What ‘green’ means: the role of disclosure in sustainable finance in Singapore
Allen & Gledhill, Singapore
Alexander Fong Yi
Allen & Gledhill, Singapore
This article focuses on the objectives and effects of environmental, social and governance (ESG) disclosure, and its use by the Singapore Exchange (SGX) and the Monetary Authority of Singapore (MAS), Singapore’s central bank and financial supervisory authority, as a calibrated regulatory tool in the sustainable finance sector.
At the outset, the Singapore regulatory approach, as with many leading global financial centres, does not begin and end with compelling disclosure. Disclosure requirements sit alongside other ‘levers’, which, taken together, are designed to address climate change and other social and governance issues holistically. These include guidelines for board and senior management to consider environmental factors (ie, governance and strategy) and undertaking client risk assessments, among others.
Beyond the regulatory approach of MAS in particular, Singapore has taken a ‘whole-of-nation’ and ‘whole-of-government’ approach to tackling climate change and sustainability. This includes the implementation of the Singapore Green Plan 2030, including, inter alia, the requirement for cleaner energy car registration, increasing electric vehicle charging points, a progressive increase in carbon taxes under the Carbon Pricing Act, and mandating energy management practices under the Energy Conservation Act.
It is within this context that disclosure plays a role in sustainable finance. At least in theory, disclosure requirements assist in facilitating accurate information in the marketplace, by ensuring that each participant can make decisions that are as informed and sustainable as possible.
As a corollary, disclosure requirements serve MAS’ policy objective to protect consumers. In relation to ESG disclosures, a chief objective of disclosure requirements is to provide consumer protection from ‘greenwashing’, or a misrepresentation as to the ‘ESG’ nature of a particular financial product.
Accordingly, the fundamental question, which underlies the issue of what a 'good' disclosure requirement is, is whether the disclosure facilitates access to or otherwise promotes accurate information in the green marketplace. If it does, the disclosure can be said to be meaningful. If it does not or goes further than is necessary without a commensurate effect on the promotion of accurate information, the disclosure may be described as creating an unnecessary regulatory burden, compliance with which may be costly for participants in sustainable finance markets.
To be clear, this article does not consider the specific disclosure requirements that apply as a matter of general Singapore company law, or those arising out of MAS’ information gathering powers applicable to specific regulated businesses (eg, licensed banks, insurers, or certain capital markets intermediaries, such as securities broker-dealers).
Existing disclosure mechanisms and recent developments
Mandatory disclosures applicable to SGX-listed issuers
Following a public consultation on a mandatory disclosure 'roadmap' in 2021, all SGX-listed issuers must prepare, on a 'comply or explain' basis, a sustainability report for financial years commencing on 1 January 2022.
The primary components of a sustainability report are comprehensive. They include: (1) identification of material ESG factors; (2) climate-related disclosures in keeping with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures ('TCFD') recommendations; (3) policies and targets with quantitative and qualitative information on identified material ESG factors; (4) a sustainability reporting framework suited to its industry and business model; and (5) a board statement and governance structure for sustainability, consistent with board and senior management’s roles under the existing Code of Corporate Governance.
On 1 January 2022, the SGX Listing Rules were also amended to require, inter alia, the requirement to describe the issuer’s board diversity policy (addressing gender, skills and experience, and other relevant aspects of diversity) in its annual report, and details such as diversity targets, plans, timelines, progress and a description of how the combination of skills, talent, experience and diversity of its directors serves the needs and plans of the issuer.
The disclosure of the above information is critical in facilitating the circulation of more accurate information in the public markets in relation to the businesses of the issuers, their commitment to ESG and the efficacy of their operations in managing ESG risks.
Having said that, in its Response Paper on Climate and Diversity – the Way Forward, SGX noted that respondents raised challenges related to resources and costs associated with sustainability reporting, while others felt that the roadmap did not go far enough. Following on from this, to strike a balance between the cost of disclosure and the development of information standards in sustainable finance, a phased approach would 'allow issuers to improve their reporting in a progressive manner'. In particular, a sustainability report will be fully mandatory (ie, not on a 'comply or explain' basis) for issuers in certain industries in the years to come – for financial, agriculture, food and forest products, and energy, from 1 January 2023; and for the materials and buildings, and transportation industries, from 1 January 2024.
In connection with this, in order to mitigate the cost of disclosure, it is vital to have systems, processes and efficient digital infrastructure at the industry level in order to support transparency and the sharing of information. On 12 September 2022, as part of 'Project Greenprint' – a series of initiatives to facilitate access to clear and reliable ESG data – SGX and MAS announced the setting up of the 'ESGenome' disclosure data portal, to allow investors to access ESG-related data and information as reported by issuers, in accordance with aligned metrics and relevant disclosure requirements.
Crucially, it was highlighted in the announcement for the portal that (1) disclosures may be made across more than 3,000 metrics; (2) inputs can be mapped across selected standards and frameworks to cater to different investor requirements; and (3) a sustainability report can be automatically generated from the data inputs. These functionalities not only cut costs for the issuer, but also perform the broader substantive function of facilitating accurate information by making ESG inputs intelligible and accessible to investors.
General disclosure guide for financial institutions
Quite apart from the specific disclosures applicable to SGX-listed issuers, it is also important to consider the implementation of disclosures on financial institutions as a whole. In May 2021, the Green Finance Industry Taskforce (GFIT), which comprises representatives from financial institutions, corporates, non-governmental organisations, and financial industry associations, issued a detailed implementation guide for climate-related disclosures by financial institutions, as well as a Financial Institutions Climate-Related Disclosure Document ('FCDD'). While the implementation guide sets out general best practices that are aligned with TCFD recommendations, focusing on board and management oversight, critical policies and procedures for environmental risk management, risk identification and assessment criteria, and monitoring, the FCCD highlights environmental disclosures best practices, particularly those applicable to banks, assets managers, and insurance companies. In particular, the best practice disclosures prove useful in their granularity; for instance, in the context of TCFD’s recommended disclosure of the resilience of a bank’s climate strategy, the best practice disclosure of Société Générale recommends an 'evaluation of portfolio allocation against 2°C scenarios, including climate scenario and time horizon used', and Deutsche Bank recommends describing the 'impact on [the] bank’s balance sheet quality'.
Specific disclosure guidelines for banks, asset managers and insurers
Banks, asset managers, and insurers in particular are subject to the Guidelines on Environmental Risk Management for Banks, Asset Managers and Insurers (each issued on 8 December 2020) (the ‘Guidelines’). While these Guidelines do not technically carry the force of law, compliance with these Guidelines is considered by MAS in its ongoing supervision of the entity.
In specific relation to disclosure, the Guidelines provide that financial institutions should make 'clear and meaningful' disclosure, with reference to well-regarded international reporting frameworks such as the TCFD, at least annually. In January 2021, GFIT published a Handbook on Implementing Environmental Risk Management (the ‘ERM Handbook’). The ERM Handbook contains best practices to complement the Guidelines, including case studies of effective disclosures.
In relation to the TCFD framework, the ERM Handbook acknowledges that: ‘Currently only partial disclosure across all four TCFD categories of governance, strategy, risk management and metrics/targets are the norm, with limited disclosure on potential financial impacts and little detail provided on the resilience of business strategies to different plausible future climate states. Companies should be prepared to start with qualitative disclosures with specific focus on integration with existing strategy and governance frameworks, and add complexity over time, signalling their intention to broaden and deepen the decision-useful information they provide as the organisation’s understanding of climate change risk evolves and new inputs and processes are developed. Over time, increasing amounts of quantitative information should be added to disclosures to complement qualitative disclosures.’ Accordingly, while adoption of the TCFD framework as a whole is not mandatory as a matter of Singapore law, there is an expectation that meaningful disclosures, in particular relating to business strategies and governance, are to be furnished by financial institutions.
Aside from the initiatives of MAS and SGX, the Association of Banks in Singapore (ABS) has produced Guidelines on Responsible Financing, which require members to strictly comply with ESG disclosures in the financing process, as well as principles of financing for green bond issuance. On a related note, as part of Project Greenprint, an ESG registry was launched in May 2022, which enables banks to access green certifications through distributed ledger technology, in order to inform their sustainable financing decisions.
As alluded to above, the general and specific disclosures applicable to financial institutions at large (apart from SGX-listed issuers), are not currently mandatory. Accordingly, the calibrated approach taken in respect of financial institutions as a whole is to provide for such disclosure by way of guidelines (which do not strictly have force of law), as opposed to legislation. This is coupled with regulator - and industry - driven initiatives where best practices are being worked out and businesses are settling into common standards. In other words, in addition to the substantive function performed by the act of disclosure (which is most effective when compelled), non-legally binding guidelines on disclosure also play a role in industry norm-setting, while avoiding the regulatory burdens that come with mandatory disclosure.
MAS has publicly stated that: ‘MAS will consult on introducing mandatory disclosure requirements for financial institutions, as soon as a global baseline sustainability reporting standard is established by the International Sustainability Standards Board (ISSB), as expected by the end of '.
Further, in the vein of increasing the efficacy of digital infrastructure at the industry level to support an informed sustainable finance sector, a green print marketplace (the ‘Greenprint Marketplace’) will be introduced as part of Project Greenprint in partnership with API Exchange (‘APIX'), a global, open-architecture platform acting as a centralised, secure API gateway. The Greenprint Marketplace will connect green technology providers to investors, financial institutions and corporates to facilitate partnerships and investments. Separately, a 'data orchestrator' platform will be piloted to enable new data insights to be generated through aggregated data analytics, to better aid investment and financing decisions.
Finally, MAS issued a circular on disclosure and reporting guidelines for retail ESG funds, which will come into effect on 1 January 2023, to prevent greenwashing by requiring substantiation of the 'ESG' label, and will enable retail investors to have a better grasp of the funds in which they invest. The circular requires, among other things, ongoing disclosure of (1) the fund’s investment strategy, including risks and limitations; and (2) criteria and metrics for investment selection.
The existing and anticipated disclosure frameworks in Singapore are aptly geared toward identifying key ESG metrics and compelling their disclosure in a manner that facilitates the formation of common standards and access to perfect information by mitigating greenwashing and providing the digital infrastructure necessary to support this efficient disclosure, in a sustainable manner moving forward.
 See, for instance, the Guidelines on Environmental Risk Management for Banks, Guidelines on Environmental Risk Management for Asset Managers, and Guidelines on Environmental Risk Management for Insurers.
 www.mas.gov.sg/regulation/codes/code-of-corporate-governance accessed 16 November 2022.
 https://abs.org.sg/docs/library/financial-institutions-climate-related-disclosure-document.pdf accessed 16 November 2022.
 See www.mas.gov.sg/-/media/MAS-Media-Library/publications/sustainability-report/2022/MAS-Sustainability-Report-2021_2022.pdf?la=en&hash=4B850000BE2CE8279A1913D29763C0370E3B8E70accessed 16 November 2022.
 CFC 02/2022 Disclosure and Reporting Guidelines for Retail ESG Funds, issued on 28 July 2022: www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Securities-Futures-and-Fund-Management/Regulations-Guidance-and-Licensing/Circulars/CFC-02-2022-Disclosure-and-Reporting-Guidelines-for-Retail-ESG-Funds.pdf accessed 16 November 2022.