Tall task of implementing new sustainability accounting standards must start quickly

CREATING an environmentally sustainable world requires getting all companies to play by the same rules.

When one company calculates its carbon footprint differently from another, scrutineers lose the ability to confidently measure the environmental impact of businesses, and to tell good actors from bad.

The first two guidelines by the International Sustainability Standards Board (ISSB) – part of the International Financial Reporting Standards (IFRS) Foundation that helps to establish global accounting rules – could not have come sooner. Known in industry jargon as S1 – governing sustainability reporting – and S2 – relating to climate disclosures – the new accounting standards lay the groundwork for what is hoped to be an eventual global convergence on sustainability and climate reporting.

The fresh ISSB rules have the potential to elevate the quality of corporate disclosures on environmental issues, but that means the bar has been set high. The challenge now for regulators in Singapore and South-east Asia is to help their companies rapidly raise their game.

A particularly difficult implementation problem lies with the requirement to reporting Scope 3 emissions, which are discharges that a company is indirectly responsible for in its value chain. A study by PwC and the National University of Singapore’s (NUS) Centre for Governance and Sustainability found that most of the 50 largest listed companies in each of the “Asean 5” group of countries – Indonesia, Malaysia, the Philippines, Singapore and Thailand – did not report Scope 3 emissions as at January 2023. By contrast, most of them reported Scope 1 and 2 emissions. Scope 1 emissions are a company’s direct emissions, while Scope 2 emissions are produced from the company’s energy usage.

The smaller companies in many supply chains are likewise unprepared to determine their carbon footprints. Governments in South-east Asia can help by focusing capacity building on small and medium-sized enterprises. There is also a need to fund research to obtain regionally derived emissions data for key production inputs to improve Scope 3 estimation.

Tools for interoperability are needed as well. While the ISSB is aligned with the Task Force on Climate-Related Financial Disclosures framework and has absorbed the Sustainability Accounting Standards Board, it has yet to converge with the popular Global Reporting Initiative (GRI) standard. At least 80 per cent of the sampled companies in each of the Asean 5 countries in the PwC and NUS report used GRI. In Singapore, GRI had a 98 per cent adoption rate among the 50 largest listed companies.

ISSB and GRI are still working towards unity, but in the meantime regional regulators must address GRI’s dominance in the region.

The journey from ISSB to actual implementation on the ground can be a multi-year affair. Singapore began aligning the Singapore Financial Reporting Standards (SFRS) to IFRS in 2002, and full convergence only happened in 2018, a good 16 years later.

Getting Singapore-registered companies to begin aligning with the ISSB standards should not take that long, for the simple and practical reason that climate change and ecosystem destruction are accelerating. The social and economic costs of inadequate action grow by the day.

There is also economic opportunity, with initial feedback suggesting widespread support for the new standards. Those who can keep up can keep the spoils.