The looming spectre of climate change has compelled businesses worldwide to reassess their environmental impact and embrace sustainable practices. Investors are increasingly expecting companies to report on climate impact in a considered and consistent way, and regulators are doing their part in pushing for greater transparency and commitment to climate disclosures.
Singapore is no exception, and climate reporting is increasingly under the spotlight, so is board and management accountability for it. The Singapore Exchange (SGX) has been proactive in mandating that listed companies include climate reporting in their sustainability reports on a “comply or explain” basis, starting from FY2022. Singapore joins a growing number of Asia Pacific jurisdictions that either already have in place or are slated to have in place in the coming years, mandatory climate reporting based on the Task Force on Climate-related Financial Disclosures (TCFD) for listed companies.
The imperative for consistency and comparability in climate reporting is also clearly growing. With the International Sustainability Standards Board having issued its first two IFRS Sustainability Disclosure Standards, IFRS S1 and IFRS S2, in June, we expect these to be integrated into Singapore’s reporting framework in the near future. IFRS S2 aligns with the recommendations of TCFD, which means that issuers that are already prepared for TCFD implementation will have a smoother transition to IFRS S2 reporting once it becomes mandatory in Singapore.
Underscoring the importance of climate reporting, Singapore regulators are also exploring the possibility of requiring all listed companies to report climate-related disclosures from FY2025, and large non-listed companies to do so from FY2027. It is therefore expected that climate disclosures will soon become widely adopted and increasingly fundamental to corporate reporting and ultimately, corporate governance and accountability of management and board.
Regulatory push is essential, but only as effective as the quality of compliance and observance of the spirit of the rule.
A recent report released by EY and CPA Australia, which studied the current state of climate reporting among Singapore’s listed companies, revealed that while progress has been made on this front, there are still opportunities for improvement.
The report assessed the climate disclosures of 240 SGX-listed companies, based on the four pillars of the TCFD recommendations: governance, strategy, risk management, and metrics and targets. It found that 65% of the companies have started their climate-related disclosures in FY2022. Sectors where issuers are mandated for climate reporting in FY2023 have initiated climate disclosures in FY2022. The large-cap and mid-cap issuers tend to be leading the way in climate reporting.
However, many climate disclosures were found to be lacking in depth and breadth. As well, just 10% of companies in the study had sought external assurance on their climate reports. External assurance is instrumental to the credibility of climate reports and is expected to play a bigger role amid rising concerns over greenwashing and greenwishing. It can also help companies identify and address gaps in their climate reports, resulting in more robust disclosures and insights to support companies in their decarbonisation efforts.
Five actions for companies
There are five key actions that companies should take to better articulate their climate impact through reporting.
First, it is important that companies have the necessary data, systems and processes to comply with climate reporting requirements. This requires them to engage proactively with their internal stakeholders as climate efforts have broad implications across many parts of the business. Similarly, they should communicate regularly with external stakeholders to better understand the information desired and how to bridge the expectation gaps.
Second, companies should set specific metrics to measure and manage material climate risks and track their performance against meaningful quantitative targets. This facilitates transparent reporting and holds companies accountable to their sustainability pledges.
Third, companies need to enhance their ability to assess the financial impact of climate-related risks — and opportunities. This link between climate actions and financial outcomes is important, and reporting must serve to clarify the picture for stakeholders. When companies can pinpoint climate-related risks material to their operations based on their impact, they can prioritise and implement the necessary mitigation strategies.
Fourth, companies should employ scenario analysis to evaluate and quantify potential climate-related risks and opportunities under various hypothetical futures. Often, not enough is being done to contemplate the opportunities that climate change can bring to the company, or how climate-related risks can be turned into opportunities. In doing so, companies should challenge themselves to go beyond operational aspects like reduced resource consumption, and consider opportunities such as green products and financing so as to drive greater value for the business.
Lastly, the above would be futile if companies fail to integrate climate change considerations into their budgeting and strategic planning process. When budget discussions fall short of considering climate-related strategies, it makes the company’s ability to execute its plans and commitment to change questionable.
Building resilience beyond compliance
Singapore-listed companies have made meaningful progress in their climate reporting efforts. As we move towards a reality marked by increasing climate disruptions to businesses, it is essential that companies invest time and effort to deliver transparent, robust and comprehensive climate reporting as a key component of their decarbonisation journey. By doing so, they will not just meet regulatory requirements, but will also chart a course to a more resilient, sustainable future.
Ken Ong is assurance 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