The transition towards a sustainable economy requires information from businesses on their sustainability performance and strategies. There is a groundswell of demand from investors, lenders, and insurers for relevant, reliable, and comparable information, to help them to assess how businesses are managing climate-related risks and opportunities.
Disclosures underpin a market-based approach to incentivise businesses to transform and build climate resilience, by making the necessary data available for these stakeholders to assess their prospects in light of climate change, and make informed decisions on investment, lending, and underwriting. As the saying goes, what gets measured gets managed.
Mandatory climate reporting
In line with this, mandatory climate-related disclosures are gaining momentum globally. The EU has adopted the Corporate Sustainability Reporting Directive (CSRD), which member states are expected to transpose into national legislation by July 2024. The CSRD is estimated to apply to about 50,000 companies, including around 10,000 foreign firms.
At first glance, the CSRD appears to be just another piece of legislation passed by the EU. But businesses that have a presence in the EU should note that the CSRD has extraterritorial implications and extends its tentacles to non-EU parents of certain entities in the EU. The extraterritorial impact may be significant as the non-EU parent then has to provide disclosures covering entire operations both within and outside the EU.
Thus, companies in the Asia-Pacific region or elsewhere with group operations in the EU will need to act fast to assess whether they fall within the scope of the CSRD and consequently whether they need to prepare for compliance with disclosure requirements thereunder. Even if the entity is already subject to climate-related disclosure requirements in its home jurisdiction, a gap assessment will need to be performed to identify any variations in the relevant requirements.
In Singapore this year, regulators announced the imposition of mandatory climate reporting requirements on SGX-listed issuers and large non-listed companies (companies with annual revenue of at least SGD 1 billion and total assets of at least SGD 500 million). The requirements will be implemented in phases, starting with the listed issuers, which are already required to publish sustainability reports. With the new requirements, issuers will be required to report climate-related disclosures in accordance with the International Sustainability Standards Board (ISSB) Standards from FY 2025, and large non-listed companies from FY 2027. At the outset, the reporting will cover Scope 1 and 2 emissions, but for listed issuers, this will be extended to include Scope 3 emissions from FY 2026.
Harmonising international approaches
The adoption of the ISSB Standards in Singapore is aimed at laying the foundation for international convergence and managing companies' reporting efforts. The ISSB was formed in response to growing calls for comparable and consistent disclosures, and its standards are focused on baseline requirements and build on the work of existing Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Businesses that are already reporting based on TCFD recommendations will be better prepared and face a smoother transition to ISSB Standards-based reporting.
The ISSB Standards have also gained international traction. Various other jurisdictions that have implemented, or are looking to implement, mandatory climate reporting – such as the UK, Australia, Hong Kong, Malaysia, and the Philippines – are also consulting on, or have decided on, the use of the ISSB Standards.
Harmonising international approaches to climate-related disclosures is crucial. Ideally, companies' climate-related reporting should draw from a common set of topics and requirements, so that they need only collect information once and can provide more comparable and complete information to stakeholders. This reduces the reporting burden of the companies on the one hand, and facilitates analysis, interpretation, and action by users of the information on the other hand.
In this regard, the ISSB and the European Commission have worked together towards achieving alignment between the ISSB Standards and the European Sustainability Reporting Standards (ESRS, which set out the reporting requirements under the CSRD), including in respect of materiality concepts and common defined terms. An ESRS-ISSB Standards Interoperability Guidance was published in May 2024 to clarify the alignment of disclosure requirements and set out the information needed to enable an entity that is starting with either one of the standards to be able to comply with both.
In Singapore, large non-listed companies subject to mandatory climate reporting will be exempted from requirements to report and file the relevant climate-related disclosures if their parent company is already reporting climate-related disclosures using ISSB-aligned local reporting standards or equivalent standards (e.g., the ESRS), provided the large non-listed company's activities are included within the parent's report, which is available for public use. If the parent company reports climate-related disclosures using other international standards and frameworks, a transitional exemption will be granted for a specified period, which will be subject to extension based on a review of global developments.
Preparation for climate-related reporting
Climate-related reporting should not be viewed as a mere compliance exercise. It is an opportunity for businesses to demonstrate to stakeholders, including investors, their sustainability strategy and performance. Climate-related reporting also serves as an internal diagnostic tool to help businesses to identify and plan for the challenges ahead. To meet the requirements of climate-related reporting, businesses should undertake a comprehensive review across key areas such as governance and strategy, emissions measurement capabilities, assurance, transition planning, procurement policies, and engagement with suppliers.
Overcoming challenges in measuring and reporting emissions
An important focus for climate reporting is on Scope 3 emissions, which account for approximately 88% of business emissions. Scope 3 emissions arise along the value chain, both upstream (e.g., raw material extraction, manufacturing processes, transportation) and downstream (e.g., use and disposal of the company's goods or services).
Measuring and reporting Scope 3 emissions is often very challenging because the sources of data generally lie beyond the reporting company's operational reach. The company's partners along the supply chain, particularly if they are smaller businesses, often lack good-quality data or the resources to collate and share the data effectively. Even where the partners do have the data, they may not be inclined to share it, for reasons such as confidentiality and reputational concerns.
From the companies' perspective, the potential solutions to these challenges may lie in the following:
The use of data collection technology that enables the automation of emissions measuring processes – emissions measurement software is already commonly used among larger businesses that are more mature in their sustainability reporting journey. Access to these data collection tools can be of significant help to smaller players in collecting and managing their emissions data and thus facilitating Scope 3 emissions reporting.
The consideration for Scope 3 emissions when implementing procurement policies and supplier engagement programmes – in the same vein, employees should also be educated on climate reporting obligations generally, as well as the relevance of Scope 3 emissions. This would create a shared understanding of, and responsibility for, emissions reporting through the supply chain and facilitate data collection efforts.
What reporting means for boards
To ensure credible and good-quality information for stakeholders, there is a need to uphold accountability over climate-related disclosures. Directors generally have responsibility in relation to compliance with mandatory reporting requirements.
That said, there are generally safe harbour provisions and other forms of protection available to directors who act honestly, diligently, and in good faith. Section 157C of the Singapore Companies Act, for instance, allows a director to rely on information and advice given by an employee, a professional adviser, or an expert, or any other director or committee of directors, if they act in good faith, make proper enquiries, and have no knowledge that such reliance is unwarranted. In general, directors should show that they have conducted due enquiries and sufficiently satisfied themselves as to the viability of statements or likelihood of achieving any promises made, have inserted appropriate caveats or qualifications where necessary, and have not merely cherry-picked the most optimistic scenarios.
As stewards of governance, directors have a duty to be proactive and critically evaluate and address material risks and opportunities associated with climate change. Boards must ensure that management is giving them relevant and adequate information on these risks and opportunities, to allow them to devise short- to long-term strategies for the business. Balancing these different timeframes, risk factors, and stakeholders is a key responsibility of directors.
How a board deals with climate change risk is generally not prescribed in detail at law. It is for the board to adopt the most appropriate governance approach in the context of its organisation. Good governance in this regard may involve, among others, requiring regular climate-related reports from management, which would enable the board to exercise oversight and send a clear signal to management and the wider organisation as to the importance of prioritising climate risk.
Canadian securities administrators have helpfully published a list of questions that boards should be asking, including the following:
Is the board provided with appropriate information to help directors to understand sector-specific climate change-related issues?
Has the board been provided with sufficient information to oversee appropriately management's assessment of the materiality of climate-related risks?
Is the board comfortable with the methodology used by management to capture the nature of climate risks and assess their materiality?
Is the board aware of how investors factor climate-related risks into their investments and voting decisions?
Is the oversight and management of climate-related risks and opportunities integrated into the company's strategic plan?
Has the board considered the effectiveness of the disclosure controls and procedures in place in relation to climate change-related risks?
The enabling role of assurance
External assurance will play an important role in enhancing the reliability of disclosures and increasing stakeholders' confidence in the information reported.
In the EU, limited assurance will be required under the CSRD by 2026, while the European Commission assesses the feasibility of moving towards reasonable assurance.
In Singapore, limited assurance on Scope 1 and 2 emissions will be required from FY 2027 for listed issuers and from FY 2029 for large non-listed companies, with the recommendation to move towards reasonable assurance over the entire report eventually.
The implications of climate-related reporting for businesses
Climate-related reporting is increasingly a business imperative and no longer a good-to-have for companies. While such reporting and external assurance will necessarily involve costs, this will soon become the inevitable cost of doing business if companies wish to stay competitive in a low-carbon future.
Rather than burying one’s head in the sand, businesses should adopt the mindset that climate-related disclosures present an opportunity to showcase to the market how they are adapting their business model to address material risks and prepare for the transition to a sustainable economy, and to address any questions stakeholders may have regarding the long-term viability of the business.
Boards that are enlightened should not dwell on the increased responsibility arising from the additional disclosures. Instead, they should consider embarking on the journey of setting up systems and processes to collect the relevant data and engaging with auditors and other professional advisers to explore how to translate climate-related disclosures into financial ones.
In the near to medium term, companies that are forthcoming in their climate-related disclosures might have an edge over their competitors, which may be left out by customers in tenders or lose support from investors as a result of their lack of disclosure. Thus, companies should view climate-related disclosure requirements not only as a defence, but also as an attack, strategy.
