIs) and listed companies to make International Sustainability Standards Board (ISSB)-aligned disclosures on a risk-proportionate basis.
In February 2024, the Sustainability Reporting Advisory Committee (SRAC), an industry-led 15-member panel set up by the Accounting and Corporate Regulatory Authority (ACRA) and Singapore Exchange Regulation (SGX RegCo), following a public consultation on the recommendations of the SRAC published in July 2023 which concluded in September 2023, announced that Singapore will mandate for both listed issuers (Listed Issuers) – including those incorporated overseas, business trusts and real estate investment trusts – and large non-listed companies with annual revenue of at least SGD 1 billion and total assets of at least SGD 500 million (Large NLCos) to be subject to mandatory International Sustainability Standards Board (ISSB)-aligned climate-related disclosures (CRDs). The reporting of CRD will be introduced in a phased approach, with Listed Issuers required to report and file annual CRD from FY2025, followed by Large NLCos from FY2027 onwards.
As to the scope of CRD reporting, Listed Issuers will have to report and file CRD, including Scope 1 and 2 greenhouse gas (GHG) emissions (i.e., emissions that are direct emissions from owned or controlled sources (Scope 1), and emissions that are indirect emissions from the generation of purchased energy (Scope 2)) from FY2025, with Large NLCos to follow from FY2027 onwards. From FY2026, Listed Issuers will be required to report Scope 3 GHG emissions (i.e., emissions that are indirect emissions (not included in Scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions). Large NLCos will not be required to report Scope 3 GHG emissions any time earlier than FY2029. Finally, Listed Issuers will also be required to conduct external limited assurance on their Scope 1 and 2 GHG emissions from FY2027, while Large NLCos will be required to do so from FY2029.
Following the public consultation, ACRA has decided to exempt Large NLCos with parent companies that are reporting CRD using ISSB-aligned local reporting standards or equivalent standards (e.g., European Sustainability Reporting Standards), subject to certain conditions. If Large NLCos have parent companies that are reporting CRD using other international standards and frameworks (e.g., Global Reporting Initiative, Task Force on Climate-Related Financial Disclosures, etc.), they will be exempt from reporting and filing CRD with ACRA for a transitional period of three years, from FY2027 to FY2029. ACRA will review whether to extend the transitional period, depending on global developments relating to the adoption and recognition of other standards and frameworks.
As companies are faced with more ESG disclosure requirements (such as the proposed US SEC rules), we expect greenwashing lawsuits to increase in frequency only further. While some of these regulations remain to be implemented, clients should be prepared to begin addressing these concerns immediately, as the risk of greenwashing litigation extends beyond securities laws to consumer fraud and protection laws as well as traditional contractual liabilities for misrepresentation.
“S”: Developments in Singapore’s employment law landscape
Companies should also pay greater attention to developments in the employment law landscape in Singapore, which will see significant changes that aim to better protect the welfare and well-being of employees in the post-COVID era. This includes a new workplace fairness legislation, tripartite guidance on reasonable accommodations and flexible work arrangements, as well as stronger regulations to promote workplace safety.
In August 2023, the Tripartite Committee on Workplace Fairness (Tripartite Committee) released its final report setting out its final set of 22 recommendations on a proposed workplace fairness legislation. First announced by the Singapore Prime Minister at the 2021 National Day Rally, this new legislation strengthens Singapore’s stand against workplace discrimination and will complement the existing Tripartite Guidelines on Fair Employment Practices (TGFEP).
This new legislation will prohibit employment discrimination, which will be defined as “making an adverse employment decision because of any protected characteristic”. As covered in our previous alert – “Final recommendations for Workplace Fairness Legislation” – this proposed definition means that the legislation will only prohibit direct discrimination and will not cover indirect discrimination. According to the Tripartite Committee, prohibiting indirect discrimination in the legislation may impose greater legal obligations on employers and result in greater uncertainty for both employers and employees.
The Tripartite Committee also considered feedback for reasonable accommodations to be enshrined in the new legislation but recommended instead that a tripartite advisory be issued to provide guidance to employers on granting reasonable accommodations to employees with disabilities. According to the Tripartite Committee, accommodations would be considered ‘reasonable’ when they help persons with a disability perform essential job functions, do not impose undue burden on the employer, and do not change the fundamental nature of the business.
A new Tripartite Guidelines on Flexible Work Arrangements were also launched in April 2024, which requires employers to fairly and properly consider flexible work arrangements (FWAs) requests in a practical manner, considering both workers’ and businesses’ needs. Previously, employers can voluntarily adopt the Tripartite Standard on FWAs, which sets out best practices in offering flexi-work and handling requests for such arrangements. The guidelines, which employers are required to follow, were first proposed in the White Paper on Singapore Women’s Development that was submitted to Parliament in March 2022.
Finally, in light of a spate of workplace fatalities, the Singapore Ministry of Manpower (MOM) introduced a Heightened Safety Period (HSP) that extended from 1 September 2022 to 31 May 2023. During the HSP, MOM put in place a range of measures to promote and ensure workplace safety. This included tighter enforcement measures, where chief executives will be required to personally account to MOM for workplace accidents and take responsibility for rectifications, and an increase in statutory penalties for breaches of the Workplace Safety and Health Act 2006 (WSHA). Following the end of the HSP, MOM introduced the Safety Accountability, Focus and Empowerment (Safe) as permanent measures in replacement of the HSP. The Safe measures aim to “encourage the industry to take ownership of workplace safety” and would hold corporate leaders accountable for lapses in workplace safety. MOM also announced that penalties will be increased to deter breaches of the WSHA.
“G”: Strengthening Singapore’s AML regime
Following a landmark billion-dollar AML case in Singapore, the Singapore government has announced the establishment of an inter-ministerial committee (IMC) to review Singapore’s anti-money laundering regime and ensure it stays up to date with increasingly sophisticated crimes, comprising MAS, MOM, the Ministry of Home Affairs, the Ministry of Law and the Ministry of Trade and Industry.
This IMC will focus on better prevention of corporate structures from being abused by money launderers, enhancing FIs’ control and collaborations with other FIs and the authorities to guard against and flag suspicious transactions, and centralising and strengthening monitoring and sense-making capabilities across government agencies to better detect suspicious activities.
In addition, several new legislative measures are expected to be introduced in Parliament in 2024. First, ACRA has proposed additional measures such as enhancing the penalties on errant service providers and their senior management, to strengthen the effectiveness of Singapore’s anti-money laundering regime. Second, new rules will be put in place to ensure that nominee directors are fit and proper to take up the role and to limit the number of nominee directorships that a person can hold. Third, new legislation will be introduced to harmonise the AML measures to be undertaken by all service providers which submit regulatory filings on the ACRA electronic filing system.
These proposed changes come at the heel of legislative amendments that were passed in May 2023 to the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act 1992 (CDSA) and introduced new offences of rash and negligent money laundering. These offences allow money laundering offences to be made out against individuals at lower levels of culpability where they have carried out a transaction while having some suspicions about the transaction or despite the presence of red flags.
In July 2023, MAS also proposed a new framework for Single Family Offices (SFOs) operating in Singapore which would require SFOs to be incorporated in Singapore and establish and maintain business relations with at least one MAS-regulated FIs so that there is adequate AML and countering the financing of terrorism (CFT) checks by MAS-regulated FIs over SFOs.
Conclusion
Against the backdrop of rapidly developing ESG regulations, as well as the increased enforcement activity by regulatory bodies and stakeholders across various jurisdictions, businesses today are certain to face tremendous challenges in ensuring compliance with the myriad ESG laws, both presently in force and on the horizon. Companies are placed under increasing scrutiny to build an organisational framework that will address ESG risks adequately and efficiently throughout its operations and supply chains around the world. Failure to pay attention to these issues may result in not only legal consequences but perhaps, more importantly, reputational damage, loss of brand trust and missed opportunities.
Businesses will no doubt have to adapt constantly and in different ways. For our clients with complex supply chain demands and cross-border operations, being aware of all the different rules and regulations, ranging from disclosure requirements to anti-AML obligations, and how they interact across borders will be of utmost importance for them to be able to develop effective and cost-efficient systems that adequately address these ESG concerns. In this uncertain and evolving regulatory climate, businesses aided by experienced and trusted legal counsel will be well-positioned to navigate the growing challenges posed by ESG. At Baker McKenzie, we are well-positioned to advise on such matters, and we are committed to helping our clients develop optimal solutions amidst this developing regulatory landscape.
1 ‘The Year Ahead: Global Disputes Forecast’ is an annual report prepared by Baker McKenzie that explores key disputes trends for the year. The full report of The Year Ahead: Global Disputes Forecast 2024 can be found by clicking this link.
2 April 2023 report by ClientEarth and the Asia Investor Group on Climate Change (AIGCC): https://www.aigcc.net/greenwashing-and-how-to-avoid-it-an-introductory-guide-for-asias-finance-industry/.
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