The article was published in the The Business Times on 26 January 2016.
MENTION sustainability reporting and it is enough to cause company executives to shudder about the potential compliance costs. Such concerns, however, fail to take into account the higher corporate social responsibility expectations that a more enlightened populace demands of companies. Stakeholders increasingly expect access to non-financial information in these sustainability reports, such as investors who incorporate sustainability factors in their investment decisions.
In another sign of the changing times, more than 185 countries committed to setting national targets to reduce carbon emissions at the recent 2015 Paris Climate Change Conference of Parties. Businesses in these countries may now face pressure from their governments to develop, disclose and align their carbon reduction strategies with the respective national targets.
"Comply or explain" requirements have already been put in place in a number of global stock exchanges including Australia, Brazil and South Africa to varying degrees. For example, large listed companies in the European Union will have to disclose non-financial issues such as environmental, social or employee matters and bribery from 2018 onwards.
The Hong Kong stock exchange's sustainability reporting guide will be on a "comply or explain" basis, raised from a "recommended" basis, with effect from this year.
Singapore Exchange (SGX) first announced its intention to introduce "comply or explain" sustainability reporting regulations in October 2014. Since then, SGX has engaged extensively with various stakeholders to communicate the importance and timeliness of these requirements, and has gathered feedback from listed companies that may be affected by the change.
REPORTING REQUIREMENTS TIMELY AND RESPONSIBLE
The worldwide push towards more responsible global citizenship makes SGX's sustainability reporting requirements a timely measure. SGX released a public consultation paper on the draft sustainability reporting guidelines ("the Guide") most recently on Jan 5. The Guide asks companies to identify and communicate material environmental, social and governance (ESG) risks and opportunities based on feedback from key stakeholders. Companies will also need to disclose the respective governance structures used in managing those risks and opportunities.
To enhance the accountability of firms on their sustainability performance, SGX is proposing they develop policies, performance indicators as well as reasonable targets. An internationally recognised reporting framework, suitable for the business, has also been listed as a primary requirement in the Guide. Such a framework should be used to navigate the reporting and disclosure exercise to lend credibility to the sustainability report.
Some Singapore-listed companies have raised concerns about the initial investment needed to satisfy another regulatory requirement and that's before they have proof that doing so will deliver tangible results. SGX does not view this as "just another compliance exercise".
If taken seriously and done correctly, the sustainability reporting journey will allow companies to identify risks within the value chain at a much earlier stage, and take timely mitigating actions. At the same time, companies can pinpoint and capitalise on opportunities at a much earlier stage, potentially opening new markets or product lines. An ability to swiftly address ESG risks and opportunities signals to a company's investors that the management team is forward-looking, proactive and adept at safeguarding the business.
COMMITMENT AT THE TOP IS CRUCIAL
Management teams face the biggest challenge, on the road to sustainability reporting, in demonstrating to stakeholders how ESG factors align with and impact the firm's business model and performance. The key to overcoming this challenge is in understanding SGX's sustainability reporting requirements and the rationale behind them. Doing so will help the management direct the efforts of the business towards a common goal, and obtain buy-in from stakeholders within the company.
ll the companies interviewed in the KPMG study stressed that strong commitment from top management is critical when introducing sustainability reporting, and this commitment must be demonstrated through tangible targets and performance reporting. As such, SGX strongly emphasised board responsibility in the public consultation paper and draft requirements.
The next challenge is assessing the business's progress in its sustainability journey, and the benchmark against which it plans to measure its performance within a set time frame. Companies can overcome this issue by identifying performance indicators to close the gap between where the company is and where it wants to be.
Communicating this process to the company's stakeholders improves transparency around business operations, safeguarding the business amid intense scrutiny of ESG issues. Sustainability reporting frameworks exist to support the development of ESG strategies and facilitate this communication process. Given that sustainability reporting is a reality in today's business environment, the earlier companies embark on this journey the sooner they will reap the benefits.
The article is contributed by Mr Ian Hong , partner, sustainability advisory & assurance, at KPMG in Singapore . The views expressed are his own.