A new focus on environmental, social and governance disclosures
The Singapore Exchange Securities Trading Limited (“SGX”), recognising an increasing interest by investors in sustainability issues and the consequent calls for listed companies to report on their environmental and social policies, has recently issued “The SGX Guide to Sustainability Reporting for Listed Companies” (“Sustainability Guide”). The Sustainability Guide is applicable from 27 June 2011 onwards and aims to be a useful reference for listed companies on sustainability reporting.
As set out in the Sustainability Guide, “sustainability reporting” refers to the publication of environmental, social and governance (“ESG”) information in a comprehensive and strategic manner that reflects the activities and outcomes across these three dimensions of an organisation’s performance. This is an extension to the existing requirements to disclose financial and governance aspects that are currently part of the Code of Corporate Governance (“Code”). Although reporting of information in these ESG areas are bundled together when referred to in the Sustainability Guide, financial and governance information required to be disclosed under the Code applies a “comply or explain” basis (as explained below), whereas disclosures under the Sustainability Guide are made on a voluntary basis with the aim of allowing investors to measure the sustainability and ethical impact of an investment in a company.
Sustainability reporting, with the increased level of scrutiny associated with ESG analysis, allows investors to identify companies that are:-
- leaders in their industries;
- better managed and forward-thinking;
- better at anticipating and mitigating risk;
- meeting the positive standards of corporate responsibility; and
- focused on the long-term
“Sustainability reporting” explained
The Sustainability Guide sets out broad principles to guide listed companies in formulating their sustainability frameworks, with focus on the environmental and social aspects.
As described above, sustainability reporting refers to the publication of ESG information in a comprehensive and strategic manner that reflects the activities and outcomes across these three dimensions of an organisation’s performance.
A listed company benefits from sustainability reporting in the following ways:-
- Raised Corporate Transparency. Sustainability reporting broadens organisational disclosure beyond traditional financial metrics and raises corporate transparency on environmental and social metrics.
- Strengthens Risk Management. Corporate reputation is protected and shareholder value improved by a risk management approach that incorporates sustainability provides management with useful data for identifying emerging issues and developing appropriate responses.
- Promotes Stakeholder Engagement. Listed companies can identify their stakeholders to effectively engage those that are interested in, and affected by, the company's sustainability performance.
- Improves Communications with Stakeholders. Sustainability reports can be used for benchmarking and assessing sustainability performance with regard to existing frameworks, demonstrating how the organisation influences and is influenced by expectations about sustainable development.
- Investor Interest. The ability of a listed company to demonstrate sustainable practices may generate investor interest, especially from investors which have made a commitment to ESG sustainability. For example, the International Finance Corporation has in place a sustainability framework which sets out its commitments to environmental and social sustainability.
Companies in sectors with a high environmental and social impact
The Sustainability Guide recommends that companies in the following sectors should undertake sustainability reporting:-
- air transport;
- chemicals and pharmaceuticals;
- food and beverages;
- forestry and paper;
- mining and metals;
- oil and gas;
- shipping; and
Compliance with SGX’s governance policies
Singapore’s approach to corporate governance is based on both primary legislation (the relevant statute dealing with corporate governance is the Companies Act) and non-statutory regulations, which is the Code, which, as mentioned above, applies to listed companies on a “comply or explain” basis.
The Code requires compliance with these provisions:-
- The Board’s Conduct of Affairs. The board should work with management to achieve long-term success and management remains accountable to the board.
- Board Composition and Guidance. There should be a strong and independent element on the board, which is able to exercise objective judgment on corporate affairs independently.
- Chairman and CEO. There should be a clear division of responsibilities between the leadership of the board and the executives responsible for managing the company's business.
- Board Membership. There should be a formal and transparent process for the appointment and re-appointment of directors to the board.
- Board Performance. There should be a formal annual assessment of the effectiveness of the board as a whole and its board committees and the contribution by each director to the effectiveness of the board.
- Access to Information. In order to fulfil their responsibilities, directors should be provided with complete, adequate and timely information prior to board meetings and on an on-going basis so as to enable them to make informed decisions to discharge their duties and responsibilities.
- Procedures for Developing Remuneration Policies. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors.
Level and Mix of Remuneration. The level and structure of remuneration should be aligned with the long-term interest and risk policies of the company, and should be appropriate to attract, retain and motivate:-
- the directors to provide good stewardship of the company; and
- key management personnel to successfully manage the company.
- Disclosure on Remuneration. Every company should provide disclosure in relation to its remuneration policies to enable investors to understand the link between remuneration paid to directors and key management personnel, and performance.
- Risk Management and Internal Controls. The board should ensure that management maintains a sound system of risk management and internal controls to safeguard shareholders' interests and the company's assets.
- Accountability. The board should present a balanced and understandable assessment of the company's performance, position and prospects.
- Audit Committee. The board should establish an audit committee with written terms of reference which clearly set out its authority and duties.
- Internal Audit. The company should establish an effective internal audit function that is adequately resourced and independent of the activities it audits.
- Shareholders Rights. Companies should treat all shareholders fairly and equitably, and should continually recognise, protect and facilitate the exercise of shareholders' rights.
- Communication with Shareholders. Companies should actively engage their shareholders and put in place an investor relations policy to promote regular, effective and fair communication with shareholders.
- Conduct of Shareholder Meetings. Companies should encourage greater shareholder participation at general meetings of shareholders, and allow shareholders the opportunity to communicate their views on various matters affecting the company.
Distinctions between non-compliance with the Code and sustainability reporting
The environmental and social policies applicable to listed companies are only recommended and are not mandatory, thus any non-compliance with the Sustainability Guide will not require an explanation for such non-compliance. The governance policies in the Code, on the other hand, is relatively more stringent and any deviation must be reported and rationalised.