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Bridging the gap in sustainability
THE rise of technological innovation, which has enabled near-instantaneous exchange of information around the world, coupled with generational differences, has resulted in investors and consumers placing a huge emphasis on the external impacts of businesses.
The new generation is conditioned to be mindful of the effects of any action on the environment as well as external parties, hence sustainability has become an integral part of daily life. This awareness impacts those whom this generation will work for, buy from, invest in and even vote for.
The extensive reach of technology into everyday life means that stakeholders now expect to be able to access information quickly and conveniently. They demand information that is up-to-date, accurate and consistent. With this level of public scrutiny, companies are under even more pressure to present real-time and reliable sustainability information at all times.
Therein lies the issue facing corporates on the topic of sustainability.
As the existing directors and senior management of companies today grew up in a very different environment, they find it hard to imagine why investors would care so much about environmental, social and governance-related (ESG) factors.
It is this perception gap that makes corporate executives reluctant to invest in sustainability reporting, even though there is growing evidence that investors care. More than US$70 trillion assets under management (AUM) have signed on to the UN principles of responsible investing - that is more than half the world's AUM and growing.
Investors actually care more about sustainability issues than many executives believe. A 2015 study on corporate sustainability from MIT Sloan Management Review and The Boston Consulting Group highlighted that 75 per cent of senior executives in investment firms attest to the material importance of a company's sustainability performance when making investment decisions. However, only 60 per cent of managers in publicly traded companies feel likewise.
SMALL FIRMS NOT EXEMPTED
There is a possibility that smaller companies think they are exempted from sustainability reporting because they are not looking for these types of fund managers to invest in them. However, they should note that as Singapore has signed the Paris Agreement on Climate Change together with almost all the other countries in the world, Singapore, like the rest, will need to introduce a carbon tax to meet its obligations. This will inevitably impact companies' bottom lines, and investors will want to know how this will be managed.
You may believe that conventional wisdom remains unchanged and that investors are interested only in corporate earnings and care little about a company's efforts in ESG metrics.
But this disregards developments such as the task force on climate-related financial disclosures set up by the Financial Stability Board. Major financial institutions such as Aviva, HSBC, Citibank and Standard Chartered Bank have all signed on to this. The Association of Banks in Singapore also has guidelines on responsible financing.
So, even if you think your investors don't care, your bankers and insurers care and they will make sure that your suppliers and customers care, too.
Eventually, you will have to care because the way people think about investing, lending, insuring and consuming will have changed. If you are not prepared, you will be disrupted. It is SGX's job as a regulator to anticipate global trends and to prepare the market to be ahead of the curve.
Our advice to companies is to lay a robust foundation for word-class sustainability practices as developing a sustainability report that accurately reflects a company's commitment takes time. While this may seem like an uphill task, it all starts with a single STEP.
S: Structure your approach. We encourage a phased approach to sustainability reporting. Focus on identifying the material factors and policies to tackle these issues in the first year. You might discover how much you may already be doing towards this end. Ultimately, sustainability is about ensuring long-term business viability.
T: Tailor to your company. The report needs to reflect the company's unique attributes and sustainability ambitions. This includes operations, size and geography. A large company with complex operations and a significant ESG footprint may want to adopt a reporting framework like GRI (Global Reporting Initiative) and set quantitative targets that require external assurance, whereas a smaller company can adopt a simpler format.
E: Engage stakeholders. With seamless connectivity, organisations can make their reports available through diverse media channels - videos, interactive infographics and virtual reality. Even if you opt for more traditional reporting methods, the report can become a compelling way to engage with different stakeholders. Globally, more companies are leveraging different channels to disseminate sustainability reports in a more interesting and enjoyable manner for readers. This in turn can help businesses engage new and different audiences.
P: Propose targets. Before embarking on your sustainability, you need to consider how best to measure progress and traction. These targets may start out as qualitative ones before becoming quantitative as you develop more sophisticated mechanisms to evaluate your efforts.
The sustainability reporting journey may take years as companies need time for the transition and to adopt sustainability reporting. The ultimate goal is for companies to view the sustainability agenda not just as a necessity, but an opportunity to stand out among peers and carve out an additional competitive edge by effectively bridging sustainability leadership and business results.
- The writer is Singapore Exchange's chief regulatory officer