27 September 2023

In an article posted on the Regulator’s Column on 8 September 2023, Singapore Exchange Regulation (“SGX RegCo”) shared its expectations on transition plans and elaborated on three key elements of developing, executing and disclosing a credible climate transition plan. SGX RegCo explains that a company’s climate transition plan outlines a company’s strategy to respond to climate-related risks and opportunities, and to build long-term resilience into its business model.

While SGX RegCo notes that many companies have begun to show greater transparency by disclosing emissions data and their material ESG factors, many have yet to formulate and communicate a credible climate transition plan. SGX RegCo explains that disclosure of such transition plans is important to fulfil the growing interest from investors and other stakeholders on how the company intends to meet its climate ambitions. It can be an extremely effective tool to provide transparency on a company’s business and risk management strategies, and demonstrate resilience against climate change. Governments and companies across the world are innovating to take advantage of opportunities and mitigate risks from climate change, and SGX RegCo cautions that those who fall behind risk being cut off from global cross-border supply chains and capital markets.

Rising expectations on transition plans

SGX RegCo explains that companies will have to transition their business activities towards a low-carbon economy given the incoming impact of public policy and climate change itself. Sustainability reporting requirements, which guide companies on how to explain the financial impact of climate change on their business, are a key pillar of the response to the climate crisis and will help companies better manage the associated risks and opportunities. SGX RegCo expects to consult on any amendment to the Listing Rules to align sustainability reporting requirements with the IFRS Sustainability Disclosure Standards (“ISSB Standards”) by the end of 2023.

The ISSB Standards, published in June 2023, build on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which published explicit guidance on transition plans in October 2021. The International Organization of Securities Commissions (IOSCO) has endorsed the ISSB Standards as an effective and proportionate global framework for investor-focused sustainability reporting.

In finalising its recommendations by 2024, SGX RegCo will also consider the feedback received by the Sustainability Reporting Advisory Committee during its public consultation to mandate climate-related disclosures for Singapore-incorporated companies.

Developing, executing and disclosing a climate transition plan

SGX RegCo explains the following three key attributes common to credible transition plans:

  • Comprehensive understanding of material climate-related risks: Companies can begin development of a credible climate transition plan by seeking a deep understanding of the sources, severity, and likelihood of material climate risks to their business prospects. Such climate risks comprise both physical (acute and chronic) and transition risks. Identifying and understanding the material risks and their interdependencies allow the company to concretely evaluate key business decisions and formulate a sound, strategic response to mitigate these risks. Companies will likely have to engage with a full range of stakeholders to refine their understanding of the risks across the value chain. Assessing risks at the asset level is crucial, especially for companies operating in capital-intensive industries.
  • Strong governance structures to ensure accountability for resourcing, financing, and executing the transition plan: Transition plans need a clear governance structure, lines of accountability, and appropriate incentives to drive implementation. Formal oversight from the board of directors and senior management should set the right tone at the top. There should be accountability at all levels, supported by an appropriate incentive structure and capacity building to equip relevant personnel with the necessary skills and knowledge. This will ensure that the entire organisation has the necessary impetus and resources to drive the transition at every level.

Companies need to think through how to obtain and allocate the resources and financing needed to achieve their transition objectives. A credible transition will require changes in business operations, which in turn requires a corresponding dedication of resources. While details will change over time, there should be some indication of how the entity intends to resource and finance the plan into the long term.

  • Monitoring of actionable, science-based near- and long-term decarbonisation targets: A strategic plan will require setting credible decarbonisation targets. The trajectory of such targets should be based on the latest climate science. This ensures that targets are actionable and consistent with a global policy environment where the global economy reaches net-zero emissions by 2050 and global average temperature rise is limited to 1.5⁰C in 2100. A science-based approach further refines the company’s understanding of climate-related risks, sensitivity to key assumptions used, and the potential solutions available to it.

As the low-carbon transition will take place over long time horizons, companies should outline processes and metrics to track progress against the transition plan. This involves monitoring how greenhouse gas emissions change over time, attributable to actions taken as part of the transition plan. Companies should disclose forward-looking metrics, such as projections of emissions reduction over multiple time horizons, to create interim targets that drive implementation in the short and medium term. Stakeholders such as capital providers would also benefit from being able to track these forward-looking metrics to better understand the expected effect of the entity’s transition strategy, and benchmark targets against actual progress.

Reference materials

The Regulator’s Column article is available on the Singapore Exchange website www.sgx.com.