‘Reporting for the sake of it’: Small-cap companies’ concern over upcoming mandatory climate disclosures

PUTTING the cart before the horse – that’s how some listed companies with a small market capitalisation are describing the recent climate disclosure requirements laid out by the Singapore Exchange Regulation (SGX RegCo).

While agreeing that such disclosures are important, they question whether the requirements may largely end up as a compliance exercise, rather than guide companies to genuinely transform their businesses to align with decarbonisation goals.

“There is so much pressure on listed companies to produce sustainability reports, and as a result, they do it when they are not sustainable. So they end up doing for the sake of doing it,” said Ernie Koh, executive director of Koda, a furniture manufacturer.

There is also concern about how boards of directors and key management – who are often still unfamiliar with the climate reporting frameworks – are expected to sign off on sustainability reports and be liable for any disclosure breaches, just as they are for financial statements.

“From that basis, of course, most people should be nervous. And if you are not, something is wrong,” said Lim Kai Ching, chief financial officer of investment company Uni-Asia. “Nobody knows what the end report will be, because nobody has published it before.”

On Sep 23, SGX RegCo announced that from the financial year 2025, listed companies are required to report their Scope 1 and 2 emissions – which refer to emissions arising out of their operations and purchase of electricity – as well as other climate-related disclosures aligned to the International Sustainability Standards Board’s (ISSB) framework.

However, the exchange softened its proposed requirement obliging companies to report their Scope 3 emissions from FY2026 onwards. Scope 3 covers indirect emissions from a company’s supply chain.

While SGX RegCo will still likely get larger issuers to report their Scope 3 emissions by then, it said it would carry out an “in-depth review of issuers’ experience and readiness in reporting Scope 3 greenhouse gas emissions before setting out the implementation road map”.

The need for a global baseline of sustainability standards has been raised by investors, regulators and corporations in the last few years as environmental, social and governance (ESG) concerns gained prominence amid the Covid-19 pandemic.

There was a call to standardise the way companies report on their environmental and social impact, as investors faced difficulties in obtaining sustainability-related information to make informed investment decisions amid the plethora of existing frameworks in the market.

Culture of sustainability

Companies here anticipated the changes after RegCo stated its intention to adopt the ISSB standards even before they were officially launched in June last year.

However, Uni-Asia’s Lim said that the whole marketing exercise by the exchange placed too much emphasis on sustainability as a function of reporting, instead of a business-wide transformation.

For a sustainability report to be meaningful, the responsibility for the disclosures cannot solely rest with the finance department, he noted. The investment team in Uni-Asia also had to start factoring in sustainability metrics on top of financial considerations when assessing its investment decisions.

“How many people in the company actually understand what Scope 1 and 2 are? For this journey to be really meaningful, the majority of people in the organisation must be able to understand them,” he pointed out.

Lim added that Uni-Asia has made progress on this front by hiring a consultant.

As for Koda, Koh said that the company has already been collecting Scope 1 and 2 data for the last few years, and could comfortably make these disclosures by the start of next year.

However, he questioned whether these disclosures could effect genuine change among small and medium-sized enterprises if they were simply treated as a report card.

“Companies need to build a culture of sustainability first. From there, you will have the reporting,” he added, echoing Lim’s sentiments.

Nonetheless, he recognised the effectiveness of mandating such disclosures in getting companies to move in line with the demands of capital markets.

However, instead of deploying only the stick (in the form of mandatory climate disclosures), he suggested that regulators put in place demand-driven incentives so that companies would naturally nudge themselves towards this direction.

For example, if authorities here start legislating the use of green materials in renovation, companies in this sector would transform their business model to be more sustainable in a bid to remain competitive.

“Not just a report card”

However, larger-cap listed companies The Business Times spoke to were more optimistic about having to meet the additional disclosure requirements.

Elena Arabadjieva, chief operating officer and head of investor relations at Cromwell European Real Estate Investment Trust, said that the company has already been preparing for the ISSB reporting requirements as they were already anticipated by its investors.

Arabadjieva added that SGX RegCo’s deferment of the Scope 3 reporting requirements will not make any difference to the Reit’s implemented processes, which include having an internal carbon price and assessing its procurement policies.

“Investors are expecting it. So if you’re a listed company, and if you really want to have capital coming from institutional investors, whether it’s equity or debt, you will end up having to report Scope 3. It is as simple as that for us,” she explained.

What the delay may provide is more flexibility and “breathing space” in terms of the number of categories of Scope 3 emissions the company chooses to disclose. Under the Greenhouse Gas Protocol, there are 15 categories of such emissions that companies can disclose.

A spokesperson from Golden Agri-Resources said that the company has already started reporting its Scope 1, 2 and 3 emissions in its sustainability report, and is currently refreshing its materiality assessment to meet the upcoming ISSB-aligned reporting requirements.

Meanwhile, oil company Rex has been reporting its Scope 1 and 2 emissions for the last two years, and expects to align its sustainability reporting with ISSB standards “in good time”, said a spokesperson.

It has been calculating its Scope 3 emissions since two years ago, and has completed an inventory of all its greenhouse gas emissions produced last year.

Pan-United also said that it has begun reporting on Scope 1 and 2 emissions, and is now working towards disclosing its Scope 3 emissions.

Stephen Beng, head of ESG strategy at Phillip Capital, said that the attitude among many companies is positive, as most management is increasingly aware of its fiduciary duties. He added that these disclosures are “not just a report card”, but a means for companies to display their commitment towards sustainability.

Investors will look at these reports not just as a box-ticking exercise, but on how companies are preparing themselves to mitigate the negative externalities relating to climate change.

Higher costs and capacity-building

A common theme among the listed companies, wherever they were on their reporting journeys, was how compliance costs would go up due to the need to hire external consultants.

While not mandatory at this point, Jean Woo, office managing partner of law firm Ashurst Singapore, said that the increase in compliance costs related to the reporting of Scope 3 emissions will be significant. 

A spokesperson from Pan-United said that such additional expenses will be unavoidable, given the unfamiliarity with Scope 3 reporting.

Ultimately, the aim for these companies is for sustainability reporting to eventually be done in-house, without the need for external consultants.

However, Arabadjieva said that the expertise to do this at a corporate level is still lacking in the Singapore workforce. “Where most capabilities will need to be is in actually retraining finance professionals to think about ESG... You’re not going to achieve long-term success if you don’t build up the capabilities in-house. We can’t over-rely on consultants,” she added.