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Mandatory Climate Reporting in 2023

How Ready Is The Financial Sector?
Koh Wei Chern
Patricia Tan Mui Siang
BY Koh Wei Chern and Patricia Tan Mui Siang

TAKEAWAYS

  • With effect from 1 January 2023, climate reporting consistent with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations will shift to a mandatory basis for some industry-prioritised firms, namely those in the (i) financial industry; (ii) agriculture, food and forest products industry; and (iii) energy industry.
  • Another key change is that the issuer’s sustainability reporting process must be subject to internal review with effect from 1 January 2022. However, an independent external assurance is not mandatory.
  • Most financial sector firms have not adopted the TCFD recommendations as a framework for reporting climate disclosures for financial years ending in 2021. But, given the high levels of alignment among the available standards and frameworks, the financial sector appears ready to do mandatory climate reporting based on the TCFD recommendations.

With effect from 1 January 2022, climate reporting is mandatory on a “comply or explain” basis for all issuers listed on the Singapore Exchange (SGX). Specifically, the sustainability report should have climate-related disclosures consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) as a primary component in its sustainability report1. The TCFD sets out recommendations to help firms disclose climate-related financial information that would be useful for investment decision making.

With effect from 1 January 2023, climate reporting consistent with the TCFD recommendations will shift to a mandatory basis for some industry-prioritised firms. In other words, these firms cannot comply on a “comply or explain” basis2. For financial years commencing 1 January 2023, mandatory climate reporting will apply to issuers in three industries, namely (i) financial industry; (ii) agriculture, food and forest products industry; and (iii) energy industry. For financial years commencing 1 January 2024, mandatory climate reporting will apply to issuers in two additional industries, namely (i) materials and buildings industry; and (ii) transportation industry3.

The TCFD has 11 disclosure recommendations, based on the four pillars of (i) Governance; (ii) Strategy; (iii) Risk Management; and (iv) Metrics and Targets. Under the Governance pillar, there are two recommended disclosures, and for each of the other three pillars, three recommended disclosures. SGX Practice Note 7.6 paragraph 7.1 allows compliance with the TCFD recommendations to take place progressively. Practice Note 7.6 paragraph 7.2 illustrates a phased approach over three years, though for the industry-prioritised firms, they would have to do so over a shorter period of time.

Another key change is that the “issuer’s sustainability reporting process must be subject to internal review” with effect from 1 January 20224. However, an independent external assurance is not mandatory.

DISCLOSURE GUIDES

An Institute of Singapore Chartered Accountants (ISCA) Climate Disclosure Guide (“ISCA Guide”) released in April 2022 interviewed key sustainability executives from three listed companies which were forerunners in TCFD reporting, to hear their experiences on climate reporting based on the TCFD recommendations.

In addition, the ISCA Guide provided examples on TCFD reporting from various firms that were at different phases of the phased approach to complying with the TCFD recommendations. Of these firms, nine were listed on the SGX, eight were listed on foreign exchanges, and two were unlisted, namely PSA International Pte Ltd and Temasek Holdings (Private) Limited. For the nine listed on the SGX, three were from the materials and buildings industry; two from agriculture, food and forest products industry; one from energy; one from transportation, and two from others.

It was not surprising that there was no example of disclosures from the financial industry in the above guide. Instead, this was the focus of another guide, the Financial Institutions Climate-related Disclosure Document issued by the Monetary Authority of Singapore (MAS) in May 2021. The guide provided examples taken from 40 financial institutions listed on different exchanges that were at different phases of the phased approach to complying with the TCFD recommendations. The financial institutions are from the banking, asset management and insurance sectors. Given that climate reporting is mandatory for financial industry firms listed on the SGX with effect from 1 January 2023, this article examines the “readiness” of the financial firms listed on the SGX with respect to the recent SGX rule changes. We studied, specifically, (i) the manner of issuing their sustainability reports along with their annual reports; (ii) the adoption of the TCFD framework; and (iii) the extent of external assurance.

METHODOLOGY

We downloaded the list of issuers that are listed as Banking and Investment Services, Collective Investments, and Insurance sectors based on the Thomson Reuters Industry Sector Classification, that is available on the SGX website. This resulted in a list of 28 issuers. For completeness, we also included four issuers that are classified under the Financial Technology (Fintech) & Infrastructure industry classification code. We had a total of 32 issuers in our sample.

First, we studied how each of these issuer firms issued their sustainability reports. We downloaded the annual reports and sustainability reports for each of these issuer firms for their financial years ending in 2021. Sixteen (16) firms included their sustainability reports as part of their annual reports, one included its sustainability report as part of its annual report and also separately, and the remaining 15 firms issued their sustainability reports separately and made reference to the sustainability reports in their respective annual reports. Hence, it would appear that there was no specific preference in the financial sector in terms of issuing their sustainability report, either as a separate report from the annual report or including it as part of the annual report.

Next, we searched the sustainability reports for the sustainability framework/guideline used to guide their reporting and disclosure. In total, 31 out of 32 firms disclosed the sustainability framework/guideline used and, of these 31 firms, 11 used more than one reporting framework/guideline. The most common framework/guideline used was the Global Reporting Initiative (GRI), followed by TCFD and United Nation’s Sustainable Development Goals (SDG) (see Table 1). Only nine firms (or only 28%) stated that they reported based on the TCFD recommendations.

Table 1 Sustainability framework/guideline adopted

Third, we checked the extent of assurance on sustainability reporting on these issuers. At this point, external assurance on sustainability reporting is not required but is encouraged by SGX in its listing rules and practice notes. For financial years ending in 2021, only three out of the 32 financial sector firms had limited external assurance performed on their sustainability reports. Four of the 32 firms explicitly stated their intention to seek external assurance on their sustainability reports in the future.

CONCLUSIONS

To be fully compliant with SGX rules, the financial sector firms listed on the SGX will need to do mandatory climate reporting based on the TCFD recommendations for financial years beginning on 1 January 2023. This article examines the current reporting behaviour of the financial sector prior to the effective date. It is noted that most financial sector firms have not adopted the TCFD recommendations as a framework for reporting climate disclosures for financial years ending in 2021. Nevertheless, the “Better Alignment Project” initiated by the Group of Five, that is, CDP, Climate Disclosure Standards Board, GRI, International Integrated Reporting Council and SASB, found high levels of alignment between the different standards and frameworks. Given that close to 90% of the financial firms listed on the SGX adopted the GRI as a framework in sustainability reporting, and given the high alignment among the standards, the financial sector may be more ready than it appears to be to do mandatory climate reporting based on the TCFD recommendations. The Financial Institutions Climate-related Disclosure Document is a useful resource to help these firms in their TCFD disclosure journey. It will be interesting to follow up and examine how these firms comply with climate reporting in 2022 on a “comply or explain” basis and on a mandatory basis in 2023, as well as examine the firms that eventually seek external assurance on their sustainability reporting.


Koh Wei Chern is Associate Professor, Accountancy Programme, School of Business, Singapore University of Social Science, and Patricia Tan Mui Siang is Associate Professor of Accounting, Nanyang Business School, Nanyang Technological University.


1 Singapore Exchange Mainboard Rule 711B (1)(aa) and Catalist Rule 711B (1)(aa); SGX Mainboard Rule Practice Note 7.6 paragraph 4.1(b) and also Catalist Rule Practice Note 7F paragraph 4.1(b); SGX Mainboard Rule Practice Note 7.6 paragraph 4.1(e) and also Catalist Rule Practice Note 7F paragraph 4.1(e)

2 SGX Mainboard Rule 711B (2) and also Catalist Rule 711B (2)

3 SGX Mainboard Rule Practice Note 7.6 paragraph 4.9 and also Catalist Rule Practice Note 7F paragraph 4.9

4 SGX Mainboard 711B (3) also Catalist Rule 711B (3)

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