ESG FACTS: Reporting what matters to investors

SGX-listed companies are assessing how best to comply with the new sustainability reporting requirement. In the first of a series of articles, Chaoni Huang, Trucost’s head of business development in Asia, explains why disclosing relevant information on environmental, social and governance performance is important to investors.

From 31 December 2017, all companies listed on the SGX will be required to publish a sustainability report on their environmental, social, and governance (ESG) performance or explain why they have not done so. For many, this will be the first time they have disclosed such information.

The SGX took the step in recognition of the global consensus among investors that climate change is a risk to the financial performance of companies. Some 120 investors with $10 trillion in assets under management have signed the Montréal Pledge, an agreement to disclose the carbon footprint of their portfolios. Investors worth $230 billion have signed up to the Portfolio Decarbonization Coalition to cut carbon emissions associated with investments. There are a growing number of legal requirements on investors in different regions to disclose information about how they are integrating and managing climate change risks in investment decision making.

To keep the global temperature increase below 2°C and adapt to the impacts of climate change, a transformation of our development patterns is needed to shift towards a more sustainable and resilient economy. An estimated annual investment of about US$2tn over the next 15 years is required to transform our energy system, preserve ecosystems and ensure sustainable water use. The private sector will be a key source of this funding, so deep and comparable disclosure on corporate ESG performance to underpin the development of innovative investment vehicles, from ESG indices and funds to green bonds, is essential.

This is driving investor demand for material and quantitative data and metrics to analyse the ESG risks and opportunities in their investments. Examples include checking the ‘two-degree alignment’ of companies in a portfolio with the carbon reduction pathway implied by the Paris climate change agreement, assessment of the carbon liabilities and water stress levels companies are exposed to in either direct operations or supply chains, and analysis of employee management practices in attracting and retaining talent.

To diversify your investor base and attract long-term capital, companies have to publish the right sustainability information – the information that responsible investors need. A common mistake is to disclose a lot of irrelevant information, creating a burden for the company and burying investors in paperwork; or disclose so little that it does not meet investors’ sustainable investing criteria.

Companies should focus on the material sustainability risks that threaten financial performance, as well as sustainability opportunities that offer competitive advantage. Companies should then set indicators and targets to measure performance and drive improvement in a way that is transparent and tied to business strategy.

Next time we will look in more detail at how your company should account for material sustainability issues…

About Trucost
Trucost helps companies and investors to achieve success by understanding environmental issues in business terms. Our data-driven insights enable organisatons to manage risks and identify opportunities for growth. We are the world’s leading expert in quantifying and valuing the environmental impacts of operations, supply chains, products and financial assets. By putting a monetary value on pollution and resource use, we integrate natural capital into business and invstments decisions. With offices in Europe, the US and Asia, Trucost works with businesses worldwide to increase revenues, improve communications, meet marketplace expectations and comply with regulatory requirements.

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