The growing problem of bribery and corruption in Southeast Asian countries could derail efforts to properly fund environmental, social and governance (ESG) initiatives, according to a new report by international law firm Hogan Lovells.
To continue reading, subscribe to Eco‑Business.
There's something for everyone. We offer a range of subscription plans.
- Access our stories and receive our Insights Weekly newsletter with the free EB Member plan.
- Unlock unlimited access to our content and archive with EB Circle.
- Publish your content with EB Premium.
“Many so-called ESG programmes – carbon offsetting and nature-based climate mitigation, for example – are vulnerable to corruption. They can even fuel corruption because they create large money flows into jurisdictions with weak governance and few controls,” the firm’s partners Chalid Heyder and Liam Naidoo wrote in Hogan Lovells’ 2023 Global Bribery and Corruption Outlook.
In Southeast Asia, supply chains in particular experience a high risk of corruption. At least a third of Southeast Asians have identified supply chain or third party misconduct, according to PwC’s Global Economic Crime and Fraud Survey 2022. A similar percentage believe that they had lost business opportunities because a competitor paid a bribe, while 17 per cent had been asked to pay a bribe to “alleviate supply chain stress or disruption”.
These trends are expected to continue, “if not worsen”, given that businesses and local authorities must currently contend with a challenging economic landscape, Hogan Lovells said, due to pandemic-related border controls, the rising cost of global shipping and higher energy prices. This is likely to attract growing regulatory scrutiny both within the region and from international agencies, say Hogan Lovells partner Nick Williams and senior associate Khushaal Ved, and companies will need to consider how ESG issues could attract regulatory attention.
“Supply chains have been thrown into disarray, increasing the risk of companies or their suppliers taking shortcuts to facilitate the flow of goods and services. Real care is therefore needed before funding is given to local community leaders to help ESG efforts,” said Heyder and Naidoo.
They added that ESG funding without due diligence could be misconstrued as inducing recipients to allow environmental or human rights misdemeanors within their communities.
“It is crucial to understand where such funding is being paid and how it is going to be used,” they said.
Disparate local governance structures across countries in Southeast Asia make the problem more complex. In countries such as Indonesia, Vietnam and Thailand, different types of local officials are common and identifying public officials can prove difficult, the report said.
“Indonesia is a good example of a jurisdiction where ESG opportunity meets ESG risk. Multinational investors looking to exploit the country’s rich resources must navigate local permitting requirements and interact with local communities and traditional authorities,” Heyder and Naidoo said.
“Though many licensing requirements have moved to an online submission system, there’s an inherent bribery risk associated with the grant of licenses and concessions,” they added.
One sector that is particularly exposed to both corruption and ESG risk is industrial agriculture, due to the roles of both national governments and local tribes or villages across multiple jurisdictions. In countries like Indonesia and Malaysia, demand for timber, palm oil and alternative protein sources have driven deforestation and human rights abuses, often enabled by local leadership, Hogan Lovells partners said.
The risks are compounded by the difficulty associated with conducting effective due diligence to address both ESG and corruption risks in the agri-commodity sector.
“For example, to conduct effective corporate due diligence in Indonesia, you would need to go to local authorities to establish ownership. There’s simply no easy access to databases that will give you the answers you want,” the authors said.
There is a fix: good anti-bribery and corruption programmes can be used to support the management of such ESG risks, partners at Hogan Lovells said. A company’s existing anti-bribery and corruption risk assessments as well as assessments for anti-money laundering risk would provide a useful starting point or guide in making sure the company is not funding ESG breaches by paying corrupt authorities or entering into supply contracts with suppliers that abuse human rights.
“Based on our in-depth research conducted among 600 chief compliance officers, heads of legal or equivalent compliance leaders across the world, we found that anti-bribery and corruption and ESG management are widely seen as co-existing,” they said.
As a matter of fact, established ESG standards such as the UN Global Compact and the Global Reporting Initiative explicitly reference or require anti-bribery standards, the authors point out.
“Despite the challenges compliance leaders face in incorporating ESG into their practices, 81 per cent recognise that integrated programmes can positively affect their organisation,” Heyder and Naidoo said.
A risk-based approach to both anti-bribery and corruption as well as ESG could become mandatory in many companies because of emerging regulations, such as the European Union’s Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive. In the United States and Southeast Asian countries including Indonesia, Malaysia, Thailand and Singapore, authorties have introduced new disclosure requirements that will require public companies to enhance their climate-related disclosures.
“Companies ahead of this regulatory curve have the opportunity to streamline and standardise their management across their businesses and value chains – ultimately, mitigating risk and maybe even saving money,” they said.
On the other hand, jurisdictions or businesses that cannot show compliance with ESG principles are likely to lose opportunities or face regulatory scrutiny as a result, say Williams and Ved. To addres these risks, companies should ensure that they clearly articulate anti-corruption policies, practice responsible and strategic sourcing and clearly articulate their environmental and social principles to suppliers.
In the meantime, authorities across Southeast Asia should consider aligning ESG standards to make the ecosystem easier to navigate for international investors and other stakeholders looking to do business in the region.
“In the medium to long term, Southeast Asian jurisdictions should consider adopting a consistent ESG standard, which would serve to unify an ESG framework that businesses and other organisations can adopt within the region as a whole,” said Williams and Ved.
The article has been updated to include comments from Hogan Lovells’ partner Nick Williams and senior associate Khushaal Ved.
