A reminder to retail investors to read those sustainability reports

THE growing importance of environmental, social and governance (ESG) considerations requires investors to understand relatively new terms such as decarbonisation, net zero targets and greenwashing.

Underlying the use of these terms is a warning from scientists that swift and drastic action is necessary to avert irrevocable damage to the planet caused by rising greenhouse gas (GHG) emissions.

These emissions, which trap heat in our atmosphere, come from activities such as the burning of fossil fuels, agriculture, industrial processes and transportation.

The result of this trapped heat has been extreme weather events that have already caused hunger, death and destruction. Rising global temperatures and changing weather patterns have also contributed to supply chain disruptions and ecological losses.

If left unchecked, the situation can only get worse. It is crucial that everyone collectively transitions to clean energy sources, while protecting the ecosystems that provide us with clean air, water and natural resources.

Given that the corporate sector is being increasingly pressured to act as responsible environmental citizens, investors need to understand not just the terminology but also the issues at stake.

A global movement, not a fad

The call for urgent global action has generated a multifaceted approach involving governments, businesses, non-profit organisations, academia and individuals to safeguard our planet’s future.

These actions can have significant effects on corporates, both direct and indirect. Here are some of the steps taken:

• Countries are committing to reduce GHG emissions and transition to renewable energy sources.
• Efforts to restore forests, protect biodiversity, and conserve natural habitats are gaining momentum. The projects aim to absorb carbon dioxide and mitigate climate impact.
• The global community is investing in climate resilience by allocating funds for adaptation and mitigation projects.
• Global standard setters, supranational organisations and regulators are coming together to agree on global frameworks and standards to help companies adopt consistent and comparable information and data for disclosure and measurement.

Notably, millennials, Gen-Z, and even older generations are helping to propel the ESG movement, demanding actions to combat climate change, promote social justice and uphold ethical governance.

Significant influence on value of businesses

The crisis has prompted companies to adopt sustainable practices, reduce waste and commit to net-zero emissions. At the same time, many companies are grappling with risks arising from extreme climate events that disrupt ecosystems, supply chains and business operations.

It is important investors understand that ESG investing is about having a holistic understanding of all material risks and opportunities that a business faces, including sustainability-related risks.

ESG is therefore not a trade-off; it is robust investment analysis. There is research indicating that companies that are able to manage their financially material ESG risks and opportunities tend to outperform others, thus enhancing shareholder value.

Financial metrics no longer tell a complete story about a company’s performance and suitability as an investment. It is becoming increasingly necessary to consider ESG factors alongside financial metrics in order to arrive at a holistic investment profile.

Investors need to read company’s sustainability reports in addition to their annual reports, and then make a buy or sell decision based on the company’s overall merits as an investment.

Investors will have to check on the following primary components of sustainability report requirements for issuers on the Singapore Exchange (SGX):

• Material ESG factors
• Climate-related disclosures
• Policies, practices and performance
• Targets
• Reporting frameworks
• Board statement

Investors must also be vigilant about greenwashing – when companies overstate or exaggerate the eco-friendliness or sustainability of their products and services, or portray them as environmentally friendly but are unable to back up their claims with objective evidence.

To safeguard their investments, it is prudent for investors to check whether the claims made in sustainability and annual reports are true and measures taken effective.

This can include benchmarking companies’ climate commitments against the latest science, or checking if business processes have been independently certified as sustainable. A company operating in the palm oil value chain, for example, may obtain certification from the Roundtable on Sustainable Palm Oil.

To protect investors from greenwashing, it is important that regulatory authorities such as the Monetary Authority of Singapore and the Accounting and Corporate Regulatory Authority work to improve the consistency, comparability and reliability of sustainability reporting.

SGX Regulation has amended its listing rules to align climate-related reporting requirements with the recommendations of the Task Force on Climate-Related Financial Disclosures, and has recently consulted on further amendments to align with standards from the International Sustainability Standards Board.

Duty of investors to learn and engage

With trillions of dollars invested in climate-related endeavours, retail investors must acquire new knowledge in ESG investing.

Just as they once learned to analyse company financial statements and interpret annual reports, now they also need to read and understand ESG metrics to evaluate the effect of ESG-related risks and opportunities on a company’s business prospects and financials.

Gaining more insight into the risks and opportunities faced by listed companies is useful for investors to review, understand and vote on resolutions, and hold companies accountable.

The Securities Investors Association (Singapore) recognises that sustainability concepts may be new to many investors, and is collaborating with CFA Society Singapore to offer an introduction to ESG investing.

We hope to share how investors can integrate ESG factors into investment decisions, helping them seek financial returns while also contributing to positive social and environmental changes.

The writer is founder, president and chief executive of the Securities Investors Association (Singapore)