Just these past two weeks, parts of Bukit Timah and Tampines experienced flash floods as a prolonged downpour buffeted across Singapore. And if the experts are right, more bouts of heavier rain leading to flash floods can be expected to occur ahead.
As financial market practitioners pay more attention to climate change concerns, climate-related disclosures by companies are becoming an important aspect of sustainability reporting. Currently, Singapore Exchange (SGX)-listed companies are not required to make climate-related disclosures in their annual sustainability report, except on a voluntary basis.
But that will soon change, as the Singapore Exchange Regulation (SGX RegCo) is proposing that companies do so on a mandatory basis in accordance with the Task Force on Climate-related Financial Disclosures’ (TCFD) framework.
Citing the recent warning issued by the United Nations body, Intergovernmental Panel on Climate Change, Tan Boon Gin, CEO of SGX RegCo, says the effects of climate change will be widespread, rapid and intensifying.
“We have experienced some of these phenomena, and it is likely to get worse,” he told a briefing on Aug 25. “This is one of the reasons why we are proposing that our issuers do climate reporting, guided by the recommendations of the [TCFD].”
He adds: “I believe we are the first exchange in Asia to propose mandating climate disclosures in accordance with the TCFD recommendations.”
‘Comply or explain’
In a consultation paper released on Aug 26, the stock market regulator is proposing climate-related disclosures to be undertaken gradually over a three-year period. From the financial year (FY) commencing in 2022, all SGX-listed companies are required to adopt climate reporting on a “comply or explain” basis. This means that companies that do not make climate-related disclosures must state so and explain what it does instead and the reasons for doing so.
From the FY commencing in 2023 onwards, however, climate reporting will be mandatory for companies that belong to sectors such as financial; agriculture, food and forest products; energy; materials and buildings; and transportation. And from the FY commencing in 2024 onwards, more companies of other sector classifications will adopt mandatory climate reporting, with the rest doing so on a comply or explain basis.
In accordance with the TCFD framework, SGX RegCo is proposing disclosure across governance, strategy, risk management, and metrics and targets. As an example of one of these four areas, companies will be required to disclose their scope one, scope two and scope three greenhouse gas emissions (see graphic on Page 6) and related risks. Other examples include the requirement for companies to disclose the board’s oversight of climate risks and opportunities, as well as the management’s role in assessing and managing these risks.
To ensure the veracity of the climate-related disclosures, SGX RegCo is proposing that the sustainability reports be subject to assurance by their internal auditors. The scope should minimally include assurance on whether the data being reported is accurate and complete. Companies may also choose to have their sustainability reports assured externally through external auditors or an independent assurance services provider.
Asked whether the assurance of the climate-related disclosures will be as rigorous as the auditing of financial statements, Michael Tang, head of listing policy and product admission at SGX RegCo, says this is a “developing area”. He notes that the International Financial Reporting Standards (IFRS) SGX RegCo proposes new disclosures as climate change concerns arise Foundation intends to conduct more research before implementing a “harmonised” set of reporting standards globally.
“In the meantime, I think companies should really start asking the external auditors to look through the reporting process to report and give assurance to the directors that the information produced is accurate and complete,” he says at the briefing.
As to why SGX RegCo is proposing adherence to the TCFD framework, Tang explains that this is to provide comparability between different key jurisdictions and markets.
Notably, the New Zealand government has recently announced legislation to mandate TCFD reporting in 2022. The UK has also announced its intention to move towards mandatory TCFD reporting by 2025 and has started introducing requirements for listed companies.
Closer to home, Hong Kong authorities have also signalled their intention to adopt a mandatory TCFD reporting by 2025 across relevant sectors. And the US has published a policy consultation on climate reporting.
To prepare companies for climate-related disclosures, SGX RegCo is recommending directors to attend a sustainability training. According to Tang, investors are relying on the board of directors to oversee the management of sustainability risks within companies. Directors are starting to be called upon to consider climate risk and opportunities as part of their duties, he says.
“Therefore, to ensure that all directors have a common understanding of their roles and responsibility in relation to sustainability, we are proposing that all directors undergo a one-time training on sustainability,” he adds.
Separately, SGX RegCo is proposing a list of 27 environmental, social and governance (ESG) metrics. This is to assist companies in providing, and investors in accessing, an aligned set of ESG data. Although not mandatory, these metrics may be used by companies in conjunction with their sustainability reporting, it says.
SGX RegCo is also proposing a data portal where investors can access ESG data in a structured format as reported by companies in accordance with aligned metrics and disclosure requirements.
In addition, SGX RegCo is proposing to mandate companies to have in place a board diversity policy, which will be disclosed in the annual report. The board diversity policy should include targets, accompanying plans and timeline for achieving the stipulated diversity on its board. It should also include a description of how the combination of skills, talents, experience and diversity of directors on the board serves the needs and plans of the companies.
The public consultations are open till Sept 27.
Photo: Samuel Isaac Chua/The Edge Singapore
