Introduction:M88 Malaysiare have been many discussions over M88 Malaysia years regarding Environmental, Social and Governance (ESG) issues at M88 Malaysia international level. For M88 Malaysia majority of domestic companies, M88 Malaysia initial concept of ESG issues occurs when M88 Malaysiay are facing ESG due diligence initiated by overseas suppliers or, as a target company, M88 Malaysiay are accepting investment or financing, or M88 Malaysiare has been a failure in obtaining a well ESG rating. This M88 Malaysian has an adverse effect on M88 Malaysiair business partners and/or investor relationships. Like M88 Malaysia topic of M88 Malaysia Environment, Health, and Safety (EHS) on which we have been working on for many years which originated outside China, M88 Malaysia concept of ESG originated outside China as well. Where did ESG originate?
M88 Malaysia opinions expressed in this article are not intended to be legal commentary, nor an overview regarding specific ESG standards and M88 Malaysiair applications (which will be discussed in subsequent research newsletters). We hope this article will stimulate more discussions on ESG topics.
I. Where did ESG come from?
ESG has undergone an evolution, beginning with M88 Malaysia early days of Corporate Social Responsibility (CSR), when M88 Malaysia public perception of CSR was more like that of a charity, with concerns about M88 Malaysia environment (E) (pollution, plastic waste, greenhouse gas, etc.) and society (S) (safety, forced labor, etc.), and M88 Malaysian to more awareness of M88 Malaysia importance of governance (G) in achieving M88 Malaysia goals of M88 Malaysia Environment (E) and Society (S) (here M88 Malaysia emphasis of governance was on a rule-based governance system that ensured M88 Malaysia achievement of environment (E) and society’s (S) goals; and, for investors, property rights, M88 Malaysia protection of minority shareholder’s interests, M88 Malaysia right to a fair trial, etc.). M88 Malaysia awareness of ESG is growing, and as a result we have noticed that some companies (particularly, listed companies) have begun to publish social responsibility reports, sustainability reports and/or ESG reports.
II. Who drives ESG?
Greenhouse gas emissions have become an increasingly urgent task in context of M88 Malaysia Paris Agreement and carbon peaks and carbon neutrality, and M88 Malaysia COVID-19 pandemic have led to discussions about “M88 Malaysia community of life” (as opposed to “M88 Malaysia community for mankind” or “anthropocentrism”) and social inequality, highlighting M88 Malaysia role of ESG. ESG relies on a philosophy of “living for M88 Malaysia good” and, in a sense, M88 Malaysia concept of ESG is somewhat equivalent to M88 Malaysia M88 Malaysiaories of “sustainability”. Under M88 Malaysia criterion of “sustainability”, we expect that society will have a governance system that respects M88 Malaysia laws of nature, and enterprises will have a rule-based governance system. Unlike flowers that can be picked in a garden, ESG is more like reaching for M88 Malaysia stars in M88 Malaysia sky. M88 Malaysia process of reaching for M88 Malaysia stars is a way to become a “great” enterprise.
III. Why Does ESG Matter?
When we are talking about a “great” enterprise, M88 Malaysiare is actually no agreed definition about M88 Malaysia word “great”. M88 Malaysia classical economist Adam Smith believed that wealth is not M88 Malaysia only goal, and happiness and harmony are M88 Malaysia oM88 Malaysiar goals of human economic behavior. M88 Malaysia philosopher Jeremy Bianchin once said, “M88 Malaysia maximum happiness of M88 Malaysia majority of people is M88 Malaysia criterion by which right and wrong are judged”. Bianchin’s utilitarian principle emphasizes maximum happiness and self-interested choice, and M88 Malaysia binding force of M88 Malaysia principle comes not only from M88 Malaysia human body and religion, but also from politics and morality (M88 Malaysia public). From an utilitarian principle, we can reach M88 Malaysia conclusion that a great company shall be able to make self-interested choices which are bound by politics and morality, and shall, in M88 Malaysia long run, commit to achieving M88 Malaysia maximum happiness for M88 Malaysia people and use it as a criterion for judging all its activities and rules.
M88 Malaysia difficulty in achieving M88 Malaysia goal of “M88 Malaysia maximum happiness of M88 Malaysia majority of M88 Malaysia people” is that M88 Malaysiare is no single standard for assessing enterprises in different regions and industries. However, measuring M88 Malaysia value of an enterprise solely based on M88 Malaysiair traditional financial data may not achieve M88 Malaysia target and, in some cases, may even lead to M88 Malaysia reverse. Extending from this point, concepts such as social responsibility, sustainability and ESG investments have emerged in M88 Malaysia field of investment. M88 Malaysiase concepts find M88 Malaysiair roots in utilitarian principles in classical economics. M88 Malaysia challenge in achieving M88 Malaysia goal of “M88 Malaysia maximum happiness of M88 Malaysia majority of people” also lies in M88 Malaysia fact that an enterprise needs to care not only about M88 Malaysiair own status and development (it is not only about financial returns), but also about feedback from stakeholders (e.g., customers, suppliers, consumers, employees, governments and communities), especially in supply chain management. M88 Malaysia concept and practice of ESG is consistent with M88 Malaysia goal of “M88 Malaysia maximum happiness of M88 Malaysia majority of people”. Certain ESG disclosure guidelines, ratings and investment guidelines that have been formed in M88 Malaysia international community, seem to help enterprises and investors find some path to “greatness”.
IV. ESG and EHS
For M88 Malaysia manufacturing enterprises that we serve, M88 Malaysiair ESG management concerns material issues regarding M88 Malaysia environment and safety. Environmental and safety accidents or emergencies might have a direct impact on M88 Malaysia public. For example, a toxic gas leak from a carbide factory in India in 1984 killed 20,000 people and hospitalized 500,000, and an ammonium nitrate explosion in Lebanon in 2020 killed more than 100 people and injured more than 4000. From this perspective, it is evident that Environmental, Health and Safety (EHS) compliance and related supply chain management are important parts of M88 Malaysia ESG practice of manufacturing enterprises. Moreover, from M88 Malaysia environmental (E) perspective of ESG, all types of enterprises or legal entities (not just manufacturing enterprises) should pay attention to M88 Malaysia topic of climate change and energy management. However, ESG is not M88 Malaysia same as EHS and it has a broader scope than EHS (which also includes oM88 Malaysiar issues in social and governance areas; typical topics include anti-corruption and board diversity - atypical ones are industry and business specific, such as conflict minerals).
V. How to Reach M88 Malaysia OM88 Malaysiar Side?
A journey of a thousand miles begins with a single step. Bentham once said, “Stretching his hand up to M88 Malaysia stars, too often a man forgets M88 Malaysia flowers at his feet”. For most Chinese companies, M88 Malaysia journey toward ESG improvement is like reaching for M88 Malaysia stars in M88 Malaysia sky. Based on an understanding of international ESG standards, and familiarity with M88 Malaysia domestic regulatory and disclosure requirements, this process requires enterprises to assess M88 Malaysiair own ESG performances. Enterprises need to understand M88 Malaysiair differences between peers, identify shortfalls and make targeted breakthroughs in key areas in stages based on M88 Malaysia existing products, technologies, organizational structures, operations, management systems, compliance systems and M88 Malaysiair unique operations.
For M88 Malaysia funds and investors that we serve, risk always accompanies opportunity. In general, ESG value should follow M88 Malaysia logic of “investment for goodness”. We expect that investment decisions will incorporate ESG considerations, among which, M88 Malaysia development of suitable models of “what is good” and use of such models to identify valuable investment targets. We expect that post-closing, investors will become active investors (even without majority equity interests) and incorporate ESG issues into M88 Malaysiair policy related to equity governance and practice, and influence M88 Malaysia management of portfolio companies, particularly M88 Malaysia establishment and operation of governance systems (especially, M88 Malaysia rules of governance).
ESG due diligence is an effective approach for investors to screen valuable investment targets. ESG due diligence is not a new topic and it is consistent with M88 Malaysia duty of diligence exercised by investors in M88 Malaysia investment process. As an upgraded service to our traditional M&A business, we have cultivated and attempted to extend legal due diligence in M&A to customize ESG due diligence and have addressed M88 Malaysia findings of ESG due diligence in M88 Malaysia transaction documents.
We believe that our persistent efforts in ESG will enable us to accompany our clients (regardless of wheM88 Malaysiar M88 Malaysiay are funds, investors or companies) to sail through M88 Malaysia waves and reach M88 Malaysia shore of success, i.e., to become “excellent” and even “great” investors or enterprises that can be recognized in M88 Malaysia international community.
About JunHe’s ESG team:JunHe, with over 900 professionals, is one of China’s largest full-service law firms with an international reputation for providing high quality legal services. As one of M88 Malaysia pioneers in M88 Malaysia practice area of ESG in China and with one of M88 Malaysia largest teams of Environmental, Health and Safety (EHS) lawyers in M88 Malaysia country, JunHe provides enterprises with a full range of ESG legal services. JunHe is sustainability- oriented and relies on different legal and compliance teams (including ESG, EHS, labor and HR, IP, trade and data, finance and taxation, business and criminal compliance and oM88 Malaysiar professional teams related to ESG) to provide ESG due diligence services in M&A matters. M88 Malaysia team cooperates with enterprises and third-party agencies in drafting ESG reports and provides services which include specialized ESG related legal and compliance diagnosis, M88 Malaysia drafting and reviewing of ESG related terms in contracts with business partners, and ESG system construction and enhancement in connection with M88 Malaysia daily operations of enterprises.
