Mandatory climate disclosures, diversity targets: get on board or risk getting left behind

SINGAPORE Exchange Regulation (SGX RegCo) announced last month proposed enhancements to its sustainability reporting regime, including a roadmap towards mandatory climate reporting, assurance for sustainability reports and common environmental social and governance (ESG) metrics. To enhance board diversity, SGX RegCo also proposed mandatory disclosures on board diversity targets, plans and timelines.

The various enhancements are timely given the increasing focus from investors worldwide on such issues, and may help locally listed companies win institutional investors.

Boards and management of companies should therefore embrace the proposals and take their responsibilities for these disclosures seriously.

In particular, the issue of board diversity needs to be tackled with better intentions on the parts of boards and nominating committees.

Changing climate

ESG and climate change are not new topics, but the focus has clearly stepped up in recent years.

And Singapore companies appear to be somewhat on the back foot.

A recent review of sustainability reports showed only a third of companies identifying climate change as a material topic, with very few listed issuers adopting reporting frameworks specifically adapted to climate change disclosures.

SGX RegCo proposed in its consultation a climate reporting structure that takes into account the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), a globally recognised body.

These recommendations are comprehensive and accepted as best practice in capital markets around the world.

Many local companies may not currently see climate as a material issue, and could see the new climate reporting standards as an unnecessary and even expensive hassle with little tangible benefit.

But companies that think this way would face increasing risks down the road.

Weak climate disclosures could limit access to financing, given that most banks and institutional investors are keeping a close watch on such topics.

Global bodies such as the International Financial Reporting Standards Foundation are also moving towards common sustainability reporting standards, with the proposed creation of an International Sustainability Standards Board.

It is no longer a question of if but when companies would need to turn their attention to ESG as part of business decision making.

Management and boards should look towards climate reporting as an opportunity.

Climate risks go beyond the physical risks of being affected by environmental changes, such as rising sea levels. There are also transition risks, where certain business models may become obsolete amid heightened climate consciousness and a shift in government policies. Such risks could also create opportunities in new segments.

Boards should be thinking about these factors early, to ensure issuers capitalise on opportunities and avoid being penalised for shortfalls.

Identifying risks and opportunities - climate or otherwise - is part of good governance, and boards who ignore new trends would have failed to help their shareholders maximise value.

It is not hard to see why institutional investors are focusing on climate as one way to identify which companies are savvy enough to tap new opportunities while filtering out those who remain stuck in old ways.

Embracing diversity

SGX RegCo's diversity proposals have suggested companies consider not only gender diversity but also how the combination of talents and skills among directors best serve the needs and plans of the issuer.

Gender diversity on boards is one of the most commonly talked about metrics. It is easy to track, but it can very quickly lead to a board diversity policy that is narrowly focused on just ticking a box.

Other easy-to-check boxes might include diversity based on age, race and education background.

Having metrics and targets is important for progress to be tracked, but issuers cannot be evaluated on diversity by showing that they have different demographics on their board.

They need to study their businesses and identify gaps in expertise and opinion that would most help improve shareholder value.

While the proposals by SGX RegCo are sensible and theoretically helpful for both issuers and investors in the longer term, it may be difficult to get companies to comply with the spirit instead of just the letter of the law.

As it is, there are already challenges relating to traditional accounting and corporate disclosures.

Regulation, of course, can only go so far. Beyond rules and enforcement, the education and engagement of various stakeholders would be more crucial for the intended outcome to be achieved.

Market forces do punish companies with weak governance and poor disclosures, as evidenced by the share price performances of quite a few companies listed here.

The proposals by SGX RegCo should therefore serve as a call to action for management and directors.