Asian risk managers must turn focus to due diligence

Asian risk and insurance managers will increasingly find themselves subject to similar corporate sustainability reporting and due diligence standards as their peers in Europe and the US, as leading regional economies such as Singapore, South Korea and Japan adopt rules in line with international standards. Parima members that work for larger Asia multinationals with operations in Europe will also have to work out how to comply with coming European Union standards that reach beyond Europe such as the Corporate Sustainability Due Diligence Directive (CSDDD) that was recently adopted after much debate in Brussels. The CSDDD was initially inspired by the tragic collapse of the Rana Plaza clothing factory in Bangladesh a decade ago. This catastrophe highlighted that European and global firms were failing to monitor the working conditions adopted by core suppliers worldwide and the impact of their activities upon the environment. Lara Wolters, Dutch member of European Parliament responsible for seeing the CSDDD through the political process, recently made a direct link to the Rana Plaza disaster as she told German news service DW that the whole point of the new law is to ensure that companies own up to the abuse occurring through their business activities and do not say: “We didn't know.” "That's what happened with Rana Plaza. All these companies said they didn't know. Instead, if they always had procedures to investigate, they would have found out long before the disaster happened. So we’re setting an expectation that you have to know what work your companies are doing. You have to go and investigate." The Singapore office of international law firm Herbert Smith Freehills recently issued a warning note to Asian multinationals operating in Europe, stressing that risk managers in the region need to take the CSDDD seriously or risk unwelcome penalties and reputational damage. “CSDDD will make it mandatory for large companies to carry out due diligence to identify, avoid, and remediate adverse environmental and human rights impacts. Importantly, the directive has extra-territorial effect and will apply to certain Asian companies with significant turnover generated in the EU,” stated the law firm. “CSDDD will also impact many Asian companies indirectly as a result of the new due diligence obligations to be imposed on EU and other companies, which are likely to see closer attention being paid to potential adverse human rights and environmental impacts caused by the operations of Asian companies that are part of EU value chains,” added Herbert Smith Freehills. Under CSDDD, in-scope companies must systematically conduct and report on due diligence processes that assess adverse impacts on the environment or human rights arising from their own operations, those of their subsidiaries and upstream and downstream business partners. “Companies must: create and maintain notification systems and complaints procedures; monitor and review the effectiveness of their due diligence policy and measures; and conduct engagement with affected stakeholders. As a last resort, companies may put in place remediation plans, or look to suspend or, eventually, terminate business relationships if the adverse impacts cannot be prevented,” stated the law firm. Importantly, the test for whether a company will be obliged to comply with CSDDD is not based on its place of incorporation or registration. The law firm explained that CSDDD will apply to: Companies incorporated in the EU, and which in the last financial year had more than 1,000 employees and €1,500m net worldwide turnover. Companies incorporated outside the EU with at least €450m turnover generated in the EU in the last financial year. Parent companies where the relevant corporate group’s consolidated turnover generated in the EU was at least €450m. “In the context of corporate groups, the due diligence obligations will apply to the ultimate parent company, or where the parent company is a holding company, each of the operational subsidiaries closest in the chain of control to the parent company,” explained the law firm. Under the rules, EU national authorities will be responsible for enforcement against companies that fail to comply with the CSDDD and can: Initiate inspections and investigations; Impose fines up to 5% of the entity’s worldwide turnover, taking into account the parent company's consolidated turnover; and, Other injunctive measures, including orders to cease identified conduct or undertake remediation. Compliance with the due diligence obligations may also be used as part of the award criteria for procurement of public contracts and concessions, explained Herbert Smith Freehills. In scope non-EU companies will be regulated by EU national authorities most closely connected with their branches of operation within the EU and/or where the majority of their turnover is generated. Meanwhile, Singapore is steaming ahead with its climate reporting requirements despite waning enthusiasm from business elsewhere, notably in the US. International law firm Ropes & Gray issued a recent note that explained that the new rules will introduce mandatory climate reporting by large non-listed companies starting in fiscal 2027. Large non-listed companies are those with annual revenue of at least a billion Singapore dollars and total assets of at least S$500m. Singapore’s Accounting and Corporate Regulatory Authority (ACRA) has indicated that in 2027 it will conduct a review of the experience of reporting companies with a view to potentially lowering the threshold to include additional non-listed companies. Ropes & Gray said that legal responsibilities will be imposed on reporting companies, their directors and/or officers to ensure the legal requirements for reporting are complied with, including the following: Keeping record of climate-related disclosures; Circulating the climate-related disclosures, climate auditor’s report and director’s statement to members in a timely fashion and tabling such documents for approval at the annual general meeting; Filing the climate-related disclosures, climate auditor’s report and/or director’s statement with the relevant regulator(s); Revising a defective climate-related disclosure and, as a safeguard, tabling the revised climate-related disclosure at the next general meeting after the revision date; and, Appointing independent and competent climate auditors. “ACRA is committed to sustainability and environmental responsibility, and to making Singapore the best place for business. That is why we are working actively with SGX RegCo and the business community to advance climate reporting in Singapore, a crucial step in addressing the pressing challenges of climate change,” said ACRA chief executive Ong Khiaw Hong. “SGX-listed issuers have had a head-start in climate reporting and many have seen its benefits. Companies are better equipped to meet demand from their lenders, customers and investors for sustainability-related information. They can also more readily access the growing pool of sustainable capital. These position Singapore well as a green economy,” added Tan Boon Gin, chief executive officer of SGX RegCo. Meanwhile, South Korea is proceeding with its Act on Human Rights and Environmental Protection for Sustainable Management of Companies. Ropes & Gray explained that this would require subject companies – including in some cases foreign multinationals doing business in South Korea – to assess and address human rights and environmental risks and adverse impacts in their operations and supply chains. Under the Act, subject companies would also be required to implement specified management systems, publish information on their due diligence and respond to interested parties’ information requests. A subject company would need to at least annually assess human rights and environmental risks arising from its business activities and the activities of its supply chain, taking into account the business sector and regions in which such activities take place, said the law firm. The Act would establish a Human Rights and Environment Corporate Committee, under the control of the Prime Minister, to monitor companies’ compliance with the Act. The committee would designate conflict and high-risk areas, support companies’ human rights and environmental due diligence, investigate complaints under the Act and issue penalties for violations. “If the committee finds that a company violated its obligations under the Act, the committee would be authorised to issue a corrective order to the company. The committee also could seek to prohibit the company from participating in a bid for public procurement via a corrective order,” said Ropes & Gray. The proposed Act also imposes both criminal and civil penalties for violations. For example, the minister of the Ministry of Economy and Finance could impose administrative fines of up to KRW10m for: Failing to submit the annual report to the committee; Failing to identify a human rights or environmental risk; Failing to implement a risk mitigation measure; Making a false claim in the company’s report; or, Failing to listen to interested persons’ opinions. In the case of a severe violation of the Act (i.e. a failure to identify a severe risk or fulfill a corrective order), a criminal penalty – including imprisonment up to five years or a fine of up to KRW50m – could be imposed, added the law firm. The burden of proof will be on the company. “Subject companies would also be required to compensate interested parties for damages caused by their violation of the Act, including by third parties acting on the company’s behalf. If the complainant is able to prove the possibility that their damage is related to the business activities of the company or the activities of the company in the supply chain, the burden of proof would be on the company to prove that either (1) it did not violate the Act or (2) compliance with the Act would not have prevented the damage,” explained Ropes & Gray. And Japan is moving ahead with its sustainability reporting effort, as in early April the Sustainability Standards Board of Japan (SSBJ) announced the release of exposure drafts for companies to report sustainability and climate-related information, based on the recently released sustainability disclosure standards by the IFRS Foundation’s International Sustainability Standards Board (ISSB). Japan appears to be competing with Korea as both countries edge towards stricter and mandatory sustainability reporting systems. In 2021, the Tokyo Stock Exchange revised the corporate governance code with a requirement for prime market-listed companies to begin providing climate-related disclosures based on the TCFD recommendations. It also introduced a ‘comply or explain’ approach to sustainability initiatives. And the Financial Services Agency (FSA) implemented rules last year that mandated the creation of a sustainability-related information section in the annual filings for all listed companies. Disclosures are required to cover governance, risk management, strategy, and indicators and targets.

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