SGX RegCo proposals on mandatory climate reporting

In light of the growing demand for ESG related data from key stakeholders, Singapore Exchange Regulation (SGX RegCo) has proposed a roadmap for climate-related disclosures to be made mandatory in companies’ sustainability reports (SRs). SGX RegCo is consulting the public on several recommendations and suggesting that companies adopt these enhancements for their SRs and annual reports for the financial year beginning on/or after 1 Jan 2022. The enclosed article summarizes our views on the topic.

In our opinion, the proposed SGX RegCo Sustainability Reporting requirements, especially climate related disclosures, offer an excellent start but can be enhanced further with some recommendations outlined below. Furthermore, the SGX RegCo offers generous leeway in terms of timelines for implementation. 

At a time when investors and analysts face an increasing need for in-depth and standardized data to enable them to better analyse and embed ESG factors and climate credentials in company and portfolio analysis, such disclosure requirements of much needed information from listed companies are to be welcomed. After all, the lack of standardised data from the underlying companies is the primary impediment for most investors in meeting the requirements from the MAS, HKMA, EU and other regulators on climate related portfolio disclosures.

We believe there are some areas within the proposals that can offer more clarity or arguably don’t go far enough to be impactful. The key issues are listed below in brief, in the rough order of how they appear in the feedback template: 

  1. Roadmap timing: The proposed timeline of FY2022 (i.e., reporting in 2023) for voluntary reporting seems very generous. While broadly in line with many other jurisdictions, the global trend is towards tightening of standards and SGX RegCo has a chance to stay ahead of the curve. Other jurisdictions such as Switzerland, UK, etc., also require larger companies, in terms of revenues or employees, to start reporting sooner. Furthermore, with the MAS requiring fund managers to report similarly from 2022 onwards, we suggest starting at the same time, particularly given that in the first year, the reporting is proposed to be voluntary (“comply or explain”).
  2. Industry sectors to be prioritised: Broadly the proposal is positive given the degree of coverage of the Singapore market index. However, some clarification is needed regarding sector classifications.
  3. Scope of data: The companies are only being asked to report on their GHG emissions under Scope 1 and 2. This is reasonable given that this data should be quite readily available with minimal effort for most companies. However, for the financial and real estate sectors, it is important to encourage reporting on Scope 3 emissions since these are likely to be far more material, particularly for financials. At a minimum, banks and financial companies should be required to report on what efforts they are making to gather data on Scope 3 emissions.
  4. Materiality: SGX RegCo proposes that companies decide what is material for them and focus their comments accordingly. We view this as eminently sensible. However, the scope of materiality is defined as that which is likely to affect the company’s business, financials, performance etc. While this is a common approach, especially at the beginning of the ESG journey, it is more progressive to require companies to also comment on environmental matters as a result of their actions – i.e., an “inside-out approach” in addition to the proposed one, which can be called “outside-in”. We believe that the Swiss proposals encompassing “Double Materiality” is a better way forward in this regard.
  5. Audit or assurance? The proposal eschews external audits for ESG statements. Instead, it mandates that internal teams provide assurance regarding the veracity of the facts in the reports. In our opinion, this can be considered very reasonable given that ESG audit is a nascent field with many unresolved issues relating to the standards. The move to make internal assurance mandatory should be supported by all stakeholders using these statements. Currently, SGX listed companies prepare a Sustainability report; however, in the absence of any need to provide an “internal assurance”, these reports are often nothing more than glossy PR documents. A recent study by NUS jointly with the SGX found that only 18% of Sustainability reports from SGX companies were “internally assured” with a mere 2% receiving external assurance from their auditors. 

In summary, we believe that the proposed measures are an excellent and much needed step forward in enhancing transparency on climate related matters. The growth of ESG appears to have led to a commensurate growth in “greenwashing”! Such greenwashing, unfortunately, is likely to continue in some form or another, much like accounting jugglery. However, more timely and standardized information reporting will make it easier to spot. The move to require companies to report on 27 specified ESG related metrics and to make them available on a standard data portal in a prescribed format is to be strongly commended and will greatly enhance standardization of data collection and reporting. While we anticipate that there will be some challenges with companies needing to update their current reporting systems to capture and report the relevant data, this is an important step to move forward and align practices with global standards.

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