Good corporate governance will cover more ground with ESG focus

Singapore

DIRECTORS must improve their understanding of environmental, social and governance (ESG) issues if they hope to convince investors they are serious about corporate governance, industry observers said.

Experts The Business Times spoke to said boards need to understand the relevant metrics and optimise their communication on sustainability with stakeholders.

ESG is increasingly important for listed companies amid proposed requirements by Singapore Exchange Regulation (SGX RegCo) for climate reporting on a "comply or explain" basis - expected to kick in next year.

The new requirements will require "climate-competent boards", said Cherine Fok, director, sustainability services and KPMG Impact at KPMG in Singapore.

This would include working knowledge of frameworks and ratings that are relevant for their companies.

Directors would then have "a more objective benchmark and external validation of where the company is in terms of their performance vis-a-vis industry expectations and their peers" she said.

They must also be able to articulate the company's key climate issues and how these are linked to its strategy.

"It is about the board playing a much more assertive role on insisting that a process be put in place to ensure that there is no disconnect between disclosures and what is actually happening within the company," she said, adding that this addresses the risk of greenwashing.

Professor Lawrence Loh, director for the Centre for Governance and Sustainability (CGS) at NUS Business School, suggested directors would need to attend the relevant training to get up to speed.

This is because they will be taking the lead in setting out verification of climate reporting information and the scope for auditors.

"The board should proactively engage their internal audit at the very minimum, to set up all the requirements for the internal verification of their sustainability - especially climate change disclosure," he said.

Processes and controls in relation to the collection and communication of climate-related data is another important area of responsibility.

Fok said existing climate data may lack the robust checks and balances seen today in financial data. There may also be some data that is not even collected, as it might not have been identified as something important previously.

SGX RegCo's proposals include requiring at least internal assurance on the accuracy and completeness of sustainability reports.

KPMG's Fok noted that the trend globally is moving away from simply reporting about the company's impact on the environment, to a focus on enterprise value.

She sees this trend taking place in 3 phases, with the first phase being impact reporting.

"That means I have a sustainability report, I have a financial statement. The link between the two of them somehow seems to be there, but not quite," she said.

Phase 3 would be the "utopia" - where ESG externalities can be quantified and recorded in the books, allowing investors to have a holistic picture of the enterprise value with the adjustments from ESG metrics.

"In terms of market readiness, we are nowhere near there yet," Fok said while noting that things are moving in this direction with SGX's proposed rules.

"(The rules are) actually a bridge between phase 1 and phase 3, and that is where these emerging frameworks like (Task Force on Climate-related Financial Disclosures) come in."

Fok also noted that interest in ESG among clients has been broad, across listed companies of various sizes and industries.

"In terms of the reception, I think it has been well taken up; with quite serious deliberation among the boards on how they are actually going to execute all this."

Meanwhile, NUS' Loh said it would be timely for the Code of Corporate Governance (CG Code) to be revised to include more aspects of sustainability.

"It's high time we review the code," he said. "We should look at the Code of Corporate Governance as more for stakeholders. It's not just a guide that is relevant for shareholders."

One area that could be considered is requiring a board-level sustainability committee. Loh believes this could improve the governance of sustainability, which is currently weak.

The latest directorship report by the Singapore Institute of Directors found only 8 large-cap companies disclosed the presence of a sustainability committee.

But KPMG's Fok noted that the CG Code is based more on principles, and making it too prescriptive may not be helpful in terms of applicability to business models on segments.

"I think it should still be principle based. I think that it is worthwhile for us to consider whether the stakeholder capitalism portion of it should be more central," she noted, adding that focus areas such as remuneration could also be couched with a direct link to stakeholder issues.

Even without revising the code, however, Fok said having practice notes to guide execution for companies could be helpful.

The expectations for companies to be considering ESG matters are there, she said, but could be made clearer and more explicit.

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