ESG-related matters are of increasing interest to corporates and investors alike, but despite this fascination, a lack of an overarching legal framework leaves many in the dark.

Despite growing interest in environmental, social and governance (ESG) issues among corporates, this preoccupation is limited mainly to issues concerning risk management or related to standards for investments.

No overarching legal framework exists that corporates can refer to if they desire to strengthen their ESG capabilities and/or attributes. But this may soon be changing as regulators begin to notice the importance of having a legal framework for ESG, particularly for companies which are listed.

In Hong Kong, for example, although listed companies regularly publish ESG reports to comply with stock exchange disclosure requirements, many corporates who are not able to meet these requirements do not disclose the reasons for non-compliance. In fact, only 38% of 400 corporates who participated in a study conducted by the Hong Kong Exchange (HKEX) were able to comply with all 11 ESG aspects in their first report after the requirements took effect, according to a compliance report issued by the HKEX last May, 2018.

One reason could be the absence of a bona fide legal framework that provides for specific rules, regulations, and penalties for non-compliance on ESG issues. Corporates who fail to comply with the disclosure requirements, for example, are merely asked by the HKEX to give an explanation as to why they were not able to comply. But legal experts say this may be changing sooner rather than later.

"ESG is still relatively new for corporates in Asia. My sense is a lot of it is coming from what is being imposed by the requirements of certain investors, and it's still evolving. Now we're seeing certain rules being issued by stock exchanges which will help define standards that from a corporate governance standpoint. There is more to be done but I think it's still in the early stages of developing this aspect of corporate social responsibility in Asia," says Mark Uhrynuk, a partner at Mayer Brown, who covers corporate law for the Asia Pacific.

Uhrynuk is part of a recently-formed ESG group at Mayer Brown, which is a multi-disciplinary body composed of lawyers covering finance, corporate and securities, real estate, trade, regulatory and intellectual property and who deal with ESG-related issues of clients.

The formation of the ESG group, an internal body within Mayer Brown, flowed the growing interest in ESG among clients and individualswithin the firm. This group and others at the firm help clients develop and incorporate their ESG management systems as integral parts of their overall investment strategies to meet standards required by investors, advising on corporate governance requirements for listed companies, as well as incorporating ESG issues into legal due diligence reports where appropriate. The firm has been helping clients address ESG since the concept’s formal inception, and this group aims to bring these efforts together as well as forming a plank of the firm's social responsibility.

The formation of the group can be seen as an example of how professionals in the legal profession are responding to the growing need for ESG expertise in the legal space.

"One of the things that we're looking at is comparing how regulators in different jurisdictions are approaching ESG.  For example, comparing what the Hong Kong stock exchange is doing with what the US Securities and Exchange Commission (SEC) is doing. We have published an article on the rule making coming out of the SEC and we are looking at doing something similar for Hong Kong -  comparing and contrasting  what the stock exchanges are doing," Uhrynuk says.

"I think as these things evolve, best practices evolve from a regulatory standpoint and there starts to be some commonality as to how it's approached. I don't think we're there yet. But it's a much more connected world than it was a few years back and I think these regulatory bodies communicate more today," Uhrynuk says.

Interest in ESG has grown rapidly, even in the private equity space, Uhrynuk says. In particular, some fund managers are developing funds that specifically seek out investors who have an interest in ESG rather than the other way around. 

"Certain fund sponsors are embedding ESG principles onto their fund documents and seeking anchor investors that have that as their mandate as well. This is something that we  were not seeing until recently," Uhrynuk says.