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Relevance lies at heart of proposed SGX reporting rules

The "comply or explain" reporting regime can go beyond a query, Ms Yeo says, but adds that she hopes it doesn't.


A DESIRE for relevance lies at the heart of the Singapore Exchange's (SGX) latest proposal to require sustainability reporting, says SGX special adviser Yeo Lian Sim.

Whether relevance lies in the need to meet growing investor focus on sustainability or in the design of rules that tilt towards regulate-by-principle rather than regulate-by-prescription, SGX is determined to introduce a regime that is meaningful to all stakeholders, Ms Yeo told The Business Times in an interview. Formerly the exchange's chief regulatory officer, she is now leading the move towards regulated sustainability reporting.

"When you look at individual companies that are so different, in different industries, stages of development, circumstances, etc, it becomes necessary that one sees the usefulness of having principles and having them interpreted for individual companies," said Ms Yeo.

On Jan 5, SGX published a consultation paper on its plans to implement sustainability reporting on a "comply or explain" basis in 2017.

Under the proposals, Singapore listed companies will have to publish a sustainability report at least once a year, no later than five months after the end of the financial year. The report should contain discussions on five primary components: material environmental, social and governance (ESG) issues; policies, practices and performance in relation to the material ESG factors; targets for the coming year; the reporting framework being used; and the board of directors' affirmation of compliance.

Companies, however, will enjoy considerable latitude under the proposals. For example, companies may decide what are material issues within the five primary components that need to be reported. Issuers will also have discretion on which reporting framework to adopt, the implementation timeline and the need for third-party assurance. All of that is in addition to the fact that the reporting regime uses a "comply or explain" model that will allow companies to deviate from the rules if they can explain why they did so.

SGX as a market regulator took its first steps into sustainability reporting in 2011 when it published voluntary guidelines. Voluntary take-up rates have been mixed, with only about 160 out of 537 surveyed companies publishing sustainability reports in 2013.

Investor scrutiny, meanwhile, has been on the rise. Ms Yeo noted that fund managers with more than US$59 trillion of assets under management have signed the United Nations' Principles for Responsible Investment.

"This increased interest makes it relevant to our listed companies . . . As an exchange with listed companies, we think that our listed companies would want to be open to the widest pool of investors possible," Ms Yeo said. "And we are trying to propose this reporting that will enable them to attract those investors by providing the information they're interested in."

But SGX has also tried to achieve relevance within the rules.

"We wanted the rules to be relevant to the investor and to be relevant to the issuer who was doing the reporting," Ms Yeo said. "That way it would be useful. One would be providing the information and the other one would be using the information."

The exchange ended up structuring its proposed regime around broad principles while giving issuers the flexibility to tweak finer points.

For example, the exchange's proposal is that companies should discuss material ESG matters, but does not prescribe which factors should be considered as material. That way, companies will still be reporting on the same broad issues although the specifics may differ. All of that notwithstanding, SGX has also provided some tools that companies can use to help determine materiality.

"When we look at sustainability reporting, we would like to ensure that there are certain consistencies," Ms Yeo said.

A question arises, however, in how well the exchange can enforce reporting standards in a "comply or explain" regime in which issuers can explain away non-compliance. SGX will continue to have the same enforcement powers over sustainability reporting as it does in other parts of the listing manual, including investigations, queries, private action, reprimands and so on, although enforcement is less likely to escalate beyond queries.

"Can it go beyond a query? It can go beyond a query. Is it likely to go beyond a query? We would hope that it doesn't," Ms Yeo said.

But the market will also help to enforce the reporting requirements by rewarding companies that offer quality disclosures and punishing those that offer mediocrity, she argued.

"Comply or explain" ultimately allows companies to adjust the specifics of the rules, and Ms Yeo believes market pressure will induce most of those adjustments over time to shift the reports towards being better, rather than worse.

"The companies that take this view will be doing the reporting to satisfy their stakeholders before they are found wanting by their stakeholders - who will then either stay invested and complain, or simply divest," Ms Yeo said. "That is not a good outcome."