On December 15, 2021, the Singapore Exchange (SGX) responded to two consultations addressing a range of ESG-related topics that could significantly change the ESG reporting landscape for listed companies in Singapore. The consultations address the implementation of (i) mandatory climate-related disclosures for certain sectors aligned with the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), (ii) mandatory diversity-related disclosures for all issuers and (iii) a list of 27 “Core ESG Metrics” to help listed companies align their ESG disclosures with international standards and best practices on a voluntary basis.
As SGX otherwise requires ESG reporting on a comply-or-explain basis only, these proposals represent a shift toward an increased focus on mandatory climate and diversity disclosures that, in particular, has taken hold among Asian regulators. Just this month, the Stock Exchange of Hong Kong implemented mandatory gender diversity requirements and Hong Kong’s Cross-Agency Steering Group reported “progress towards mandating climate-related disclosures aligned with the TCFD framework by 2025 across relevant sectors”, while a group of Malaysian regulators announced their intention to implement mandatory TCFD disclosures by the end of 2024.
In this Blog Post, we highlight key aspects of the recent SGX announcements and provide guidance on how companies are already implementing ESG frameworks incorporating TCFD and more.
Mandatory TCFD Disclosures
The new SGX climate-related reporting rules will apply to issuers in the industries identified by TCFD as most affected by climate change and the transition to a lower-carbon economy, and will take effect in stages. Under the new rules:
- all issuers must provide climate reporting on a ‘comply or explain’ basis in their sustainability reports from the financial year (FY) commencing 2022;
- climate reporting will be mandatory for issuers in the (i) financial, (ii) agriculture, food and forest products, and (iii) energy industries from FY 2023; and
- climate reporting will be mandatory for issuers in the (i) materials and buildings, and (ii) transportation industries from FY 2024.
Diversity
Under the new rules, all issuers must establish a board diversity policy that addresses gender, skill and experience, and other relevant aspects of diversity. In their annual reports, issuers must disclose:
- the board diversity policy;
- targets for achieving the stipulated diversity, accompanying plans and timelines for achieving the targets;
- progress towards achieving the targets within the timelines; and
- a description of how the combination of skills, talents, experience and diversity of its directors serves the needs and plans of the issuer.
Other ESG-related Requirements
Also effective from January 1, 2022:
- issuers must subject their sustainability reporting processes to internal review by the internal audit function;
- all directors must undergo a one-time training on sustainability; and
- sustainability reports must be issued together with annual reports, unless issuers have conducted external assurance.
Core ESG Metrics
SGX noted that its consultation on proposals to develop 27 Core ESG metrics, as well as a portal for issuers to input ESG data, received strong market support. Accordingly, SGX has adopted all 27 metrics as proposed. These voluntary metrics are intended to be a starting point for companies to determine what information to disclose in their sustainability reports, drawing from common metrics across leading ESG reporting standards including the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), TCFD and the metrics developed by the World Economic Forum (WEF).
For example, SGX notes that each of GRI, SASB, TCFD and the WEF consider total water consumption, in terms of megaliters or cubic meters, to be a material topic worthy of disclosure. SGX therefore encourages all issuers to disclose this metric on a voluntary basis. SGX also recommends issuers conduct their own materiality assessments to ensure the relevance and completeness of their reported metrics.
Preparing for ESG-related Regulation
As regulatory attention turns to mandatory TCFD and related ESG disclosure requirements in Singapore and elsewhere, companies are already applying strategies to preserve and create value by appropriately managing ESG-related risks and opportunities. We highlight certain of these strategies below.
- Integrating ESG into corporate governance structures by clearly defining ESG-related roles and responsibilities of the board, senior management and dedicated ESG or sustainability committees;
- Adopting ESG-related policies, action plans and targets to ensure group-wide alignment on ESG initiatives and disclosing those policies, plans and targets to the public;
- Building ESG-related organizational capacities through stakeholder engagement initiatives, trainings and handbooks;
- Incorporating ESG factors into commercial contracts, due diligence processes and procurement practices;
- Benchmarking ESG governance, strategy, risk management and disclosures against peers and industry best practices;
- Analysing and responding to ESG-related regulatory and legislative developments, including with respect to mandatory ESG disclosures, ESG risk management requirements and “green claims”; and
- Assessing ESG-related disclosures in the context of increasing litigation risk, including potential claims under securities laws and consumer protection laws.