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Singapore-listed companies have made good progress in climate reporting but more can be done.
In brief
- Singapore-listed companies have progressed in climate reporting but there are opportunities to improve the depth and breadth of disclosures.
- External assurance on climate reports is crucial to help strengthen decarbonization efforts and address concerns over greenwashing and greenwishing.
- To improve climate reporting, companies should set specific metrics to measure and manage material climate risks and take other key actions.
The looming specter of climate change has compelled businesses worldwide to reassess their environmental impact and embrace sustainable practices. Investors are increasingly expecting companies to report on climate impact in a considered and consistent way, and regulators are doing their part in pushing for greater transparency and commitment on climate disclosures.
Singapore is no exception. The Singapore Exchange (SGX) has mandated climate reporting in listed companies’ sustainability reports on a “comply or explain” basis from financial year (FY) 2022. Singapore is among a growing number of Asia-Pacific jurisdictions that either already mandated climate reporting based on the Task Force on Climate-related Financial Disclosures (TCFD) for listed companies or are slated to do so in the coming years.
The imperative for consistency and comparability in climate reporting is also clearly growing. Issued by the International Sustainability Standards Board in June, the first two IFRS Sustainability Disclosure Standards — IFRS S1 and IFRS S2 — are expected to be integrated into Singapore’s reporting framework in the near future. IFRS S2 aligns with the TCFD recommendations, which means that issuers already prepared for TCFD implementation will be able to have a smoother transition to IFRS S2 reporting once it becomes mandatory in Singapore.
Underscoring the importance of climate reporting further, Singapore regulators are also exploring the possibility of requiring all listed companies to report climate-related disclosures from FY 2025 and large non-listed companies to do so from FY 2027. Therefore, climate disclosures are expected to become widely adopted soon and increasingly fundamental to corporate reporting and ultimately, corporate governance.
Quality matters
The regulatory push is certainly essential but only as effective as the quality of compliance in line with the spirit of the rule. An EY-CPA Australia report released in July on the current state of climate reporting among Singapore-listed companies revealed that while progress has been made on this front, there are still opportunities for improvement.
The report assessed the climate disclosures of 240 SGX-listed companies based on the four pillars of the TCFD recommendations: governance, strategy, risk management, and metrics and targets. It found that 65% of the companies started their climate-related disclosures in FY 2022.
In particular, 77% of companies in the agriculture, food and forest products industry, 88% in the energy industry and 75% in the financial industry initiated climate disclosures in FY 2022. Issuers in these sectors are mandated to do climate reporting in FY 2023 and many large-cap and mid-cap ones have led the way in this activity.
However, the report noted that many climate disclosures lacked depth and breadth. Only 10% of the 240 issuers sought external assurance on their climate reports.
External assurance is instrumental to the credibility of climate reports and expected to play a bigger role amid rising concerns over greenwashing and greenwishing. It can also help companies identify and address gaps in their climate reports, resulting in more robust disclosures and insights that can help them strengthen decarbonization efforts.
Without those frameworks, finance leaders are concerned about the risk implications of AI: 63% of respondents said they “have concerns about the risks of using AI in finance and reporting, from security threats to regulatory risk.” That’s barely changed from the 64% of respondents who said the same in the 2019 survey. At the same time, many finance leaders do not have complete trust in the output of these systems: 47% of respondents said, “the quality of the finance data produced by AI cannot be trusted in the same way as data from our usual finance systems.” While this is an improvement on the 55% recorded in 2019, it still means close to half of all finance leaders remain unsure.
It is clear that a lack of trust in AI outputs is an issue for a number of respondents. However, these reservations could be more of a reflection of the lack of understanding of how these systems work. An alternative view is that AI and machine learning can potentially increase the credibility and accuracy of insights rather than detract from them. This rigor is due to the fact they arrive at conclusions based on a larger number of data sets, rather than an individual probing a single set of data and potentially introducing their own biases into the equation. It is therefore likely that smart machines could undertake data-driven tasks with greater accuracy, consistency and time-efficiency than humans.
So the question becomes: how can finance functions build trust into the AI they use to drive insight? Without it, stakeholder confidence in the AI is likely to prove elusive. The starting point is for finance leaders to understand and map some of the new risks that AI brings and to use these insights to begin to create the right governance and control mechanisms. To build trust in the outputs, AI should be trained properly, with appropriate boundaries around it at first. Then, after it is put into production to identify and rectify any flaws, its performance should be continually monitored. It’s another new demand of finance leaders, whose evolving responsibilities are examined in this CFO Imperative series, which identifies critical answers and actions to help leaders reframe the future of their organizations.
Rethinking the future finance talent strategy
The impact of AI could also be profound for the people in the finance team and how CFOs think about the future talent strategy. In the survey, 64% of respondents said a wide range of core finance roles – such as financial reporting, accounting and financial control – could be significantly disrupted and changed as a result of advances in automation and AI. The function’s skills profile is also likely to change dramatically in the future to be more digitally focused. As shown below, cognitive computing skills could be the most in-demand, followed by technology delivery and digital transformation. And as shown below, respondents said that cognitive computing is the most important skill required both over the next 12 months and the next 3 years.
Exploiting the potential of AI also requires certain data analytics skills to examine and develop insights. The survey found respondents put significant emphasis on “analytical and data science skills” over the next 12 months, with 20% identifying it as one of the most in-demand skills. However, when respondents were asked about their outlook for the following three years, this dropped to 11%. This could indicate that finance leaders are confident their ongoing skills-building initiatives – from hiring data talent to building the data analytics skills of existing staff – will have made progress.
However, leaders could still face challenges in providing confidence that finance has the skills required for the future. One particularly difficult challenge could be finding talent possessing skills at the intersection of digital and finance. The top three challenges are:
- Competing for finance talent combining reporting and finance skills with technology acumen, including data science and cognitive computing
- Making sure skills and capabilities keep up with the accelerated pace of technology change
- Building an effective learning culture so people are able to constantly refresh and reinvigorate their skills
As the survey has shown, leaders are very clear on the challenges that stand in the way of securing the skills they are likely to require to provide a new future for reporting, from competing for prized talent to helping people embrace continuous learning. Designing a future talent strategy for the function could be important to earning the long-term loyalty and commitment of creative and talented finance professionals, while meeting the challenges of constant change and disruption ahead. Embedding the continuous learning mindset could require a change in culture for the function. The 2020 EY DNA of the CFO survey found that 71% of respondents said, “traditional mindsets” are slowing the modernization of the function, and 73% of respondents said “changing the culture” of the finance team is a major priority.
And, of course, finance leaders cannot forget changes to their own roles. Helene Siberg Wendin – EY Global FAAS Deputy Leader – believes that while there are, of course, companies in which CFOs largely pursue “traditional” responsibilities, that change is inevitable in the future as finance leaders drive a wider C-suite agenda. “Finance leaders have a broader network today,” she says. “They are paired with the CEO, almost like two horses running side by side. They are connected to HR and talent questions: what kind of people should the organization hire in the future, how do we balance onshore and offshore, and what impact could digitalization have on jobs? With more organizations having a chief digital officer, the CFO should understand the impact of industry disruption and how the organization could connect with consumers in the future. If you want to be seen as a CFO who is a front-runner, you should have a broader view and strong connections with other key stakeholders in the C-suite.”
Summary
AI offers a significant opportunity to transform reporting, but AI applications come with risks that companies should seek to mitigate, and as a result, CFOs should rethink their talent strategy.
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