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Sustainability reporting rules seen offering flexibility

But investors, stakeholders must look out for boilerplate reports or bare-minimum compliance responses, say observers

SGX's Mr Loh said the reporting of non-financial information will enhance the visibility of SGX-listed companies among investors.


THE Singapore Exchange's "softly, softly" approach in rolling out its sustainability reporting rules on Monday gives listed firms here enough time and flexibility to implement them, but also requires investors and other stakeholders to be more discerning in evaluating the reports, market participants said.

They expressed concern that letting listed companies pick the environmental, social and governance (ESG) factors to report on may lead to some important ones being glossed over, but added that the process of engaging stakeholders to determine the material factors could benefit all parties eventually.

They were reacting to the bourse operator's announcement on Monday of new "comply or explain" rules on annual sustainability reporting for listed firms, which will require them to publish a sustainability report at least once a year and no later than five months after the end of their financial year (FY). This followed the release of a consultation paper to the public earlier this year.

SGX chief executive officer Loh Boon Chye said in a statement: "The annual reporting of non-financial information will enhance the visibility of SGX-listed companies among investors who seek sustainable investments and want to review a company's environmental, social and governance efforts."

This rule takes effect for any FY ending on or after Dec 31, 2017, SGX said, but added that companies will get 12 months from the FY end to publish their first sustainability reports.

It said the report should include the following primary components: material environmental, social and governance (ESG) factors; the company's ESG policies, practices and performance; targets; the sustainability reporting framework it has chosen; and a statement from the board that "describes the company's sustainability actions".

The board statement replaces a board statement of compliance that the SGX had proposed in its consultation paper.

"If a company excludes a primary component, it must describe what it does instead, with reasons for doing so," it said. This is similar to the way Singapore's Code of Corporate Governance is implemented for listed firms, which also follows a "comply or explain" system.

Although the SGX had earlier this year floated the idea of making "anti-corruption" and diversity essential components of sustainability reporting, it said on Monday that it will let companies choose their own material ESG factors.

Former SGX chief regulatory officer Yeo Lian Sim, now a special adviser to the exchange and who has been leading the bourse's sustainability reporting effort, told a press briefing over the phone on Monday that the SGX understands that anti-corruption and diversity are important "to some investors".

"It's up to the investor to make the judgement," she said, adding that the exchange has singled out anti-corruption and diversity as noteworthy ESG factors, but does not want to put in requirements that hamper companies embarking on sustainability reporting.

Market watchers said on Monday that the new rules give companies enough time to prepare for sustainability reporting and would help meet investor demand for more non-financial information.

Roger Tan, president of advocacy group Small and Middle Capitalisation Companies Association (SMCCA), said: "We are especially pleased that the SGX has taken our suggestion to extend the reporting time in the first year by 12 months. We had actually asked for only seven months; this extension is more than sufficient for companies if they start their preparation work before the end of the year.

"Sustainability reporting is very new to many small and middle-capitalisation companies and it will no double create a lot of anxiety. The SMCCA is therefore glad to note that the SGX has taken such a soft approach."

He added: "Companies should now focus on how to differentiate themselves in the eyes of stakeholders through making this report unique and useful."

David Gerald, president of investors' lobby Securities Investors Association (Singapore) or SIAS, said: "Investors are clamouring for more and more non-financial information. ... In Singapore, governance has been well-canvassed, but not environmental and social issues, which affect valuation and financial performance. So if companies focus only on the financial disclosures, investors will not be able to look at the complete picture."

Sustainability consultants said that though companies new to sustainability reporting may find it tough to determine which material ESG factors to report on, firms could engage stakeholders on these decisions and take a look at industry-specific guidelines released under various global sustainability reporting frameworks.

Junice Yeo, director for South-east Asia at Corporate Citizenship, a corporate-responsibility consultancy, said: "The greatest challenge we expect to see is among first-time reporters in sustainability, who may face difficulties in identifying their own material ESG issues. It is not a natural process for companies to engage internal and external stakeholders in this process ... It would also mean investment in capability building for their division heads to contribute to ESG management and disclosure in a meaningful and impactful way."

Fang Eu-Lin, sustainability and risk partner at PwC Singapore, said that while there could be "a perceived and potential risk" that firms end up excluding "the most important environmental, social and governance factors from their sustainability reports, international frameworks such as the Global Reporting Initiative and the Sustainability Accounting Standards Board do "have guidance on material ESG factors for certain industries".

"In an ideal situation, engaging stakeholders in determining the material ESG factors could potentially be more beneficial for issuers," she added.

Still, observers flagged a risk that listed firms may end up issuing boilerplate disclosures, adding that there was now more onus on investors to evaluate companies' sustainability reporting.

Corporate governance specialist Mak Yuen Teen said: "As we have learnt from the 'comply or explain' approach to the Code of Corporate Governance, issuers may, with the aid of consultants, issue boilerplate disclosures and explanations that are not useful at all. There needs to be monitoring and education initially, followed by monitoring and enforcement after some time.

"While I favour mandatory sustainability reporting in vital areas because I think they apply to all companies, I also accept that the degree of importance may vary. For example, corruption risks may be more critical for companies that operate overseas in highly corrupt countries, compared to SMEs (small and medium enterprises) that operate locally - even though corruption risks also exist here.

"What I think is important is for shareholders and other stakeholders to understand the business, industry and countries in which a company operate and evaluate the company's sustainability reporting accordingly."

Gibson Dunn partner Robson Lee said that since firms in the various sectors have different sets of material ESG factors, the SGX as a regulator "should closely monitor the market and continuously guide issues to avoid a boilerplate or a bare-minimum compliance response from issuers".

Ian Hong, sustainability advisory and assurance partner at KPMG in Singapore, said all stakeholders play a part. "Allowing companies to pick their own material factors does mean that companies and readers need to be more discerning about what is truly the 'most material' and not merely the 'most flattering' or 'easiest' to report. Understanding sustainability and keeping pace with sustainability developments, therefore, is everyone's responsibility."