A new dawn for ESG regulation in Singapore?

September 2023  |  SPOTLIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

September 2023 Issue

Singapore’s regulators are taking important steps toward advancing environmental, social and governance (ESG) goals in the corporate sphere. In June 2023, the Monetary Authority of Singapore (MAS) launched a public consultation on a proposed code of conduct for the regulation of the ESG rating and data product industry.

In July 2023, the Accounting and Corporate Regulatory Authority (ACRA) and the Singapore Exchange Regulation (SGX RegCo) jointly began a public consultation on proposed measures aimed at requiring more climate-related disclosures from companies. This article provides an overview of these proposals and discusses their potential impact on the business landscape in Singapore.

MAS’s proposed code of conduct for ESG rating and data product providers

MAS, Singapore’s central bank, regulates financial institutions in the banking, capital markets, insurance and payments sectors. Acknowledging that the ESG rating and data product industry is at a nascent stage, and largely based on the recommendations of the International Organization of Securities Commissions (IOSCO), MAS has drafted a voluntary industry code of conduct (Code) for ESG rating and data product providers.

The Code is intended to cover best practices on governance, management of conflicts of interests, and transparency of methodologies and data sources. MAS’s stated objective for the Code is to enable investors to better understand transition risks and opportunities when allocating capital.

The Code is largely modelled on the good practices set out in IOSCO’s November 2022 ‘Call for Action’ paper. However, the Code includes additional requirements specifically drafted by MAS. For example, MAS intends to make more explicit a requirement that an ESG rating provider should not give assurances or guarantees of any particular ESG rating prior to making its ESG rating assessment.

In a similar vein, the Code also proposes to make explicit that for ESG ratings prepared on an issuer-paid basis, the ESG rating provider should not enter into contingent fee arrangements, i.e., an arrangement where the fee amount is determined by the outcome of a transaction, or the result of services provided by the ESG rating provider.

To combat greenwashing, in particular, MAS has proposed to enhance IOSCO’s good practices on transparency by explicitly requiring accurate disclosure of whether the ESG rating or data product considers ‘forward-looking elements’ such as the impact of the company on the external environment and society, its risk exposure and resilience to physical and transitional ESG risks, and its ESG risk mitigation and adaptation measures.

In the near term, MAS intends for the Code to be voluntary, in line with the approach taken by the Japan Financial Services Agency and the UK Financial Conduct Authority. MAS also intends for the Code to operate on a ‘comply or explain’ basis (which would only require compliance with the principles and best practices of the Code or to provide an explanation for non-compliance).

In the longer term, MAS is exploring the development of a legally binding regulatory regime for ESG rating providers. This would be similar to the existing licensing regime for providers of ‘capital markets services’ under the Securities and Futures Act 2001 of Singapore (SFA). This would legally require ESG rating providers to comply not only with the SFA, but also all relevant subsidiary legislation, regulations and notices made thereunder.

In our view, the Code will significantly impact the operations of businesses in the burgeoning ESG rating and data product industry. Compliance costs, in particular, are likely to increase. On the other hand, other financial market participants – especially those that deal with green loans and sustainability-linked loans (SLLs) – are likely to welcome the Code as the increased transparency should instil greater confidence in ESG ratings and data products available on the market.

It is important to note that MAS is currently only proposing for the Code to be voluntary and on a ‘comply or explain’ basis. This cautious approach is likely to keep the additional compliance costs at a minimum, retain a degree of flexibility, and thereby continue to afford ESG rating and data product providers the opportunity to continue to be viable.

ACRA and SGX RegCo’s consultation on climate reporting recommendations

The Singapore government has also recently focused on climate-related disclosures and climate change. Following the formation of the Sustainability Reporting Advisory Committee (SRAC) to advise on wider implementation of sustainability reporting, in July 2023 ACRA and SGX RegCo launched a public consultation on SRAC’s recommendations aimed at requiring more climate-related disclosures from companies.

Most notable among SRAC’s recommendations is a proposal to make climate reporting mandatory for issuers of equity securities listed on the Singapore Exchange (SGX) from 2025, and for large non-listed companies with annual revenues of at least S$1bn from 2027 (unless exempted). In contrast, currently only SGX-listed issuers in certain industries (financial, agriculture, food, forest products and energy) have been required to provide full Task Force on Climate-Related Financial Disclosures (TCFD) climate-related disclosures, and SGX-listed issuers in the materials and buildings and transportation industries will similarly be required to provide such climate-related disclosures in 2024.

As for the standards of disclosure, SRAC has recommended that Singapore’s rules align with existing international standards. For example, SRAC has proposed Singapore’s baseline climate-related disclosure requirements mirror the International Sustainability Standards Board (ISSB) standards – the ISSB is the sustainability disclosure standard-setting body of the IFRS Foundation (also known as the International Financial Reporting Standards Foundation). The ISSB standards build upon the TCFD recommendations and thus are intended to facilitate a ‘smoother transition’ for entities that already report based on the TCFD recommendations.

However, SRAC is also cognisant of the fact that some companies operate in jurisdictions with different reporting standards and that some companies may be tapping on funds from lenders that request the use of other climate reporting standards. Accordingly, SRAC recommends allowing disclosures to be made in accordance with other standards and frameworks in the same report if the applied standards and frameworks are prominently disclosed, and if the additional disclosure does not contradict or obscure the information required by the climate-related disclosures prescribed under Singapore law.

While the necessity of independent external assurance requirements on climate reporting continues to be controversial (even among regulators), SRAC has recommended the inclusion of external assurance requirements for scope 1 and scope 2 greenhouse gas (GHG) emissions. SRAC has focused on scope 1 and scope 2 GHG emissions as these are disclosures that SRAC considers to be “important to readers and [which] have well-established methodologies”. These limited external assurance requirements are proposed to kick in two years after the introduction of mandatory reporting. SRAC has also recommended that audit firms registered with ACRA and certification bodies accredited by the Singapore Accreditation Council be eligible to apply for registration as climate auditors.

Overall, SRAC’s recommendations represent a significant step toward acting on climate change. In particular, we anticipate that the inclusion of large non-listed companies under the new climate reporting regime is likely to receive significant pushback from the business community.

Conclusion

Investors are likely to welcome the increased transparency and accountability sought by MAS and SRAC. Corporates should recognise that clear disclosure requirements and a more regulated ESG rating industry will enable them to more clearly communicate potential ESG risks, including physical, transitional and reputational risks.

Harmonisation of standards will keep compliance costs at a minimum. By referencing IOSCO and the ISSB standards, Singapore’s regulators are strongly signalling that they are aware of the costs of a fragmented and complicated regulatory regime as well as the advantages of allowing companies to easily benchmark their performance against industry peers and identify areas for improvement.

Benjamin Gaw is a director at Drew & Napier LLC. He can be contacted on +65 6531 2393 or by email: benjamin.gaw@drewnapier.com.

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Benjamin Gaw

Drew & Napier LLC