Relevance and impact of climate change on businesses in Singapore

By Robson Lee

MUCH has been written and spoken about the importance of climate change.

To private companies that are not bound to comply with the Singapore Exchange’s (SGX) sustainability reporting regime and the disclosure requirements of the Task Force on Climate-related Financial Disclosures (TCFD), the concept of Environmental, Social and Governance or ESG, especially the identification and management of climate-related issues, may at best be a noble aspiration for the future.

At the other end, regarded as an esoteric subject preached by the ivory-tower academia, it does not appear to have immediate relevance or impact on their business concerns and commercial objectives. The nonchalant mindset towards climate change appears to be prevalent among public-listed companies in Singapore.

Sustainability reports published in recent years show that not many SGX-listed companies identify climate change as a material factor to their businesses. Few issuers have any reporting framework to disclose climatic changes and the impact on their business operations and sustainability.

Systematic process needed

While listed companies that fall within the respective prescribed industry sectors would be subject to mandatory climate reporting based on the TCFD standards from financial years commencing 2023/2024, it is important that issuers establish a definitive blue-print and systematic process to identify, strategise, manage and implement clear measures to transform their business operations in substance and in spirit to be more eco-friendly, and not merely playing glorified lip-service or chorusing pious platitudes to purportedly comply with mandatory disclosure requirements.

A global “change of climate” is indeed taking root towards the relevance and materiality of climate changes. Regulators, banks and financial institutions and institutional investors have established internal systems and operational frameworks to identify, set timelines for improvements and generally tightening controls for carbon-intensive industries as part of the global consensus and movement to engender a more salubrious existence for all and sundry.

Companies that are obdurately unwilling to improve their carbon footprint will over time be eschewed by financial institutions and private equity. Such businesses will also face a bulwark from the regulators of financial and capital markets, and bourse operators when seeking public fund-raising and a stock exchange listing of their securities.

Last but not least, there has been a perceptible change in the mindsets of retail investors in their investment preference for sustainable eco-friendly public-listed businesses as opposed to merely buying on hope, holding in greed and selling in fear.

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Get on the sustainability agenda, or go out of business

The global “climatic shift” towards more eco-friendly businesses will hopefully provide the impetus to effect a critical change in the mindsets and attitudes of private and listed corporations towards their climate responsibilities.

Corporations should recognise the importance of non-financial climate-related issues and their co-relation with corporate sustainability, and the financial impact on long-term growth and profitability of their businesses.

It is important for businesses corporations embracing climate responsibility to have a clear understanding of the TCFD framework, namely, governance, strategy, risk management, and metrics and targets.

The governance aspect entails the board exercising oversight responsibility in climate-related matters of the company’s business. This would include factoring climate-related issues in the corporation’s business plans and supervising a systematic implementation of the climate-related aspects of the company’s business blueprint.

Seek a consensus

In respect of corporate strategy, boards and senior management should hold thorough discussions and arrive at a consensus on the impact of climate-related risks and opportunities on their businesses, and the cardinal factors that will ensure business resilience in managing the risks. This should include identifying climate-related issues with reference to articulated timeframes.

Companies should conduct materiality analysis to identify the risks that would be paramount to their stakeholders. To better assess the resilience of their businesses, companies should also undertake proper scenario analyses of high and low carbon emissions. Information obtained from the scenario analyses should then be incorporated into their business plans as part of the sustainability goals and corporate targets.

As regards risk management, companies must understand and be in the position to rationalise and explain the significance of climate-related risks relative to other business risks, and to document the scope and size of climate-related risks. Companies should then put in place a structured plan of action to manage and to mitigate such risks.

Last but not least, in respect of metrics and targets, boards and senior management should have a comprehensive understanding of the different scopes of greenhouse gas emissions. It would be pertinent to point out that companies come from a myriad of industries and there is therefore no one-size fits all set of metrics and targets that would be generically applicable to all industries.

It can be envisaged that there would be different approaches on the use of time periods in the measurement of metrics and targets that can be applied by companies.

Every company should document the entire process of managing climate change and to maintain clear and transparent records of the progress in achieving the targets, and the metrics applied to measure and benchmark the corporation’s work in progress in discharging its climate responsibility, and the roadmap to attaining business sustainability.

This will enable the corporation to be in the position to provide transparent disclosures to regulators and its stakeholders of its climate-related identification, strategies to be adopted, the risks management measures that have been or proposed to be put in place, and the timelines to achieve the adopted metrics and targets.

There are indeed compelling non-financial and economic benefits for corporates (both private and public-listed) to institutionalise a systematic approach to discharge their climate responsibilities. In the current disruptive and rather uncertain times confronting all businesses, where the pandemic and drastic climatic changes caused by global warming are posing two of the most difficult challenges of the 21st century, companies cannot afford to be oblivious to their global duty to be more climate responsible.

It is incumbent on all businesses to undertake proper climate risk assessments to identify and assess intrinsic operational defects that are susceptible to climate change. Like periodic health checks, proper and timely climate risk assessments will provide companies adequate time and enough runway to implement mitigation measures and risk-transfer strategies to enhance their business fundamentals. This will provide the resilience ballast for corporations to sustain and future-proof their businesses for the long term.

The writer is Partner, Gibson Dunn & Crutcher LLP