Companies in Southeast Asia which are not prepared to transition to net zero emissions by 2050 are at risk of financial and legal repercussions – and so are their boards of directors, governance experts say.
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Although taking legal action over climate-related harm in the region is still not common, the rise of climate commitments and disclosure requirements will likely mean it will see more litigation going forward, said Rejina Rahim, advisor to the industry-led Institutional Investors Council Malaysia.
This trend is being observed across the region, according to a new guide on climate action for boards in Southeast Asia, developed by environmental law charity ClientEarth, corporate sustainability advisory organisation Earth on Board and Climate Governance Malaysia, a local chapter of the global Climate Governance Initiative network.
“Leading corporate counsels from various Asian jurisdictions have opined that directors are required to integrate climate risks and opportunities into governance in order to validly discharge their duties, and face potential liability if they do not,” the guide stated.
“We don’t have a choice – investors and companies need to make sure they are adhering to requirements,” said Rejina at the launch event of the guide in Kuala Lumpur last Friday.
Financial regulators in the region have been stepping up sustainability reporting requirements in recent months. For instance, public-listed Singapore and Malaysian companies must make climate-related disclosures by 2025 based on standards set by the International Sustainability Standards Board (ISSB).
On top of that, the majority of Malaysian companies are exporters and must comply with external sustainability disclosure requirements, such as the European Union’s Cross Border Adjustment Mechanism (CBAM) and anti-deforestation regulations, said Rejina.
She added that one of Malaysia’s largest institutional investors, Permodalan Nasional Berhad (PNB), has instructed investee companies to adopt net zero targets by 2050 or risk being divested.
In April this year, PNB updated its voting policy to require that investee companies adopt a net zero ambition by 1 January 2025, and a net zero strategy by the following year. This strategy should provide “a comprehensive plan outlining the steps they will take to achieve their net zero ambitions as well as interim emission reduction targets,” said PNB, which has a fund size of RM337 billion (US$76 billion) and is invested in some of Malaysia’s largest companies including Maybank and plantations firm SD Guthrie, formerly Sime Darby Plantations.
Although company law and the duties of directors vary by jursdictions, experts say that directors are responsible for integrating climate risks and opportunities into their decisions. [Click to enlarge] Image: Guide on Climate Action for Boards in Southeast Asia/ ClientEarth, Earth on Board, Climate Governance Malaysia
Malaysia’s largest institutional investor, the Employees Provident Fund, has also required its investee companies to detail their net zero transition plans. The pension fund, which had RM1.14 trillion (US$257 billion) in assets under management in 2023, has made a “clear, time-bound emissions reduction plan” a core requirement for investee companies by this year.
Philippe Joubert, founder and chief executive of Earth on Board, said that companies that fail to prepare transition plans in order to meet their climate targets are at risk of greenwashing.
“If companies are declaring (net zero ambitions) but are not fulfilling their obligations, investors will not be happy,” said Joubert.
Transition plans must be revisited
Transition planning is still weak among Asian businesses and investors. The latest guide by ClientEarth, Earth on Board and CGM confirms this, based on structured interviews with directors across Southeast Asia. One Singapore-based independent director said: “Most boards are pledging to 2050 targets but none of them will be around then… If you don’t have some targets that will be achieved by 2027 or 2030, then you are greenwashing.”
Another Philippines-based sustainability manager said that the company’s leaders struggled with making 30-year projections since corporate planning typically only spans five years, though he shared that the executive team has begun to adapt to longer-term scenario planning after committing to net zero by 2050.
“It’s an ongoing process but we are making good incremental progress,” the manager said.
It is incumbent upon boards to review key assumptions periodically for relevant robustness, even after a transition plan has been approved.
Simon CY Wong, independent advisor in sustainable finance, Cambridge Institute for Sustainability Leadership
It is also important that companies and their boards of directors update their transition plans over time, as ecological and policy changes could affect how effective the plans continue to be, said Simon CY Wong, independent advisor in sustainable finance at the Cambridge Institute for Sustainability Leadership and a contributor to the guide.
He cited Japan Airlines’ target of using sustainable aviation fuel, an “immature technology”, to reduce 45 per cent of its emissions by 2050, while activities under its direct control constitute just a sliver of the total decarbonisation needed to get to net zero.
“It is incumbent upon boards to review key assumptions periodically for relevant robustness, even after a transition plan has been approved,” said Wong.
In fact, directors continue to be liable for their past or current actions even after they have left their board positions, Rejina said. For example, former directors of Polish energy giant Enea were sued by the company’s current management over a lack of due diligence, because they had approved a failed coal plant investment despite warnings about rising carbon prices, cheaper renewables and the impact of EU energy reforms.
Giving the board an explicit mandate to oversee climate action can help address this by setting a clear direction for the business, both internally and to external stakeholders, said the guide. Sustainability should also be embedded into all board committees, avoiding a “sustainability silo,” it said.
Bringing in directors with experience or a background in sustainability has helped some boards improve their climate action. “One of our external directors told me that even after receiving formal training, it’s hard for board members to absorb (sustainability-related knowhow) if it’s not something directly related to (their roles),” said one Southeast Asian chief sustainability officer. “For us, the solution was to bring in new board members who have direct and in-depth sustainability experience.”
At the launch of a new guide on climate for boards in Southeast Asia, Rejina Rahim, advisor for the Institutional Investors Council Malaysia (third from left), said that the region can expect to see more climate litigation going forward. The other speakers (from left) were Elizabeth Wu, moderator and legal consultant at ClientEarth, Tommy Thomas, former attorney-general of Malaysia, and Philippe Joubert, founder and chief executive of Earth on Board. Image: ClientEarth
Family businesses as climate actors
The guide also noted that Southeast Asia’s family-owned businesses, which make up 85 per cent of the region’s corporations, may be in a unique position to advance climate strategy.
“In this region, the influence of the family is quite big. If you don’t convince the patriarch, nothing will get done,” said one corporate governance expert with extensive experience in Southeast Asia. “But once it’s supported by the family, it is implemented and it is implemented fast.”
Wong, who had conducted interviews with some of these family leaders, said: “It was quite inspiring to hear from some of these 70- and 80-year-old founders who want to do more (for climate).”
Some interviewees, however, said that there are still some boards of family-owned businesses that adopt short-term thinking in their business plans. This was especially true of first-generation firms, which must prioritise survival, said one academician.
Controlling shareholders of some Southeast Asia-based family businesses were personally motivated to take climate action. One founder said he was inspired by former United Nations Secretary General Kofi Annan when he introduced the UN Global Compact on human rights, labour, and environment in 1999. Another octogenarian founder was moved by watching the documentary An Inconvenient Truth by American politician and environmentalist Al Gore.
Such stakeholders can make it easier for companies to advance climate action, but boards must ultimately step up to steer the corporate transitions, stated the guide.
“It would be inaccurate for directors to view climate change as a “compliance” issue,” it said. “Boards in Southeast Asia should consider how they organise themselves, where they should focus their efforts, and the tools they should draw upon to better oversee their companies’ climate transition.”
