THE Singapore Exchange (SGX) plans to start the era of regulated sustainability reporting with plenty of elbow room for listed companies.
The market regulator is seeking feedback on proposals that would elevate sustainability reporting to a "comply or explain" regime but give issuers discretion on what is material and whether independent verification is necessary.
For companies that are listed after 2016, the proposed guidelines are targeted to take effect for financial years ending 2017 and after. For all other companies, the target implementation will be for fiscal years ending Dec 31, 2017 and after. Companies will have five months after their financial year-ends to publish their sustainability report, one month longer than the regulatory deadline for financial annual reports.
The level of compliance with the new guidelines, however, may be phased in according to publicly disclosed schedules that companies set for themselves
The proposed guidelines will require companies to include five primary components: a discussion of material environmental, social and governance (ESG) factors; an explanation of policies, practices and performance; forward targets; which sustainability reporting framework the company is following; and a board statement to affirm compliance. The exchange is seeking further feedback on whether anti-corruption and diversity disclosures should be part of the ordinary components.
Companies that do not include all the primary components must explain why they have not done so, and simply stating that a component is irrelevant will not be sufficient, under the proposed rules.
Companies should also verify with stakeholders such as customers and suppliers about the materiality of its disclosures. The companies, however, have ultimate discretion to decide what is material and whether independent assurance of the reports is needed.
The entire board of directors is responsible for ensuring compliance.
Former SGX chief regulatory officer Yeo Lian Sim, who is now a special adviser to the exchange and who led the sustainability reporting effort, said that the move towards regulation was keeping in line with global trends as well as heeding the demand from stakeholders for better disclosure on sustainability.
"This is something that is needed and asked for by investors, for instance, as well as other stakeholders like customers, like suppliers, like staff, like regulators, bankers etc," said Ms Yeo.
KPMG partner Ian Hong called the proposals "responsible and timely", noting that the 2015 regional haze and the recent global climate agreement in Paris had raised sensitivity to sustainable practices.
"Ultimately, commitment from top management is critical in the success of a company's sustainability journey and this is best reflected through tangible targets and performance reporting," Mr Hong said.
The current consultation comes after a protracted outreach effort by SGX, which has conducted polls of listed companies and investors and conducted focus groups and briefings. The investor survey showed that more than 90 per cent of respondents considered ESG factors in their investments, SGX said in the consultation paper.
Ms Yeo, who noted that global standards were still relatively fluid and evolving, said that companies also overwhelmingly told the exchange that they wanted to have flexibility in the new reporting regime to find the best fit for their business.
Granting generous latitude, such as which reporting framework to adopt and the need for independent assurance, should not dilute the effectiveness of the regulations because companies will face market pressure to raise their game, Ms Yeo reasoned.
"Look at it in practical terms, why would you choose a framework that is not well recognised? You're doing the work, you want to be recognised for what you are doing and for this transparency that you're giving to people."
In many cases, companies are also already addressing many of the risks and issues that would make it into the sustainability report; they will now simply have to report what they do, Ms Yeo said. Just as sustainability reporting embraces long-term management, SGX also views the subject as "a journey" for the entire market, she said. "There may be differences in the speed with which they adopt, but what is important is that they do adopt and they lay out a plan."