Next step in sustainability reporting: Make these disclosures useful

[SINGAPORE] The proposed sustainability disclosure standards by the Accounting and Corporate Regulatory Authority (Acra) mark an important step in embedding climate reporting into Singapore’s corporate reporting regime.

But while the country has largely settled the question of what companies must report, the challenge now is improving the quality of those disclosures.

Acra on Monday (Jul 27) announced that it is seeking public feedback on its draft set of sustainability disclosure requirements tailored to Singapore’s context.

Known as the Singapore Sustainability Disclosure Standards, these are closely aligned with the disclosure standards issued by the International Sustainability Standards Board (ISSB).

ISSB is the sustainability standard-setting body established by the International Financial Reporting Standards (IFRS) Foundation.

This exercise recalls the journey Singapore embarked on in 2002, when it began aligning its national financial reporting standards with IFRS.

The city-state progressively converged its accounting standards with the global framework, culminating in the adoption of the Singapore Financial Reporting Standards (International) in 2018.

Today, listed companies take that reporting framework as a matter of course when preparing their financial statements.

Singapore is taking a similar approach with sustainability reporting, using the ISSB standards as the basis while making targeted modifications to reflect its own climate-first approach.

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As with the ISSB framework, the Republic has proposed two sets of disclosure standards.

The first standard, S1, sets out disclosure requirements for sustainability-related information. The second, S2, focuses specifically on climate-related disclosures.

However, unlike ISSB recommendations, only the climate-focused S2 will be mandatory for companies, in line with Singapore’s climate-first approach.

The S1 standard, which includes other sustainability disclosures beyond climate ones, will be voluntary. Climate-relevant portions in S1 will be reproduced as appendices to S2, thereby consolidating all the requirements in one set of standards.

Companies that are mandated to make sustainability disclosures would need only to refer to S2.

Other proposed adjustments in the Singapore standards include removing the relief allowing companies to release sustainability disclosures after financial statements, as well as extending the relief on Scope 3 emissions reporting.

ISSB provides a transition relief only for disclosures on indirect emissions arising from companies’ value chains in the first year of reporting.

Now that Singapore is set to have its own national sustainability reporting standards, stakeholders across the sustainability ecosystem may want to turn their attention to the next stage of the journey: improving the quality and usefulness of corporate disclosures.

Improving the quality of disclosures

Some of Singapore’s largest listed companies are already reporting in accordance with ISSB standards, or at least partly.

This is because many issuers were first required to make climate-related disclosures aligned with recommendations from the Task Force on Climate-related Financial Disclosures – which formed the foundation of the ISSB standards – before the Singapore Exchange moved to ISSB-aligned reporting.

It is not uncommon for sustainability reports to stretch beyond 100 pages, detailing governance structures, engagements with their partners and stakeholders, as well as qualitative scenario analyses and risk assessments.

Yet, despite such lengths, many of the reports fall short of providing the very decision-useful information that investors need – the raison d’etre of mandating such disclosures.

While governance structures and the like are important, investors are also looking for quantitative information that allows for comparison with industry peers.

These could include the percentage of revenue from parts of the business that are green; the amount of capital and operating expenditure planned for transitioning their business to be low-carbon; the financial impact of climate risks on earnings or assets; or measurable progress in relation to climate targets.

Investors often have to plough through narrative-heavy sustainability reports just to uncover the handful of disclosures that actually inform their investment decisions.

The number of times a company’s board sustainability committee meets every year, for instance, is unlikely to be among them.

Given the wide variability on what is material for different sectors, the ISSB standards are intended to be more principle-based, and therefore do not prescribe specific metrics that companies have to disclose.

While they require firms to provide quantitative information where climate-related risks and opportunities are material, they also allow qualitative disclosures where reliable measurable data is unavailable.

And that is partly the reason sustainability reports are still so narrative-driven.

Measuring the financial implications of climate-related risks is still an evolving discipline, and many companies lack the data, methodologies or capabilities to reliably quantify how those risks could affect their assets and cash flows.

Improving the quality of sustainability disclosures, therefore, requires more than just a baseline set of reporting standards.

It calls for an ecosystem-wide effort to improve data collection, develop more robust methodologies for quantifying climate-related risks, and raise expectations around what constitutes decision-useful reporting.

Singapore has largely answered the question of what climate-related information companies should disclose. The next challenge is ensuring those disclosures become as rigorous, comparable and trusted as financial statements.