Commentary: Could mandatory climate reporting make SGX less attractive?

SINGAPORE: Climate reporting will become mandatory for all companies listed on the Singapore Exchange (SGX) from financial year 2025, under an enhanced reporting regime announced on Sep 23 by the stock exchange’s regulatory arm, after an extensive public consultation back in March.

Amid efforts to boost Singapore’s struggling stock market, what impact could this have? Some critics have argued that piling on even more onerous sustainability reporting requirements will make SGX less attractive to potential issuers, when compared to other exchanges in the region.

But this is a myopic view. The enhancements are a significant step forward in aligning Singapore’s reporting standards with the global best practices of stock exchanges around the world.

All SGX-listed companies will report their Scope 1 and Scope 2 greenhouse gas emissions - arising from operations and purchased energy. Scope 3 emissions, which include all emissions up and down companies’ supply chain, will remain voluntary for now, but will likely be mandated for large companies from 2026.

UNLIKELY TO DETER LISTINGS

Mandatory sustainability reporting has been gaining global traction in recent years. SGX’s move is in lockstep with recent global developments.

In January, the European Union’s Corporate Sustainability Reporting Directive has taken effect, requiring large companies and listed companies to start reporting their emissions. In March, the US Securities Exchange Commission (SEC) also issued a final climate disclosure rule to mandate the same.

Hong Kong Exchanges and Clearing (HKEX) is a major rival to SGX, as both are in the same time zone. HKEX has also announced similar reporting requirements following extensive public consultations of their own and continues to attract a healthy pipeline of major listings.

Climate reporting requirements can be one of many considerations for potential issuers, but they are not likely to be the primary determinant. The fundamental determinants of listing venue attractiveness primarily depend on a stock exchange’s liquidity and investor interest.

STAYING ATTRACTIVE TO ESG INVESTORS

Being slow to adopt climate reporting standards will not boost Singapore’s lacklustre stock market. Quite the opposite effect might be possible in fact.

Global investors are increasingly using sustainability data from climate reporting to guide their investment. The lack of climate reporting data will prevent investors with a sustainability focus from investing.

Additionally, academic studies have generally shown that companies with strong sustainability records tend to be better at managing risk, attracting talent, fostering customer loyalty and identifying future opportunities.

Strong sustainability practices are often correlated with robust risk management and governance. The process of preparing sustainability reports compels firms to critically examine their operations, identify inefficiencies, and develop long-term strategies for thriving in a low-carbon economy.

So, aligning with global standards ensures SGX retains its attractiveness to a growing pool of investors guided by environmental, social and governance (ESG) concerns.

SCOPE 3 EMISSIONS MOST CRUCIAL

Meanwhile, mandatory Scope 3 reporting, which has taken a back seat under the new reporting regime for now, remains the most problematic.

Scope 3 emissions are all indirect emissions that occur along the value chain of a company’s operations with upstream (such as suppliers) and downstream (such as customers) activities included.

The mandatory implementation of Scope 3 has met with pushback globally. Scope 3 emissions account for the majority of the carbon footprint for most companies, even making up to 80 per cent or 90 per cent of emissions in some cases.

Voluntary Scope 3 reporting therefore translates into a technical loophole for companies, creating opportunities for greenwashing.

To illustrate, a company could outsource its polluting operations to suppliers or sell their polluting assets to a private company, which will shift the emissions classification from Scope 1 to Scope 3. The company then could simply claim it has reduced its carbon footprint without any genuine change in the overall emissions along the value chain.

This is no different from sweeping dust under the rug – the dirt is still there, just hidden from sight.

Until Scope 3 reporting becomes mandatory and subject to strict audit requirements, mandatory Scope 1 and Scope 2 emissions reporting still lacks the horsepower to fully drive genuine decarbonisation.

INEVITABLE REALITY OF SUSTAINABILITY REPORTING

As the world moves to tackle the climate crisis, it is time for companies to have a mindset shift.

Sustainability reporting offers new opportunities to better identify risks and opportunities and should not be viewed as just another compliance burden. Companies that start building their sustainability reporting capabilities today will be far better positioned to attract ESG investment and thrive in a low-carbon future.

This is true even for small and medium-sized enterprises (SMEs), which may lack resources and would much prefer to be exempted from the latest requirement. In fact, if SMEs are those with less than S$100 million in revenue, then more than half of companies listed in SGX are SMEs.

SMEs supplying to large companies would still be required by those companies to report their sustainability data and metrics, including scope 3 emissions, if their large customers are mandated to report. SMEs may find it cumbersome to commit to sustainability reporting now, but sooner or later they would have to stop kicking the can down the road to stay in business.

The earlier companies start to recognise the inevitable reality of sustainability reporting, the better prepared they would be to deal with market requirements in the future. The laggards simply risk being left behind by this paradigm shift.

Kelvin Law is Associate Professor of Accounting at Nanyang Technological University, Nanyang Business School, and his research examines corporate sustainability and financial fraud.