Companies should focus on 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.
Why is disclosing relevant information on environmental, social and governance performance important to investors? 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.
This article was written by Trucost as part of our work with the Singapore Stock Exchange to help listed companies prepare for sustainability reporting requirements.