Sustainability reports boost Singapore's status as global market

Wong Wei Han Straits Times and AsiaOne 6 Jul 16;

Under new SGX rules, listed companies must issue annual reports on their sustainability practices and performance. Some company chiefs grumble about the work needed to produce these reports, while supporters say sustainability is key to company performance.
When investors look at which company to put their money on, the decision is often based on financials such as earnings and cash flow. But a less tangible dimension has emerged in recent years that looks beyond a firm's mere dollars and cents.

All over the world, the focus on corporate sustainability - a company's performance in the environmental, social and governance (ESG) aspects of its business - has never been higher, forcing regulators to step up ways to bring more transparency to this somewhat abstract aspect of corporate behaviour.

NEW REQUIREMENTS

After a public consultation in January, the Singapore Exchange (SGX) launched its sustainability reporting requirements last month. Under the "comply or explain" rules, all listed companies must issue annual reports on their sustainability practices and performance.

The new rules strengthen the sustainability reporting guidelines available since 2011. Annual reports are expected to cover non-financial areas, ranging from the management of environmental risks and resources to employee satisfaction, supply chain partner practices and social responsibility initiatives, depending on the company's business and reach.

SGX chief executive Loh Boon Chye said the new reporting framework "will enhance the visibility of Singapore-listed companies among investors who seek sustainable investment".

The SGX announcement echoed similar initiatives taking shape elsewhere. The European Union is looking to put into law its requirements - on a "comply or explain" basis - for non-financial reporting by December. Hong Kong's stock exchange in December upgraded its ESG Guide, also to "comply or explain" requirements. The guide will be implemented - in two phases - by the end of this year and next.This means companies can comply with the guidelines, or choose to explain why they do not wish to do so.

Ms Yeo Lian Sim, SGX special adviser and former chief regulatory officer, told The Straits Times: "We don't see this as a competitive matter of where we stand compared with others. We're doing this because it enables investors to have a more consolidated analysis of a company, and it also helps them reflect on the quality of management.

"This is what the investors want - both here and globally - so this is what we're giving them, as part of the global marketplace."

Ms Yeo added that the bourse will now focus on implementing the requirements and helping companies figure out how to prepare the reports.

REPORTING DETAILS

Part of the potential challenge for a listed company is to manage the scope and details of its report.

The SGX requirements suggest but do not dictate the reporting format. More importantly, to avoid being too intrusive and prescriptive, companies are given the flexibility to decide what environmental, social and governance factors are relevant enough to go into their reports.

Mr Adrian Chan, a board member of five listed companies, sees an initial learning curve for smaller firms. "The tricky part for them will be trying to avoid boilerplates. They will have to do a bit of research on what their peers have done, and that may result in some herd mentality at the start," he said.

Some of the companies that have been issuing sustainability reports are Keppel Corp, Singtel, Singapore Airlines and Singapore Press Holdings.

Another is CapitaLand, which released its 2015 sustainability report last month - its seventh since 2009. A quick glance at the 62-page document shows that CapitaLand has achieved a 22.6 per cent carbon emission reduction for its operational buildings, putting it well on course to hit its 2020 target of 23 per cent. Since 2009, it has saved over $93 million in utilities expenses. Investors will also learn that in 2015, the property giant's employees suffered 57 work-related injuries, down from 2014's 68, while the employee absentee rate fell from 4.3 days per person per year to 3.9.

CapitaLand chief corporate officer Tan Seng Chai said: "Every report is a year-long preparation, by a dedicated in-house team updated on the latest reporting guidelines."

It is not a process CapitaLand measures by financial gains, Mr Tan said, adding: "We find that by focusing on sustainability first, all other benefits fall into place naturally, from cost avoidance arising from reduced energy and water consumption, to greater employee satisfaction."

A spokesman for Wilmar International, which issues its sustainability reports biennially, agreed: "Adopting sustainable practices enables operational cost-savings and higher productivity in the long run. For example, responsible and controlled chemical application... reduces our reliance on pesticide and herbicide, thereby reducing our cost."

The agribusiness dedicated large sections of its 2013 report to addressing environmental concerns, showing that the total number of fires across its regional plantations fell to 46 in 2013 from 114 in 2012. Year-to-year breakdown of water, fertiliser and herbicide usage volume was also available. It will issue its 2015 report in the third quarter this year.

THE DIFFERENCE SUSTAINABILITY CAN MAKE

These efforts are welcomed by fund managers, who increasingly subscribe to the notion that sustainable businesses make the best investment.

"The ability to manage (environmental, social and governance) risks is central to a company's ability to continue to operate," said Aberdeen Asset Management Asia corporate governance head David Smith.

"These issues are often termed non-financial, but can have very real financial implications. For example, if a firm produces drinks, how does that company access the water required for production? Does it control its water supply?"

To answer these questions, Aberdeen will try to meet a company's management at least twice a year. "Unless we're totally happy on (these) issues, we don't invest," Mr Smith added.

In line with that stance, Aberdeen does not invest in Alibaba, regional managing director Hugh Young previously told The Straits Times, due to discomfort over a perceived lack of governance disclosure.

The London- and Frankfurt-based Arabesque Asset Management has taken this principle even further and made sustainability the definitive feature of its portfolio as it believes it "shows you the DNA of a company and helps us pick the stocks that outperform the benchmark", said Mr Andreas Feiner, who heads Arabesque's ESG research and advisory unit.

That selection process entails putting a company through a rigorous assessment based on more than 200 parameters under 12 categories. Arabesque will then assign a proprietary score to decide whether a company goes into its portfolio and how much capital should be allocated to it.

"Our methods have led us to rule out companies such as Volkswagen and Toshiba, which eventually turned out to be the right decision," Mr Feiner said.

Last year, Volkswagen was found to have cheated on emission tests in the United States while Toshiba was rocked by an accounting scandal.

At the other end of the spectrum, Arabesque has found plenty of jewels, including several in Singapore. It gave CapitaLand a score of 95 out of 100 for its efforts on environmental, social and governance while rating Singapore Exchange 89 and Keppel Corp 77.

The quantitative approach of building its portfolio around sustainability has in turn rewarded Arabesque, which manages assets of around US$50 million (S$67 million).

"We have found the difference in returns to be around 1 to 1.5 per cent per annum - significant enough for our clients to cover the fees, generate extra returns and, at the same time, align themselves with the world of sustainable investment," Mr Feiner added.

PARADIGM SHIFT

Yet even though the case for sustainability is strong, not everyone here is enthusiastic about the new reporting requirements.

Sustainability is clearly important but the reports are not likely to show anything other than boilerplate statements, said renowned Singapore-based investor Jim Rogers.

"Sure, I will not want to invest in a company that isn't sustainable; it's something that a savvy investor needs to know anyway. But if you don't, I doubt you will ever hear any company report that it's bribing officials in Africa or not treating its employees right.

"Maybe a company will do that, but I'm really sceptical. From what I know so far, it sounds to me more like window-dressing and an unnecessary burden to companies."

This sentiment was echoed by some listed companies that have limited resources or are more concerned with keeping their noses above water.

A China-focused, Catalist-listed property firm, which declined to be named, sees sustainability reporting as a drag at this point as it is trying to steer its struggling business back to growth.

"We are already having difficulty trying to get basic stuff like occupancy data from the China side. Now, imagine how challenging it will be if we have to find out how the building materials are sourced. The amount of effort and time involved is no joke," its chief executive said.

"The preparation will be a distraction to us. We're already in survival mode, so sustainability reporting is my last priority now."

Mr Chan said the comply-or-explain requirement means that companies will at least have a choice: "If a company really doesn't think the report is worth the time, it will just have to justify that decision."

Mr Feiner, however, stressed that the SGX is on the right track with its latest initiative.

"Hopefully, five years down the road, sustainability reporting will become a culture where investors are so used to seeing ESG issues addressed that companies can no longer selectively disclose such information."

He added: "There is always a way to make something cooler, stronger, more effective. But to summit Mount Everest, you have to first reach the base camp. That's what we are doing now."

Just as importantly, sustainability reporting is in essence not unlike the other regulatory initiatives Singapore has pushed, such as last month's commitment to the Organisation for Economic Cooperation and Development anti-tax-avoidance framework.

It confirms Singapore's status as a developed market that is fully in sync with global standards and narratives. And if doing so can empower investors in the process, all the better.