This article is authored by Chin Chee Choon (Director)
The corporate reporting landscape has changed over the years with an increased focus on non-financial aspects surrounding environmental, social and governance (ESG) factors. In particular, the concept of Sustainability and Corporate Responsibility and how it forms an integral part of a business strategy. Institutional investors and general investors have placed greater emphasis on the consideration of these ESG factors in their investment decisions.
In view of the current expectations in creating value for the stakeholders, Sustainability Reporting brings clarity to both investors and listed companies.
Since the issuance of Listing Rule 711A and Listing Rule 711B by the Singapore Stock Exchange (SGX) in June 2016, all listed issuers will have to publish a sustainability report to describe their sustainability practices on a ‘comply or explain’ basis. This addresses the need for companies to integrate stakeholders’ expectations with business strategy and objectives.
Whilst this is a shift from voluntary disclosure to mandatory disclosure, which indicates that all issuers, including the smaller companies who are new to sustainability reporting, will have to publish a sustainability report. It is important to note that there is a positive correlation between addressing sustainability issues and financial returns. Some positive outcomes include value creation as well as maintaining long-term competitiveness.
Under the Code of Corporate Governance issued on 2 May 2012, one of the Board’s role is to consider sustainability issues, for example, environmental and social factors, as part of its strategic formulation¹. The Board will therefore have to consider some of the key drivers of sustainability, such as competition for resources, climate change etc., as part of their role in the responsibility for the long-term success of the company.
Global Reporting Initiative (GRI), one of the world’s most widely-used sustainability framework, had launched the world’s first global standards for sustainability known as the GRI Sustainability Reporting Standards. The divergent interests of different stakeholders may give rise to complexity, as such sustainability reporting encompasses these differences which requires consensus decision-making. From the move from G4 reporting to the new GRI Reporting standards, it provides reporters with a common language in disclosing non-financial information². This enables reporters to communicate their ESG aspects in a manner which is comprehensible to all stakeholders, including common industry peers.
In fact, sustainability has always been, in a way of another, assessed in all levels of corporate activities, for example, vendor sourcing, quality assessment, human capital development etc. Management regularly considers challenges and risks their companies face in relation to ESG factors and assesses how they are best able to manage and mitigate these risks.
Sustainability Reporting has always been seen as a reporting tool for large Multinational Companies (MNCs) and Small and Medium Enterprises (SMEs), however, this has not been an area of focus. Voluntary disclosures from companies, such as CapitaLand and Keppel Land Limited, on Sustainability Reporting are already in place prior to the mandatory guidelines issued in 2016.
Although voluntary disclosures used to be dominated by the larger capital issuers, SMEs, though smaller comparatively to the larger corporations, they play a crucial role in driving economic growth as well. With the integration of sustainability in the strategy and operations, SMEs will reap benefits in both internally and externally, such as reputational image, competitive advantage, new capital, production efficiencies and employee retention etc. In a publication by GRI, Small Business Big Impact, it emphasises on the importance of SMEs in the economy and the need to consider factors which affects the environment, social and governance climate in order to be successful.
Taking the carbon tax for example, in Singapore Budget 2017, a carbon tax will be imposed on large direct emitters of greenhouse gases such as power stations and refineries from 2019. As part of Singapore’s commitment to the Paris Climate agreement, emissions intensity will be reduced by 36% by 2030 compared to 2005 levels. This indicates the increasing emphasis on the potential adverse impact on current companies, both large and small, will have on future sustainability and how reporting on the carbon footprints will aid both the companies as well as the investors in making decisions.
Furthermore, a survey published in The Business Times (April 2017) by Ernst and Young shows an increase in the percentage of investors (2016: 68%, 2015: 52%) looking at non-financial performance in investment decisions. There has been an increase in importance for disclosures surrounding material ESG factors and how these risks are being managed as part of the company’s strategy.
Many initiatives and organisations are in place to raise both awareness and understanding of Sustainability Reporting. For example, the Institute of Singapore Chartered Accountants (ISCA), has set up a Corporate Reporting Committee to aid first time reporters in producing and publishing quality sustainability reporting articles. Other organisations, such as the Global Compact Network Singapore, have been established to advance corporate responsibility in business strategy and practices. Initiatives such as the Singapore Sustainability Awards are also in place to showcase leading sustainable practices and innovative green solutions.
Drawing from the guidelines, listed issuers will start to embark on their sustainability reporting journey. In the snapshot, Roadmap to Implementation, it demonstrates the pathway of how a company or its appointed service provider shall embark in preparation for the publication of the Sustainability Report within 12 months for financial years ending on or after 31 December 2017.
Sustainability remains and will continue to be an integral part of the business strategy. At this moment, the key challenge revolves around reporting in a form that aids both the stakeholders and reporters in aligning their expectations. The first step is always the toughest. But as the late Mr Kwek Leng Joo, President of Global Compact Network Singapore, said “It has often been said that a journey of a thousand miles begins with a single step.”
¹Code of Corporate Governance, Board Matters, The Board’s Conduct of Affairs ²https://www.globalreporting.org/information/news-and-press-center/Pages/First-Global-Sustainability-Reporting-Standards-Set-to-Transform-Business.aspx
For more information, please contact:
Mr Chin Chee Choon
Director, Corporate Advisory