Amidst the growing emphasis on good sustainability practices and the desire for greater transparency by the public, particularly those from the younger generation, Environmental, Social and Governance (“ESG”) reporting and assurance are likely to become a commonplace.
ESG at a glance
The concept of ESG saw increased attention in recent years. An ESG-focused organisation is one that is committed to do more than just making a profit. It actively strives to contribute to environmental and social causes, and conducts businesses in a responsible manner. As the world is a common space with finite and depleting resources, there is a growing imperative that companies should shoulder the responsibility of being active drivers of positive change to the environment and society.
Companies are increasingly embarking on their journeys to develop a strong ESG culture.
A strong ESG culture
However, to an organisation, what exactly are the benefits of having a strong ESG culture? Is ESG just a fad or is it an area that organisations should pay attention?
Beyond the initial scepticisms that it is just a fad, it turns out that there are actual benefits such as:
a. Better long-term growth
Companies with strong ESG credentials tend to have better, long-term growth prospects, since they are more sustainable and forward looking with regard to their ESG policies. Given how the pandemic has shed light on inflexible and unsustainable business practices, which led to companies closing down, incorporating ESG practices into business practices seems more pressing than ever.
b. Greater access to funding
Investors are increasingly more sustainability-conscious. Based on a report by Standard Chartered Bank, four in 10 Singapore investors plan to allocate a portion of their funds to sustainable investments over the subsequent three years. The projected increase in demand for green- and sustainability-focused investments means that companies with strong ESG focus and reporting will be more appealing to sustainability-conscious investors.
c. Stronger appeal to sustainability-conscious consumers
The sustainability-conscious millennial generation is another driving force behind the growing focus on ESG. For instance, companies that engage in questionable business practices, such as poor handling of users’ personal data, poor environmental practices, and the lack of governance amongst others, are routinely boycotted. This can severely impact these companies’ revenue and reputation. In the age of social media where information spreads quickly, it is important that companies adopt good ESG practices to attract and retain consumers and business partners.
d. Attract young talents
With a strong ESG culture, companies are able to brand themselves to appeal to young talents who are passionate in doing good – millennials prefer to join companies that emphasise on workplace sustainability.
Given the changing demands of investors and consumers, there will be strong pressure for companies to integrate ESG considerations into their business practices.
ESG reporting and assurance
Stakeholders have further increased scrutiny on companies’ organisational culture and resilience as the level of preparedness is also questioned in the face of the pandemic. ESG reporting is now essential for transparent disclosure of risks that arise as a result of pursuing business interests. ESG reporting also allows companies to document their year-on-year progress of their ESG policies, and review unsustainable business practices. Companies are then able to communicate their long-term, sustainable growth strategy more clearly to their investors and the public. The regulatory landscape has also evolved.
Since 2016, it is mandatory that all SGX-listed issuers prepare an annual sustainability report on a comply-or-explain basis. Most chose to comply. However, as there is no requirement for them to obtain independent assurance on their sustainability reports, only a handful chose to do so.
Yet, the benefits of ESG assurance are clear: Improves transparency and credibility with stakeholders, better public perception, improves compliance, and greater comfort to management, according to the Sustainability Reporting Implementation Roadmap by the Institute of Singapore Chartered Accountants (“ISCA”).
The future of ESG reporting and assurance
Moving forward, what can we then expect for the future of ESG reporting and assurance?
Today, despite the hype surrounding ESG, the reporting environment appears to be slightly fragmented and, at times, confusing to companies, investors, and the public. All these stem from one key factor – the lack of a prescribed approach for ESG reporting. As SGX does not specify the use of a particular framework, companies are free to choose from the several globally-recognised options, such as the Global Reporting Initiative (“GRI”) Standards and the Sustainability Accounting Standards Board (‘SASB”), amongst others.
Although GRI is the most widely adopted framework by most companies, recent developments might challenge its position. This is because there are growing global demands by companies and investors for a unified ESG reporting framework so that the sustainability reports across different companies can be easily compared.
Efforts are now underway to achieve this:
- In September 2020, it was announced that the five leading organisations that created ESG standards will work together to develop a comprehensive corporate reporting system based on their existing frameworks and standards.
- The World Economic Forum, in collaboration with the Big 4 accounting firms, released a recommended set of universal ESG metrics and disclosures.
- In February 2021, the International Financial Reporting Standards (“IFRS”) Foundation indicated the possibility of establishing a Sustainability Standards Board (“SSB”) for developing a global set of sustainability-reporting standards.
All these developments point to a rapidly evolving ESG reporting landscape. It is likely to mature to a state similar to what the financial reporting system has achieved with the IFRS and US GAAP – both are globally accepted and use a common language.
It is still too soon to determine which of the frameworks will emerge as the globally accepted one. With many strong contenders, there may be a need for the local regulatory authority to prescribe the use of an ESG reporting framework to avoid confusion and ambiguity within the community. Given that most countries adopt IFRS Standards as the foundation for financial disclosures, there is a fair chance that their new sustainability standards, when created, will be a strong contender.
Regardless, discussions and developments surrounding ESG reporting will lead to a more robust and consistent ESG reporting environment amongst Singapore companies, including those that are non-listed.
With the increase in ESG reporting, there will also be a likely increase in the demand for ESG assurance services to enhance credibility of their reports (to both their stakeholders and the public).
According to a report by SGX published in 2019, only a mere 14 out of 495 companies undertook external assurance on their sustainability reports. This number needs to increase substantially, especially if Singapore wants to establish itself as a credible sustainability hub.
The recent Budget 2021 has outlined the government’s increasing focus on sustainability agenda, and there is likely to be a trickle-down effect where companies are encouraged to incorporate sustainability considerations into their company policies. Instead of scrambling to revamp company policies to incorporate ESG considerations when regulators push for it, companies stand to benefit by starting early as organisational changes take time to materialise.
This article is contributed by Reiko Leow of our Technology, Media & Telecommunications practice.
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