Net-zero pledges now cover around 92% of global gross domestic product and 88% of global emissions. Singapore, too, is committed to driving climate action through the Singapore Green Plan. The country’s sustainability regulatory standards have progressed over time, with a strong focus on advancing climate reporting in recent years.
From financial year (FY) 2025, Singapore will require all listed issuers to make climate-related disclosures, followed by large non-listed companies from FY2027. These disclosures must be aligned with the standards set out by the International Sustainability Standards Board (ISSB).
Mandatory climate disclosures enhance market transparency and motivate businesses to manage their sustainability efforts more actively. Such transparency enables consumers, investors and financiers to make informed decisions on their spending and investments, thereby funnelling capital to companies that exhibit robust sustainability credentials.
Investing in climate action is a financially savvy move. According to the 2023 EY Sustainable Value Study, firms taking the most action to address climate change are 1.8 times more likely to report a higher-than-expected financial value from climate initiatives, compared with those taking the least action. Additionally, companies that diligently channel efforts toward addressing the environmental, social and governance (ESG) factors most material to their industry enjoy a higher alpha than their peers that do not.
Headwinds in the climate change journey
Still, navigating the sustainability landscape is fraught with complexities, as ESG concerns demand thoughtful decision-making that sometimes come with intangible trade-offs. The absence of well-defined internal procedures and metrics for valuing non-financial ESG components can be a challenge, while the need to agilely maintain compliance with the dynamic ESG regulatory environment and meet the demands of stakeholders adds a layer of complexity.
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Demonstrating a link between ESG activities and financial performance can be tricky. While the positive correlation between strong ESG practices and long-term profitability is generally recognised, quantifying these benefits can be intricate and complex. Hence, aligning stakeholder expectations with the long-term investments required for meaningful ESG outcomes remains a daunting task.
Embedding ESG considerations into organisational strategy involves not only the adaptation of internal processes but also the reorientation of the corporate culture and development of governance structures that prioritise accountability and sustainable growth.
Urgent action needed
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With mandatory climate reporting on the horizon, companies that embrace this practice can demonstrate their commitment to sustainability, instil confidence in stakeholders and gain a competitive edge for long-term success. Boards should consider several key actions.
Seek greater alignment with financial
reporting
As IFRS S1 and S2 come into effect, boards must take decisive action for greater alignment with financial reporting, given the intrinsic link between sustainability and financial performance. According to the 2023 EY Global Climate Risk Barometer report, only 26% of companies include the quantitative impacts of climate-related risks in their financial statements. This suggests gaps between climate strategy, risk management and corporate reporting.
To meet IFRS S1 and S2, boards must enhance their oversight of how ESG matters are identified, measured and reported in financial terms. They need to evaluate which ESG issues are financially material (i.e., likely to influence the economic decisions of users of financial reports) and ensure that these are adequately reflected in the company’s financial statements and disclosures.
A crucial aspect of the new standards is the emphasis on aligning the reporting boundaries for financial and sustainability reporting. This means that boards must require ESG information to be consistently and coherently reflected alongside traditional financial metrics.
To bridge this gap, appointing a chief sustainability officer (CSO) can be a strategic move. The CSO can act as the pivotal link, connecting sustainability initiatives with financial results by translating non-financial data into insights that meet the rigour of financial reporting standards.
Place greater emphasis on data quality
Enhancing data quality is imperative. Accurate and granular environmental data empower companies with the insights necessary to evaluate their carbon footprint comprehensively and understand the broader environmental impact within their supply chains.
Companies can implement several key controls and processes for ESG data management. Establishing standardised procedures for data collection, validation and storage is fundamental. This helps to maintain consistent and reliable data across different business units and geographical locations, enabling a holistic view of the company’s environmental performance.
Adopting automated data collection systems will also streamline performance tracking and reduce manual errors, enabling the consistent, real-time capture of relevant data. Subsequently, setting clear environmental targets and establishing well-defined monitoring metrics will provide a framework for measuring progress against these goals.
The role of assurance is key. External verification of ESG data would help boost stakeholders’ confidence in the company’s climate reporting. By overseeing the implementation of these controls, boards can foster a regime where climate reporting is methodical and reliable, while being transparent and accountable.
Drive the decarbonisation strategy across the organisation
For companies with institutional investors, the drive to achieve net zero is becoming increasingly non-negotiable as investors seek to align their portfolios with the transition to a low-carbon economy.
Boards should consider developing comprehensive decarbonisation strategies that align with global standards and national commitments to reduce GHG emissions. These should clearly articulate decarbonisation targets aligned with scientific pathways. With the enhanced climate-related and greenhouse gases (GHG) emissions disclosure requirements, companies have an increased responsibility to integrate these targets into their overall strategy with clear accountability.
Boards also need to prioritise the setting of science-based targets for emissions reduction, invest in sustainable solutions and regularly communicate progress toward achieving net zero to maintain investor confidence and support.
The integration of these methods forms a solid foundation that supports a transparent and reliable ESG reporting process. It positions companies to comply effectively with emerging frameworks like IFRS S1 and S2 and addresses the demands of institutional investors for sustainable investment considerations.
Ultimately, high-quality ESG data is not just about meeting reporting requirements. It is also about equipping the board and management with actionable insights needed to transition to lower-carbon operations and align with a path to net zero, reinforcing their commitment to long-term value creation.
Praveen Tekchandani is Singapore Climate Change and Sustainability Services Leader and Partner at Ernst & Young LLP. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms. This article was first published in the 3Q2024 issue of the SID Directors Bulletin by the Singapore Institute of Directors
