When the Monetary Authority of Singapore (MAS) published a study last year, with consultancy McKinsey, on how to accelerate the retirement of coal-fired power plants in Asia, it was a sign of how the region continues to seek innovative ways to decarbonise its fossil fuel-dependent economies.
South-east Asia, where Singapore is the financial hub, includes countries that are among the most exposed to the adverse impacts of climate change — such as Vietnam and Indonesia, both of which depend heavily on coal-generated power.
That makes coming up with creative ways to end reliance on fossil fuels all the more urgent — hence the MAS study, which looks at how improving financing structures could persuade coal plant owners to wind them down, voluntarily — ahead of their technical end of life.
The research covers a new type of carbon credit, which would provide a mechanism for generating a revenue stream to compensate coal plant owners for the income forgone from early plant closure.
At stake is how to align the interests of plant owners and lenders. “We must take an ecosystem approach to address the complexities of energy transition,” said Leong Sing Chiong, deputy managing director at the MAS’s markets and development group, speaking at the launch in December of a pilot for the idea, involving two coal plants in the Philippines.
This means bringing investors and businesses with often differing interests together, which is becoming increasingly important as environmental, social and governance (ESG) principles are implemented in Asia.
Demand for legal remedies that align these interests shows no sign of abating, even as a politically driven ESG backlash in the US is throwing up awkward dilemmas for investment managers and others outside Asia. Indeed, law firms in the region are responding to growing pressure from clients to advise on ESG issues, while demonstrating their own commitment to such principles.
At Baker McKenzie’s Melbourne practice, lawyers have been devising a power purchase agreement (PPA) to satisfy the differing commercial interests of a renewable power producer and the buyer of the power, known as an off-taker.
Decades of reliance on coal and gas in Australia has meant that its grid and transmission infrastructure is not always suitable for accommodating renewable power, and upgrades are needed. This means that renewable power project developers may occasionally vary the mix of power sources in their output — from solar to battery-driven, for instance — to take account of infrastructure bottlenecks and network congestion.
For Baker McKenzie, the challenge, while working with one developer on a “hybrid” project involving solar and battery power, was to reconcile the desire of the developer to maximise revenue across the project with the needs of an off-taker that had committed to buying the solar power.
Lawyers devised a way of not disadvantaging the off-taker in situations where the developer would need to switch from solar output to battery output as a result of network constraints or other reasons. They also ensured the developer was able to “optimise revenue across the whole hybrid project”, according to Aylin Cunsolo, a partner at Baker McKenzie.
“The mechanism that we came up with was for the project developer to have full flexibility and control over dispatch [of power], but there was also a complex revenue-sharing regime that we developed with our clients that [in effect] made sure that the off-taker was no worse off in that circumstance,” she says.
Achieving balance has also been important in the lending context. King & Wood Mallesons, a Chinese-Australian law firm, acted last year for AirTrunk, an Australian data centre business, on an expansion and refinancing of its A$4.7bn “sustainability-linked loan” (SLL) — part of a global wave of multibillion-dollar ESG fundraising in the sector.
The terms of the refinancing are linked to how well the data centre operator meets ambitious carbon, water, and power usage reduction targets — as data centres are among the largest users of energy and water. The arrangement also factors in a target for gender pay equity.
Normally, under an SLL, the borrower must pay a higher rate of interest if it fails to meet certain targets in relation to carbon usage and other metrics, or benefits from a lowered rate if such targets are achieved or exceeded.
In the AirTrunk case, a different balance was struck, revolving around treatment of the margin that a lender typically charges on top of the basic interest rate on a loan.
AirTrunk and its lenders agreed that if the business meets its targets this interest margin is reduced, and AirTrunk contributes the saving to a sustainability fund for the community in which it is operating. Alternatively, if the business fails to meet its targets, rather than paying an increased interest margin to the lenders, the company contributes that amount to the sustainability fund.
Jeff Clark, a partner in the firm’s Melbourne office, says traditional sustainability loans are “one-sided” in the sense that they are often designed to offer a benefit to the borrower. But the fact that the AirTrunk arrangement was more nuanced, offering benefits to the borrower while also allowing the lender to participate in a sustainable loan with novel characteristics, was “quite unique in this market”.
He adds: “Rather than simply going into general revenue, the payments into the fund are used for sustainability benefits, so there are community benefits that otherwise wouldn’t have been there.”
Human rights governance moves up the ESG agenda
In Australia, companies have only relatively recently started to focus on incorporating human rights issues into how they apply environmental, social and governance (ESG) principles. That is partly because, unlike in many other liberal democracies, there is no federal bill of rights in the country to provide some impetus.
This is starting to change amid pressure from investors, who expect businesses to demonstrate respect for human rights and undertake due diligence to understand risks and the impact of projects on indigenous communities.
Phoebe Wynn-Pope, head of responsible business and ESG at Australian law firm Corrs Chambers Westgarth, says this means companies must examine how to deal with questions such as modern slavery in a more holistic way — across the business and supply chain.
“One of the things that we see a lot with our clients is that human rights expertise sits in different places,” she notes. “Sometimes, it’s very focused on supply chain and supply chain management, or it will sit in a sustainability, compliance or risk team.”
“This range of different lenses impacts the way clients think about rights,” says Wynn-Pope. If human rights is part of the compliance department, for instance, clients may view it as a risk only to the business as opposed to a risk to people “because they’re looking at it with a different lens”.
To advise clients on addressing such problems, Corrs Chambers Westgarth built a “cross-practice team” including legal and human rights experts to help companies integrate human rights in their businesses.
The team recently advised an Australian private equity firm on how to co-ordinate a policy on human rights that could be applicable across its portfolio of companies in education, healthcare, and food processing.
“Each company was doing something different,” says Wynn-Pope. “Some had great policies but no idea what their supply chain looked like, and others had a view of their supply chain but no policies [on human rights]. I wanted something that would be consistent that they could apply across all their portfolio companies, regardless of sector.”
In addition, the team has advised an Australian construction company with subsidiaries across Asia on how to shift from having a policy focused on modern slavery to building a new human rights governance framework across the whole business.
“We’ve also been looking at human rights in every stage of a major project,” says Wynn-Pope. “Not only are we putting in place these governance structures, [we are] also thinking about where risks arise and how to mitigate them all the way through the project cycle.”
https://www.ft.com/content/0aabff0f-483c-4671-a5c2-3ab70c74b21d
