Investor Guide to Reading Sustainability Reports

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SGX has made it mandatory for listed companies to produce a sustainability report, which is a report on the ESG factors affecting the company and how a company manages these factors.

Introduction

What are ESG factors?

Environmental factors are mainly those to do with climate change, pollution, water scarcity, use of non-renewable resources, disposal of waste, and loss of biodiversity.

Social issues are those to do with corruption, labour relations, talent retention, succession planning, staff training, health and safety, diversity, non-discrimination, child and forced labour across supply chains, relationships with local communities, and other stakeholders. In certain circumstances, quality of produce/service provided to customers could be included.

Governance issues have to do with oversight of ESG issues, how stakeholder interests are balanced at the Board level, and traditional corporate governance.

Environmental Social Governance A firm’s performance as a steward of the

natural environment

Its relationship with its employees, customers, suppliers

and community

Leadership, oversight, policies and practices

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All companies must produce a sustainability report each year. The sustainability report may or may not be included in the company’s Annual Report. If not, a standalone sustainability report will be produced, and the company will provide a summary in the Annual Report. Both reports should be read together as they refer to the same reporting period. Companies have up to 12 months from the end of the financial year to produce their first sustainability report. Subsequent sustainability reports must be produced within 5 months from the end of the financial year.

If you can’t find a company’s sustainability report, contact the Investor Relations department of the company. The contact details are normally found at the company’s website.

Want to know more about a firm’s sustainability practices? Here’s what you can do:

A good ESG profile indicates sustainability; it also encourages sustainability disclosure.

Request for the sustainability report

Look on the company’s website

Ask questions at AGMs

The report must contain the five primary components as follows:

SGX has also provided A Guide to Sustainability Reporting which describes what companies must cover in their sustainability report. Learn more: https://bit.ly/2qk1IQi

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Climate Change and Sustainability Reporting

In considering Environment in ESG, be aware of climate change which is a global issue with long term implications.

Did you know that the following sectors have been identified by the international Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD) as the likeliest to be impacted financially by climate change?

¾ Energy¾ Transportation¾ Materials and construction¾ Agriculture and forestry¾ Financial mainly banks, insurance companies, asset managers and asset owners

SGX does not yet require listed companies to report on climate change and its impact on business. But some companies may include climate change if its impact is material to their businesses.

Learn more about the TCFD’s recommended disclosures for companies: https://www.tcfdhub.org/

Do remember that risks of climate change are physical in terms of damage to buildings, infrastructure, agricultural land etc, as well as transitional in terms of regulations and taxes, technology change, economic supply, and demand changes.

Climate change may also present opportunities to companies such as alternative energy like solar and wind energy, and processes and products that improve energy and water efficiency.

1. Sustainability reports provide information on how businesses are affected by the environment and society and in turn, how businesses affect the environment and society. Knowing these ESG considerations through reading the sustainability reports helps the investor develop a more comprehensive view of the company’s prospects.

2. Companies which produce sustainability reports often enjoy better market value.

Why should investors care about sustainability reports?

A 2017 study of SGX-listed companies has suggested that sustainability reporting is positively related to the firm’s market value. This relationship was found to be independent of sector or firm status such as government-linked companies and family businesses. (Source: Loh, Thomas and Wang, 2017)

Similarly, a study by the London Business School and Harvard Business School, found that over a period of 18 years, companies that embraced sustainability significantly outperformed those that didn’t in terms of market returns. They also performed better in terms of return-on-equity (ROE) and return-on-assets (ROA). The authors concluded that the excess returns could have a relationship with companies being more proactive, more transparent, and more accountable in the way they engage with their stakeholders.

Source: https://hbs.me/2IDqVzU

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High: High sustainability companies are those that voluntarily adopted sustainability policies by 1993

Low: Low sustainability companies are those that adopted almost no sustainability policy

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3. Good management of ESG factors can result in lower cost of capital and better operational performance. Ultimately, companies with good sustainability policies achieve better stock market performance, according to 80% of global studies (Source: University of Oxford and Arabesque Asset Management Ltd, 2015).

4. Poor management of ESG factors can hurt a company’s reputation and brand, ultimately affecting business and financial performance.

For example:¾ A food company forced to cease operations of an outlet for 2 weeks due to unhygienic conditions. ¾ A construction company had to exit from a contract before project completion due to poor workplace safety as a

structure the company had been working on had collapsed, killing one worker and injuring several others. ¾ Another construction company was fined $130,000 for multiple safety lapses.

5. Governments all over the world, including in Singapore, are introducing policies on ESG that affect businesses and companies.

For example:Regulations on Climate ChangeFrom 2019, a carbon tax of $5 per tonne of Greenhouse Gas (GHG) emissions will be applied to large emitters upstream, e.g. power stations and other large industrial facilities that directly emit 25,000 tonnes or more of carbon dioxide equivalents. Emitters of 2,000 tonnes or more will be required to report on their emissions annually.

Regulations on WasteIn 2014, the Environmental Public Health Act was amended to effect the mandatory reporting of waste data and submission of waste reduction plans for large commercial premises. By the end of 2020, firms that use packaging – from supermarkets to importers – must produce reports on the packaging in their products, as well as their packaging waste reduction plans. A mandatory electrical and electronic waste management system will also be implemented by 2021.

6. Customers and employees care about how ESG factors are managed. For example, more than half of Singapore consumers prefer sustainable brands as they believe businesses have a responsibility to prevent environmental damage (Source: YouGov, 2018). There is also a growing desire among Singapore consumers to verify the sustainability credentials of the products they buy (Source: The Business Times, 2017). In a 2013 survey of 750 employees across industries in Brazil, China, India, Germany, the UK, and the US, roughly two-thirds of respondents said they care more about sustainability now than three years ago, with many saying sustainable business is extremely important to them (Source: Bain & Company, 2013). Ultimately, the reactions of customers and employees will affect the performance of the company.

7. Many investors care about how ESG factors are managed. These investors use ESG information as an indication of the quality of management. Institutional investors representing US$59 trillion of assets from over 50 countries have committed to apply the United Nations-supported Principles for Responsible Investment – which are largely to do with ESG factors – in the belief that these issues can affect the performance of investment portfolios.

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1. What are the material ESG factors and how are they important to the company. Knowing this increases your understanding of what risks the company faces and the company’s disclosure about

related policies and processes will show you how the company is managing ESG risks and opportunities.

The omission or misstatement of these risks or opportunities could influence your decisions. For example, in the real estate sector, health and safety, energy use, water use and anti-corruption are likely to be key material issues. For the agriculture sector, product traceability and human rights are likely to also be material.

2. How the targets and performance compare against those from the previous year, or the expected targets and performance from year to year. This will give you an ongoing view of the company and build up your understanding of ESG in relation to its performance and strategies. It will be even better if the company provides short, medium and long term strategy, targets and metrics. Explanations of over- and under-performance will also provide indications of how forthright and transparent the company is.

3. What the Board’s account says it has done with regard to ESG. This must be distinct from the actions of management and the rest of the company, and is an indication of the amount of leadership support for ESG-related opportunities and risks and how this translates down the management chain. Do see if the management of ESG risk is integrated with other risks faced by the company as part of its disclosure on the overall risk management of the company.

4. How ESG risks and opportunities fit in with the rest of the company’s businesses to produce financial returns. Look for what the company discloses about the financial impacts of ESG actions. They may affect items such as investment, capital and cash flow.

5. How sustainability of the company’s businesses goes beyond its direct operations. Do take into account the sustainability of the company’s value chain, from suppliers through to its customers. Look for information about the value chain to better understand the company’s present and future prospects. Changes in the value chain may have implications for developments in the future.

6. Do compare your company’s report with those of other companies in the same sector. Companies from the same economic sector are likely to face many similar risks and opportunities and those to do with ESG factors should be covered in the sustainability report. But do remember that individual companies may face specific factors in addition to industry similarities.

7. Do pay attention to metrics published. They are indicators of what the company is tracking in managing its material ESG factors. Time series data provide

insights. Usage levels of resources such as energy and water, emissions such as individual Greenhouse Gases (GHG), waste treatment, level of Green Mark sustainable awards in the building industry, and licences held are important metrics in various individual industries. Occasional awards received such as “Employer of the Year”, are also indicative of how the company is managing the Social element of ESG.

What should you look out for in a sustainability report?

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1. What are the material ESG factors affecting your peers which the company does not consider as material? Why?

2. What are your poorly-performing ESG factors and how do you plan to improve or manage them?

3. What ESG factors are you not reporting or not managing which are important for the company or sector?

4. How do you compare with your peers and whole sector in terms of management of ESG factors?

5. How much are you spending or investing in managing ESG factors versus financial or other benefit(s) you expect from these expenditures or investments?

Are you an investor in sectors with big ESG impact? Here are some additional questions you can ask:

Agri-commodity companies: How are deforestation and land-clearing managed? Manufacturing companies: How are leaks and spills managed?Construction or engineering companies: What are the health and safety records like?

Others:What is the staff retention rate and how do you manage carbon emissions?

Five questions on sustainability you can ask at the AGM

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