A closer look at Singapore’s mandatory corporate ESG disclosures and associated legal risks
Joseph Chun, Tan Wei Shyan and Joseph Tay of Shook Lin & Bok explain the commercial and legal controls in place for Singapore’s businesses as they make more ESG disclosures and claims
Corporates in Singapore are increasingly under pressure from regulators, investors, customers, and other stakeholders to make environmental, social and governance (ESG)-related disclosures. This article offers an overview of the mandatory ESG disclosures in Singapore and highlights the potential legal pitfalls that corporates should look out for.
Singapore Exchange (SGX) introduced sustainability reporting on a ‘comply-or-explain’ basis to its listing rules in June 2016. These reports are intended to complement its listed issuers’ financial reporting, by showing how their material ESG risks and opportunities are being managed, thereby enabling a more holistic assessment of the issuer’s financial prospects and quality of management.
SGX explained that increasingly, investors are expecting that issuers fulfil their obligations of repayment and returns on investment in a responsible and sustainable manner. Compliance with the listing rules is enforceable through the administrative power of SGX, and through court order.
All SGX-listed issuers must, beginning with the financial year ending on, or after 2017, prepare and publish a sustainability report yearly on the following primary components, on a comply-or-explain basis. The primary components are:
The material ESG factors in the context of the issuer’s business and value chain that contribute to its product or service that act as barriers or enablers to achieving its business goals in the short, medium, and long term;
Policies, practices and performance in relation to the ESG factors, and performance in the context of previously disclosed targets;
Targets for the forthcoming year in relation to each ESG factor;
An appropriate (for its industry and business model) generally-accepted sustainability reporting framework or frameworks to guide reporting and disclosure; and
A board statement that the board has considered sustainability issues as part of its strategic formulation, determined the material ESG factors, and overseen the management and monitoring of these factors.
SGX has also stressed that sustainability reporting does not detract from the issuer’s continuing obligation under the listing rules to disclose any information that would be likely to materially affect the price or value of its securities. The intentional or reckless breach of this continuing obligation to disclose may result in criminal liability or alternatively civil penalties under the Securities and Futures Act (SFA). Breach of the obligation may in certain cases also result in civil liability to pay compensation under the SFA.
SGX will be consulting in 2021 on enhancements to its sustainability reporting guidelines, including climate-related reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The recommendations are that organisations disclose:
Their climate-related governance;
The actual and potential impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning;
How climate-related risks are identified, assessed and managed; and
Metrics and targets to assess and manage relevant climate-related risks and opportunities.
Noting how environmental risks, including comprising physical risks and transition risks can translate into financial risks for financial institutions (FIs), the Monetary Authority of Singapore (MAS), issued its ‘Guidelines on Environmental Risk Management for FIs’ in December 2020. Its aim is to enhance the FIs’ resilience to and management of environmental risk through setting out sound risk management practices.
“ESG statements should be supported by fact or data and be accurate and complete”
The guidelines apply to all banks, merchant banks and finance companies; fund management companies and real estate investment trust managers; and insurers. These FIs are expected to, at least on an annual basis, publicly disclose its approach to managing environmental risk in a manner that is clear and meaningful to its stakeholders, in accordance with well-regarded international reporting frameworks, such as the TCFD’s recommended framework.
FIs have been given a transition period of 18 months to implement the guidelines. Breach of MAS guidelines generally do not result in criminal or civil penalties; nevertheless, MAS has stated that how well guidelines are observed may have an impact on its overall risk assessment of an institution or person. MAS also has the power to take stronger action to ensure compliance, such as issuing directives with the force of law.
MAS will be consulting the financial sector in 2021 on mandatory climate-related disclosures against a single, internationally aligned standard.
Subject to certain exemptions, all companies incorporated under the Companies Act (CA) must prepare financial statements. The directors must present the financial statements at every annual general meeting of a company. The financial statements must also be sent to the company’s shareholders.
The financial statements must give a true and fair view of the state of the company’s financial affairs and its profit and loss for the accounting period in question, i.e. the accounts must not be misleading to shareholders or other interested persons; and comply with accounting standards.
Accounting standards in Singapore are based on the standards (IFRS Standards) issued by the International Accounting Standards Board, the independent standard-setting body of the International Financial Reporting Standards (IFRS) Foundation. If the accounts do not present a true and fair view of the state of affairs of the company or do not comply with the accounting standards, the directors may be criminally liable under the CA.
In November 2020, the IFRS Foundation published ‘educational material’ stating that while the IFRS Standards do not specifically address climate-related risks, companies may need to disclose climate-related information relevant to an understanding of any of the financial statements. Companies must consider climate-related matters in applying IFRS Standards when the effect of those matters is material in the context of the financial statements taken as a whole, i.e. if omitting, misstating or obscuring such matters could reasonably be expected to influence decisions that primary users of financial statements make on the basis of those financial statements.
Climate-related matters may also be relevant when applying specific principles in the IFRS Standards, such as changes to liabilities due to changes in levies, regulations, restructuring to redesign products or services, or contracts becoming onerous; changes in expected credit losses; and changes to the fair value measurements of assets and liabilities, or disclosures about such measurements.
The IASB position follows similar guidance from the Australian Accounting Standards Board and Auditing and Assurance Standards Board and has been endorsed by the UK Financial Reporting Council in its report on its climate thematic review.
Engaging in an unfair practice in relation to a consumer transaction may under the Consumer Protection (Fair Trading) Act (CPFTA) attract regulatory action by the Competition and Consumer Commission of Singapore against the supplier through a court declaration or injunction; and/or civil liability including restitution of money, damages for loss or damage suffered, order for specific performance, or variation of contract.
“companies must consider climate-related matters in applying IFRS Standards”
The CPFTA specifies that omitting to provide to a consumer, any information that a supplier knows or ought reasonably to know would affect the decision of a consumer to enter into a consumer transaction is an unfair practice. However, to determine whether a person has engaged in an unfair practice, the reasonableness of the person’s action in the specific circumstances must also be considered.
With reports of rising ‘responsible consumerism’ in Singapore, there is an increasing risk that a supplier who with actual or constructive knowledge of the materiality of certain ESG information to a consumer, omits to provide the information to the consumer, may be found to have acted unreasonably in the circumstances and thus engaged in an unfair practice.
Liability for misstatements
False and misleading statements
Potential liability may arise from making ESG-related disclosures that are materially misleading or false, regardless of whether such disclosures are mandatory or made voluntarily.
Under the SFA, a person who makes a statement or disseminates information that is false or misleading in a material particular and is likely to induce other persons to subscribe for securities; induce the sale or purchase of securities; or have the effect of raising, lowering, maintaining or stabilising the market price of securities, is guilty of an offence if he does so without care as to the truth or otherwise of the statement or information, or with actual or constructive knowledge that the statement or information is false or misleading.
Separately, and also apart from contractual or tortious liability, the person may also be subject to statutory civil liability in favour of a claimant if the statement or information was made or disseminated in connection with the dealing of a security, and the claimant, in reliance of the statement or information, had been dealing in the security and suffered a loss.
SGX’s view on materiality for the purpose of sustainability reporting is that an ESG factor counts as material to an issuer if in the context of its business’ internal operations and value chain, the factor and will act as a barrier or enabler to achieving business goals in the short, medium and long term. Generally, what is material in sustainability reporting would also be considered material in financial terms, if not in the immediate period, then over time. The omission or misstatement of these risks or opportunities could influence the decisions of investors.
There already exists ESG-minded investor networks such as the UN-backed Principles for Responsible Investment, which comprises some 4,000 asset owners, asset managers, and service providers around the world, including some of the world’s largest investment managers such as BlackRock, The Vanguard Group, and State Street Global Advisors, and 46 Singapore-located entities, committed to incorporating ESG factors into their investment and ownership decisions.
Apart from the potential financial materiality of ESG factors, a significant number of investment managers are mandated to invest in (and/or divest) shares of companies that meet designated ESG criteria, and/or divest in the shares of a companies that fail to meet such criteria.
There is therefore a prima facie case that making or disseminating false or misleading ESG statements or information about a company could potentially constitute an offence under SFA. While some leeway may be given to aspirational generalisations and vague, subjective assertions, such disclosures may not be sufficient to meet the expectations of regulators and investors.
As such, ESG statements should be supported by fact or data and be accurate and complete, and relevant. Forward-looking statements should not be made unless there is a reasonable basis for such statements. They should where possible, be properly qualified with disclaimers, hedges, or warnings that prominently and explicitly cover the statements.
Disclosures or statements must not mislead, e.g. due to the failure to tell the whole truth about an issue raised by an initial statement or disclosure. A statement could also be misleading if it is susceptible to alternative interpretations by a reasonable investor. The disclosure of ESG metrics, ratings or reporting methodologies that are irrelevant to the company could also be misleading to an investor.
Finally, all ESG disclosures, whether mandatory or not, should be consistent across different types and different platforms.
Under the CPFTA, the doing or saying anything, or omitting to do or say anything, that as a result might reasonably deceive or mislead a consumer, or the making of a false claim, in relation to a consumer transaction is also an unfair practice.
The Advertising Standards Authority of Singapore’s voluntary Singapore Code of Advertising Practice may offer some basic guidance on what could amount to engaging in an unfair practice. In respect of environmental claims, it calls on the advertising industry to explain clearly the basis of a claim; avoid overly broad unsubstantiated claims; avoid claims of universal scientific acceptance if this is not the case; ensure claims are relevant to the product; and avoid extravagant language or unclear scientific terms.
Guidance from other jurisdictions additionally suggest that sustainability claims must consider the full life cycle of a product; and inter-product or service comparisons must be fair and meaningful.
ESG disclosures are increasingly legally and commercially necessary, but companies must carefully consider what and how to disclose. By managing the pitfalls well, companies can turn disclosures into opportunities to create value in alignment with stakeholders’ rising expectations.
Shook Lin & Bok
T: +65 6439 0759
Joseph Chun is a partner in the ESG practice of Shook Lin & Bok. He specialises in environmental law, and advises on compliance with regulatory and voluntary standards, and environmental legal risks in corporate actions and transactions.
Joseph is concurrently an adjunct associate professor at the Faculty of Law in the National University of Singapore (NUS), where he teaches environmental law. He has spoken and written widely on the subject, including a co-authored textbook on Singapore Environmental Law, published in 2019.
Joseph is a graduate of NUS and has a PhD in law from University College London (UCL). He is admitted as an advocate and solicitor in Singapore, and as a solicitor in England and Wales.
Tan Wei Shyan
Shook Lin & Bok
T: +65 6439 0792
Tan Wei Shyan is a partner at Shook Lin & Bok. He focuses on matters including corporate finance and securities transactions, IPOs, dual/secondary listings, strategic investments, corporate restructuring, fund-raising exercises and securities regulation compliance by public listed companies.
Tan Wei is also active in commercial transactions covering various areas of corporate practice, in particular joint ventures and acquisitions and disposals of corporate assets. He has also advised on matters relating to ESG compliance, disclosure and reporting.
Tan Wei is a graduate of the University of Exeter, and is admitted as an advocate and solicitor in Singapore.
Shook Lin & Bok
T: +65 6439 0621
Joseph Tay is a partner at Shook Lin & Bok. He specialises in litigation and dispute resolution, international arbitration, and construction and projects.
Joseph has experience in an extensive range of legal disputes including matters relating to financial services and securities, infrastructure and projects, restructuring and insolvency, and commercial fraud. He also advises on ESG matters, and has represented leading banking and financial institutions, multinational corporations, conglomerates, local and foreign listed corporations, as well as real estate investment trusts.
Joseph is a graduate of NUS and is admitted as an advocate and solicitor in Singapore.