Future-Casting – Disputes and Sustainability in the UK, Singapore and Australia

Regulation of ESG Funds by MAS 

With the influx of ESG-focused investment schemes and retail funds into Singapore, the Monetary Authority of Singapore (MAS) launched several codes and regulations with a view to reducing the instances of greenwashing. Some of these include the Code on Collective Investment Schemes (CIS Code), the Securities and Futures (Offers of Investments) Collective Investment Schemes) Regulations 2005 (SF(CIS)R) and Circular No. CFC 02/2022 on Disclosure and Reporting Guidelines for Retail ESG Funds (MAS Circular). 

In particular, the MAS Circular and the Third Schedule of the SF(CIS)R lays out mandatory disclosure in the prospectuses of ESG-focused financial products. The prospectus must:

• disclose the ESG focus of the specific scheme (e.g. climate change, the reduction of greenhouse gas emissions, or achieving a low carbon footprint);
• detail the relevant ESG criteria, methodologies or metrics used to measure the attainment of the scheme’s ESG focus, whether they are third-party or proprietary ratings, labels, or certifications;
• detail the risks associated with the scheme’s ESG focus and investment strategy;
• describe the sustainable investing strategy of the scheme, incorporating the binding key elements of that strategy and explaining how the investment process will be implemented on a continuous basis; and
• if the scheme uses a benchmark index to measure the progress of how the scheme’s ESG goals are being achieved, explain how the benchmark index is consistent with or relevant to the scheme’s investment focus. 

The MAS Circular also sets out Enhanced Reporting and Disclosure requirements in the annual reports of these ESG funds. The annual report must include:

• a narrative on how and the extent to which the scheme’s ESG focus has been met during the financial period, including a comparison with the previous period (if any);
• the actual proportion of investments that meet the scheme’s ESG focus (if applicable); and
• any action taken by the scheme to attain its ESG focus. 

In addition, the MAS Circular provides that, where appropriate, additional information regarding the ESG Fund, its manager or index provider should also be disclosed to investors or prospective investors on the manager’s website or by other appropriate means. Such information includes:

• how the ESG focus is measured and monitored;
• related internal or external control mechanisms in place to monitor compliance with the scheme’s continued ESG focus;
• sources and usage of ESG data or assumptions made where such data is lacking;
• due diligence carried out in respect of the ESG related features of the scheme’s investments; and
• any stakeholder engagement policies that may shape the corporate behaviour of companies that the scheme invests in and contribute to the attainment of the scheme’s ESG focus. 

Climate-related disclosures for SGX-listed issuers and large non-listed companies 

In February 2024, the Accounting and Corporate Regulatory Authority (ACRA) and Singapore Exchange Regulation (SGX RegCo) announced details on mandatory climate reporting for Singapore Stock Exchange-listed issuers and large non-listed companies. 

The mandatory climate-related disclosures (CRD) will be introduced using a phased approach, with all listed issuers mandated to report and file their annual CRD using requirements aligned with the International Sustainability Standards Board (ISSB) standards from FY2025.

For large non-listed companies (NLCos) (companies with an annual revenue of at least SGD 1bn and total assets of at least SGD 500m) the mandatory reporting of CRD annually will begin in FY2027. ACRA will monitor the experience of listed issuers and large NLCos before introducing reporting requirements for other companies. 

As some companies are already reporting their CRD using other international standards and frameworks, ACRA will exempt large NLCos with parent companies that are reporting CRD under certain circumstances. A large NLCo whose parent company reports CRD using ISSB-aligned local reporting standards or the equivalent will be exempted from reporting and filing CRD with ACRA, provided that the large NLCo’s activities are included within the parent company’s report that is available for public use. Other large NLCos whose parent companies report CRD using other international standards and frameworks (for example, the Global Reporting Initiative Standards or the Task Force on Climate-related Financial Disclosures Recommendations) will be exempted from reporting their CRD with ACRA for a transitional period of three years from FY2027 to FY2029. Whether these exemptions will be extended will depend on global developments on the adoption and recognition of other standards and frameworks.    

The ACRA initiative to mandate CRD reporting by businesses is a sign of Singapore’s commitment to sustainability and environmental responsibility with a view to making Singapore a global business hub. By advancing climate reporting within the business community, the nation hopes to tackle the pressing challenges of climate change and to equip companies to be able to meet the demands from their lenders, customers and investors for sustainability-related information.   

Case Study: ASIC v Mercer Superannuation 

Within APAC, the Australian Securities and Investments Commission (ASIC) commenced civil penalty action in early 2023 against Mercer Superannuation (Mercer) at the Federal Court of Australia, alleging greenwashing by Mercer in the reporting of the sustainability of its investments. The ASIC alleged that Mercer, which oversees AUD 65 billion in assets, misled members about its Sustainable Plus fund by claiming that it excluded companies involved in carbon-intensive fossil fuels. However, Mercer was found to have made significant investments in 15 companies involved in carbon-intensive fossil fuels, including BHP, Glencore, AGL Energy and Whitehaven Coal. Mercer was also found to have invested in 34 companies across the alcohol and gambling sectors, including Budweiser, Carlsberg, Heineken, Crown Resorts and Tabcorp, despite informing members that investments from these two sectors were excluded. 

This case carried particular importance for the Australian courts as it was the first greenwashing litigation of its kind in the financial services industry. The barrister appearing on behalf of the ASIC, Tim Begbie, KC, urged the Australian Federal Court to impose a penalty that sends a strong message of deterrence against future wrongdoing. The intention was to avoid undermining businesses that expend effort and costs into structuring their financial products and services to reflect consumer sustainability and governance concerns. A deterrent sentence will dissuade recalcitrant parties from making false claims about the sustainability of their businesses. 

The ASIC has since launched further legal action against other investment funds and superannuation giants, such as Vanguard, Active Super and Future Super, signalling that ESG and sustainability-related litigation are no longer a thing of the future, but very much part of present-day reality in the APAC region. 

Workplace Fairness Legislation: a safeguard against workplace discrimination 

Focusing on the ‘social’ and ‘governance’ elements of ESG, the Singapore government has been working with the Tripartite Partners – the Ministry of Manpower (MOM), the National Trade Unions Congress (NTUC) and the Singapore National Employers Federation (SNEF) – to come up with legislation prohibiting workplace discrimination. 

Due to be enacted in the latter half of 2024, the Workplace Fairness Legislation (WFL) aims to eradicate workplace discrimination with respect to five sets of characteristics:

1. age;
2. nationality;
3. sex, marital status, pregnancy status, caregiving responsibilities;
4. race, religion, language; and
5. disability and mental health conditions. 

The WFL will cover all stages of employment from pre-employment (i.e. the recruiting phase) to in-employment (i.e. for appraisal, promotion and training), and end-employment (i.e. during termination or dismissal). 

Interestingly, the WFL will only govern direct discrimination, defined as “making an adverse employment decision because of any protected characteristic”, but not indirect discrimination, because the Tripartite Committee is concerned that prohibiting indirect discrimination may impose burdensome legal obligations on employers and cause greater uncertainty for employers and employees alike. 

The WFL will work hand-in-hand with the existing Tripartite Guidelines on Fair Employment Practices to ensure employers enact anti-discriminatory practices in the workplace. However, unlike the upcoming WFL, the Tripartite Guidelines do not have the force of law in Singapore. 

Employers will also be required to put in place proper grievance-handling processes to avoid situations where employers may attempt to retaliate against those who report workplace discrimination and harassment. Retaliatory actions may include wrongful dismissals, unreasonable denial of re-employment, unauthorised salary deduction, deprivation of contractual benefits, harassment and any other act done to victimise the individual who made the report. 

Claims relating to workplace discrimination will undergo compulsory mediation at the Tripartite Alliance for Dispute Management (TADM) first with referrals to the Employment Claims Tribunal (ECT) for adjudication a last resort. Employers will also have their interests safeguarded given that the ECT is empowered to strike out frivolous claims from disgruntled employees making baseless allegations against their employers.

ESG-related litigation from an UK perspective 

In the UK, organisations are increasingly being targeted by activists who are bringing novel legal claims on ESG-related matters to create public attention for their complaints and drive changes in corporate behaviour. 

Recent examples of activist claims in the UK include: 

• Client Earth v Shell (2023), where Client Earth alleged that the Shell board was in breach of directors’ duties in failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement.
• Client Earth’s attempt to judicially review a decision by the Financial Conduct Authority (FCA) in 2023 to approve the prospectus of a UK oil and gas company. 

Both claims by Client Earth were ultimately unsuccessful. However, an important purpose behind the legal claims of activists is to raise the profile of the issues at the centre of these complaints and to ensure that boards are aware that corporate actions may be subject to public challenge. 

In addition to the activist actions described above, there is a growing risk of ESG-related litigation from claimants who are seeking commercial returns. Some examples of the types of litigation risks in the UK include:

• Consumer-led litigation and group action risk with sophisticated claimant law firms and litigation funders seeking out opportunities to pursue claims. There is a risk of consumer claims where “green” investments or other products have been sold on a misleading basis.
• “Securities litigation” where shareholders are bringing claims against companies as a result of alleged losses suffered. These claims are brought under the statutory liability regimes provided for by the UK Financial Services and Markets Act 2000 and common law claims in fraud or negligent misstatement. Claims are usually brought by way of group action and there is an increasing risk of these claims arising from ESG-related market disclosures and ESG-related corporate scandals.
• Claims in the context of commercial agreements or M&A transactions, where a counterparty considers that the information provided was inaccurate. These types of claims are likely to increase as ESG-related disclosures become more commonplace.
• Claims for the alleged misconduct of companies within their supply chain and also parent company responsibility for the actions of overseas subsidiaries.
• Shareholder derivative claims alleging breach of director duties. For example, ESG-related claims may allege breach of section 172 (duty to promote the success of the company having regard to the company's operations on the community and the environment) and section 174 (duty to exercise reasonable care, skill and diligence) of the English Companies Act 2006.
• Claims against directors arising from a statement in a directors’ report, strategic report, directors’ remuneration report or any separate corporate governance statement where it is alleged that they have been dishonest or reckless in making the relevant statement or knew it concealed a material fact (per section 463 of the English Companies Act 2006). 

Unsurprisingly, many of the ESG litigation risks currently prevalent in the UK are likely to start materialising in Singapore and Australia in the near future, given the maturing regulatory landscape and growing awareness of ESG breaches in the APAC region. 

Conclusion 

The increased focus on ESG regulation in Singapore is likely to mean a corresponding increase in ESG-related litigation in the near future. This is already taking place in Australia and the UK, and companies in Singapore and the APAC region are advised to ramp up their ESG-related capabilities and study current and future regulations to avoid becoming embroiled in costly ESG disputes that could result in reputational damage. 

Apart from climate and environment-related regulation, true sustainability requires companies to take a broad, holistic approach to their environmental, social and governance challenges.  Upcoming legislation and regulations on employers should also be a focal point for companies as they strengthen their ESG policies. The old adage ‘an ounce of prevention is worth a pound of cure’ comes to mind and this is an opportune moment for companies to make ESG compliance a priority in their businesses.