ESG Investing: A brief legal perspective on what to look out for
What is ESG Investing? Environmental, Social and Governance (ESG) investing, in simple terms, refers to a type of investment approach that considers environmental, social, and governance factors alongside traditional financial and commercial factors when making investment decisions. Here's a breakdown of what each element represents:
Environmental (E): This aspect assesses how a company's activities impact the environment. Investors consider factors such as a company's carbon footprint, water usage, energy efficiency, and overall environmental sustainability.
Social (S): The social component looks at how a company treats its employees, customers, and the communities in which it operates. It encompasses issues like labour practices, diversity and inclusion, product safety, and community engagement.
Governance (G): Governance relates to how a company is managed and controlled. It involves evaluating the company's leadership, board structure, executive compensation, and transparency in financial reporting, amongst others.
ESG investors seek to invest in companies that not only generate financial returns but also demonstrate responsible and sustainable business practices. The goal is to align investments with one's values and to promote positive societal and environmental impacts while earning a financial return.
What to look out for Below is a list of information you may want to look out for in ascertaining the extent to which the target company is ESG compliant, from a legal perspective. Please note that the list is not exhaustive and only serves to provide an indication as to what should be reviewed and assessed. Reports, records, permits and licenses, etc. as required under the law
Reports Activities categorised as ‘prescribed activity’ In the event the business of the company that you are investing into relates to a ‘prescribed activity’ pursuant to the Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order 2015, then it is important to check whether the company has caused an Environmental Impact Assessment (EIA) Report to be prepared by a suitably competent and qualified professional and thereafter approved by the Department of Environment in accordance with section 34A of the Environmental Quality Act 1974. It is to be noted that failure to produce such a report under the law shall attract a fine not exceeding RM500,000.00.
Examples of ‘prescribed activities’ pursuant to the Order include (inter alia):
Land development schemes for the purpose of agricultural production
construction/expansion of aerodomes
Drainage and irrigation
Oil & Gas (development of oil fields, construction of pipelines, etc.)
Power generation and transmission
Waste disposal and treatment
Licenses and permits Discharge of pollutants into the environment Depending on the type of industry within which the target company operates, the target company will be required to hold specific licenses pursuant to the Environmental Quality Act 1974. For example, if the target company is in the industry of manufacturing, it is imperative to check whether a license to discharge industrial effluent into the river or onto the soil (over and above the permissible parameters) has been obtained pursuant to Regulation 15 of the Environmental Quality (Industrial Effluent) Regulations 2009.
Further, if a business is involved in the discharging of pollutants into the air (typically industrial plants) which exceeds the acceptable standards, then a license to contravene such standards would need to be obtained from the Director General. Similar requirements are present under the respective regulations with regard to, amongst others, the following industries/activities:
Manufacturing and processing Palm oil;
Operation of landfills;
Treatment of sewage
Raw natural rubber
Scheduled Wastes For companies that deal with the management of scheduled wastes (its storage, disposal, transportation, etc.), it is important to check whether a written approval by the Director General of Environment has been granted to such company in accordance with section 34B of the Act. It is worth noting that the following industries are typically involved in the generation of scheduled waste: construction, mining, quarrying, and manufacturing.
Records Manufacturing/Industrial Plant activities If you’re investing in a business which operates/owns an industrial plant, you may want to ascertain whether the discharge of pollutants into the air takes place at an acceptable rate or otherwise. This can be done by checking records maintained by the target company pursuant to Regulations 10 and 17 of the Environmental Quality (Clean Air) Regulations 2014.
Mining activities If you’re investing in a mining company, say a company involved in the fossicking, panning, prospecting, exploring, mining and processing of minerals and mineral ores, then you may want to ensure that the target company is carrying out such activities in an environmentally safe and compliant manner. This can be done by requesting from the Manager of a mine for record book on pollution control and monitoring. The Manager is legally bound to maintain such records under the Mineral Development (Operational Mining Scheme, Plans And Record Books) Regulations 2007.
Certifications/safety standards Consumer Goods Where the target company is in the business of supplying consumer goods, it is imperative to check whether the goods are in compliance with safety standards imposed by the Ministry of Domestic Trade and Consumer Affairs as per section 19 of the Consumer Protection Act. Certificates of conformance (if any) issued under Consumer Protection (Certificate Of Conformance And Conformity Mark Of Safety Standards) Regulations 2010 would need to be reviewed.
Contractual Undertakings A company’s commitment to ESG can also be ascertained vide the contracts it enters into with other parties.
Environmental You may want to check whether the target company has, amongst others, the following provisions (inter alia) in place when contracting with its vendors/service providers/customers:
provisions requiring parties to comply with environmental regulations, control pollution, and minimize environmental impacts;
stipulations on sustainability goals, such as reducing greenhouse gas emissions, conserving resources, or promoting renewable energy use;
provisions which require parties to adhere to local and international environmental laws and obtain necessary permits and licenses.
Social It is imperative that the target company complies with all relevant Malaysian labour and consumer protection laws including the Employment Act 1955, Industrial Relations Act 1967 and Consumer Protection Act 1999.
You may want to check whether the company has provided for the following provisions (inter alia) in its contracts of employment/employee handbook:
Clear provisions relating to the commencement of employment, employee’s job description and responsibilities;
Clear provisions regarding payment of wages, benefits, bonuses and increment;
Leave entitlements in accordance with the Employment Act 1955 including maternity/paternity leave;
Clear stipulations on personal data protection of the employee;
Clear provisions stipulating the procedure to be undertaken in case of employee misconduct and termination.
As for elements related to consumer protection, a review of the target company's commercial contracts can be carried out to ascertain:
whether it has imposed a term deemed to be an ‘unfair contract term’ for the purpose of section 24A of the Consumer Protection Act 1999;
provisions which emphasize compliance with anti-corruption and anti-bribery laws are in place; and
sufficient safeguards with regard to the handling of personal data;
Governance In the case of the target company’s commitment to Governance initiatives, you may want to check the Constitution of the target company and/or shareholders agreement in place to ascertain, amongst others, the following provisions (inter alia):
Composition of board of directors, including the number of directors, qualifications, appointment process. This provision may be cross checked against Securities Commission’s Malaysian Code on Corporate Governance (Note: Although the Code applies to public listed companies, private companies are encouraged to embrace the contents of the Code);
The establishment of board committees such as risk/audit/compensation committees, if any;
Provisions which address shareholder rights including the protection of minority shareholders;
Provisions relating to the promotion of good ethical practices within the company and between the members;
Clear and balanced provisions pertaining to dispute resolution between members of the company and exit/termination clauses.
Fines/penalties imposed It may also be helpful to check whether the target company has been fined for breach of ESG responsibilities. Such breaches may relate to a non-compliance with relevant regulatory and/or legal requirements or breach of ESG-related contractual undertakings. You may want to:
Obtain a list of past, pending and anticipated legal proceedings involving the target company;
Obtain a confirmation of (a) from the target company’s external lawyer(s); and
Check with the Target Company’s top management on preventive measures put in place following such breaches (if any).
The above checks and assessment can be carried out via a legal due diligence exercise conducted on the target company. Before conducting such an exercise, it is pertinent to ensure that a Due Diligence Questionnaire and Requisition List (DDQR) is prepared and circulated to the target company to ensure a transparent and seamless discovery of documents/information.
This article is provided for informational purposes only and does not constitute legal advice. It is not intended to create an attorney-client relationship, and readers should not rely on it as a substitute for professional legal advice. You should consult with a qualified lawyer for legal guidance tailored to your specific situation.
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