By Wei-Han Kuo, Partner of Formosan Brothers, Attorneys-at-Law, Hsinchu Branch

Recently, the chairman of the board of the E.sun Bank, Nan-Chou Huang, indicated that he received a letter from a foreign investor in May of 2020 which focused on  ESG and would like to know about E.sun’s financial disclosure regarding climate change and whether E.sun disclosed its sustainability accounting standard in its CSR report. This shows that after the pandemic occurred, foreign investors are paying more attention to corporate sustainability and social responsibility, to the degree that corporate sustainability and social responsibility have become primary factors they consider when investing in a company’s stock. The impact of ESG on Taiwanese businesses has become ever more prominent and it is worthy to pay much attention to.

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ESG stands for “Environmental,” “Social,” and “Governance.” It emphasizes the consideration of a company’s response to its social and environmental responsibilities in addition to traditional corporate operations outlook. It aims to improve society and the environment through investments and promotes the sustainable development of society. Issues such as global warming, climate change, pollution, gender equality, labor disputes are all part of the ESG discussion. Although one may not see the direct impact of these issues relating to society, environment, or even corporate governance on a company’s financial reports at first, since they are closely related to every member of the society, the ultimate results will be reverted to the corporates and becomes the issues that the corporates should deal with accordingly.

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In modern corporate governance, whether it’s a Taiwanese or foreign business, many companies are starting to use ESG performance as a criterion for business cooperation. To require their corporate partners to value the implementation of ESG concepts and the management thereof becomes the first step to work with each other. For example: Among foreign companies, Nike and Apple both emphasize their attention to labor-related issues such as the internal employee benefit, occupational safety control, sexual harassment prevention, working hour limit of their foreign contractors. Through publishing ESG reports, these companies also try to steer away from the notoriety of being a sweatshop due to several occupational hazards and labor rights issues in the past. Another example is that many Taiwanese businesses in the chemical industry are now imposing their ESG requirements on their downstream clients. They would send out occupational safety experts to assist in training their clients in their hazard-prevention measures during the delivery of hazardous chemical products to lower the possibility of operational issues and damage compensation caused by occupational safety incidents so that their clients can effectively improve their occupational safety management system and ensure labor rights.

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Another example is a Taiwanese textile company, Z Co. After several incidents of sexual harassment and violation of labor regulations in their Southeast Asia plants, the company was asked by several of its major clients at the same time to improve its sexual harassment prevention measures and legal compliance in its Southeast Asia plants within a designated period, or else they would reduce or even cease purchasing from Z. Co. It was then that Z Co. began to realize the gravity of the situation and urgently sought to understand relevant laws, attempting to improve the situation within the designated period to meet their clients’ values and requirements regarding ESG.

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In addition to the companies’ effort to improve their ESG values, government’s promotion and policies regarding ESG also highlights the importance of ESG concepts. More and more countries, such as the E.U. and Australia, are starting to collect carbon tax on businesses. Various countries are also starting to legislate stricter regulations and strengthen inspections regarding occupational safety, labor rights protection, and pollution prevention.

Based on the foregoing, ESG is no longer a lofty expectation or innocuous slogan. Implementation of ESG by businesses can effectively reduce costs, increase the satisfaction of both clients and employees, even more, to increase the possibility of becoming a preferential business of potential corporate partners.

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However, for a business to improve its ESG performance, joining philanthropic activities, making donations, producing good PR images through advertisements are just not enough; more importantly, it means strengthening legal compliance. A business needs to be more active in understanding legal compliance in labor, environmental, and corporate governance, and assess its company policies periodically to ensure compliance with current laws and regulations. In such a way, it can then prevent the violation of the laws which results in the penalties from competent authority and damages to its corporate image due to non-compliance. Moreover, it may causes loss of business opportunities and affects its future operations of the corporation.

(This article was published in the Expert's Commentary Column of the Commercial Times. https://view.ctee.com.tw/business/23884.html )

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