Bursa Malaysia Sustainability Disclosure Review 2020: Key Observations & Recommendations

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Bursa Malaysia Sustainability Disclosure Review 2020: Key Observations & Recommendations

  • Bursa Malaysia Sustainability Disclosure Review 2020: Key Observations & Recommendations A review of 300 PLCs show average compliance levels of 93% and quality scores of 68%.
  • Date: Feb 22, 2021
  • Category: Sustainability
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Since 2017, Bursa Malaysia has undertaken Sustainability Disclosure Review (SDR) exercises on an annual basis covering different samples of public listed companies (PLCs). In 2020, the SDR was conducted in collaboration with the Minority Shareholders Watch Group, covering a sample of 300 PLCs that spanned across different sectors and market capitalisations. Summary statistics in terms of overall compliance and quality are as follows:
In providing further guidance and support to PLCs in their sustainability reporting journey, this article highlights:
a)   Key observations from the SDR 2020 exercise;
b)   Best practice/recommendations for key observations; and
c)   Questions that Boards can use as a basis to engage management on the PLC’s sustainability reporting practices and/or disclosures.
1.   Sustainability Governance
Key Observation(s):
Across the SDR sample, we observed considerable variation in the degree of detail provided to describe the sustainability governance structures that PLCs have put in place. While strong reporters have provided detailed illustrations of their respective sustainability governance structures, weaker reporters struggled to provide readers with clear context as to:
a)   Who has oversight responsibility;
b)   Who is charged with strategic management of sustainability matters; and
c)   Who performs/implements sustainability-related tasks and initiatives on a day-to-day basis.
Best Practice:
a)   Oversight of the PLC’s management of sustainability matters resides with the Board.
b)   Strategic management of sustainability matters is performed by either a Board Committee or Top Management.
c)   Typically, a dedicated sustainability function/department/unit is put in place to manage sustainability matters.
d)   Sustainability Governance disclosures include detailed description/illustration of roles and responsibilities assigned across the governance structure.

QUESTIONS FOR BOARD CONSIDERATION

Basic/Getting Started
1.   Does the PLC’s disclosure clearly identify which individuals/functions perform oversight, strategic management and implementation in relation to sustainability matters?
2.   Does the PLC disclose details pertaining to the responsibilities assigned across the governance structure?
Advanced
1.   Does the PLC disclose the specific nature of oversight performed for management of material sustainability matters/issues (e.g. reviewing/endorsing outcome of materiality assessment)?
2.   Does the PLC disclose the nature of its oversight of significant risks & impacts arising from climate change?
2.   Sustainability KPIs
Key Observation(s):
Few PLCs link director and/or top management remuneration with sustainability key performance indicators (KPIs).
Best Practice:
a)   Board and/or top management remuneration is explicitly linked to sustainability-related KPIs.
b)   Nature of KPIs as well as implications of their achievement on remuneration are disclosed.

QUESTIONS FOR BOARD CONSIDERATION

Basic/Getting Started
1.   Does the PLC express/disclose a commitment to setting as well as publishing sustainability-related KPIs in future reporting periods?
Advanced
1.   Does the PLC disclose sustainability KPIs for the relevant director(s), committee(s) and/or member(s) of top management to clearly display where accountability for their achievement reside?
2.   Does the PLC disclose how differing levels of performance achieved for sustainability KPIs affect subsequent remuneration?
3.   Scope of Sustainability Statement/Report
Key Observation(s):
Some reporters clearly define as well as illustrate the overall scope (i.e. “coverage”) of their sustainability statements while others fail to address this aspect in a sufficiently explicit and/or detailed manner. Without an appropriate “scoping statement” coupled with pertinent information on what is actually being covered, readers would not be able to know which parts of the business the sustainability statement covers or otherwise.
Best Practice:
Overall scope or “coverage” of sustainability statement is clearly defined. In addition, further clarity is provided by showing appropriate breakdown and/or elaboration of what is contained within the said scope. Examples:
  A manufacturer who defines its scope as “all Malaysian operations” subsequently provide a table detailing the location of each manufacturing facility alongside respective production capacity, staff strength, etc.
  A clothes retailer who defines its scope as being inclusive of “all activities across the Group” subsequently provide an illustration/map of its entire branch network & warehouses, size of & brands offered at each branch, size of its fleet of delivery vehicles, etc.
In both situations above, readers are able to develop a good appreciation/understanding of the “footprint” of the business as well as associated impacts.
Separately, if there are any exclusions to the scope (i.e. does not include certain activities/operations), the reporting PLC provides the underlying basis/reasons for such exclusions.

QUESTIONS FOR BOARD CONSIDERATION

Basic/Getting Started
1.   Does the PLC disclose the scope of its sustainability report?
2.   Does the PLC disclose pertinent details relating to what the overall scope actually “covers” to transparently show the “footprint” of the business as well as associated impacts?
Advanced
1.   Does the scope of the PLC’s sustainability statement cover all of its operations?
2.   Does the scope of the PLC’s sustainability statement cover its wider value chain?
4.   Materiality (Identification & Prioritisation of Material Matters)
Key Observation:
PLCs provide varying degrees of disclosures with regards to their materiality assessment process. Stronger reporters have provided detailed accounts of the extensive engagements that they have undertaken with both internal and external stakeholders to identify/refine/review their material sustainability matters. On the contrary, some PLCs have not disclosed any details relating to the process undertaken to identify their material sustainability matters. For such cases, it is unclear if such a process has even actually been undertaken.
For prioritisation of identified material matters, we have observed similar variation in terms of quality of disclosures. More specifically, stronger reporters clearly illustrated the relative importance of each identified material matter and also determined which matters are prioritised by the PLC. On the other hand, weaker reporters tended to provide a mere grocery list of material matters with no indication of relative importance – consequently, readers would not be able to discern which matter is more important to the PLC.
Best Practice:
a)   Proactively engaging key internal and external stakeholders on a continuous/frequent basis to effectively manage material sustainability matters as they evolve/change over time.
b)   Undertaking a full materiality assessment process periodically or when there are changes to the operating environment. Where there are no major changes to the operating environment, the company should undertake a limited annual review to re-affirm that current matters remain material/relevant and are appropriately prioritised.
c)   Disclosure pertaining to prioritisation of material matters clearly show the relative importance of each material matter to the PLC – mapped/illustrated via a materiality matrix.

QUESTIONS FOR BOARD CONSIDERATION

Basic/Getting Started
1.   Does the PLC disclose (in a detailed manner) how its material sustainability matters have been derived?
2.   Does the PLC disclose if external stakeholders were engaged for identification/prioritisation of its material sustainability matters, or, if not, expressed a commitment to do so for future reporting cycles?
3.   In terms of prioritisation of identified material matters, does the PLC provide any indication of the relative importance of each (even if it is a simple “low”, “medium” or “high” classification)?
4.   Even if the PLC’s assessment of materiality is currently confined to its own operations, does the PLC’s disclosures show an awareness of major sustainability issues across its wider value chain (upstream and/or downstream)?
Advanced
1.   Does the PLC disclose materiality considerations across its wider value chain (e.g. for an electronic devices manufacturer, significant environmental impacts occur when its products are ultimately disposed by its customers rather than through the manufacturing process)? In addition, does the PLC disclose measures adopted to manage/mitigate/eliminate such impacts?
2.   Does the PLC disclose if the materiality process has been subjected to independent/external assurance or expressed a commitment to do so for future reporting cycles?
5.   Management Approach (Adoption of Indicators & Quantitative Performance Targets)
Key Observation:
A majority of PLCs have provided detailed disclosures pertaining to how they manage each prioritised material sustainability matter/issue including policies & processes put in place as well as initiatives undertaken. Even so, only a minority have adopted and disclosed relevant indicators (e.g. total electricity usage, CO2 emissions, board diversity, lost time injury rate) to track progress made/how effectively they are managing prioritised matters.
While adoption and disclosure of relevant indicators to show progress/performance is commendable, even fewer PLCs have set clear corresponding quantitative performance targets to be achieved within specific timeframes (e.g. to reduce total CO2 emissions by 30% by 2025). In this regard, some have only mentioned that they ‘endeavour to do better’. Consequently, stakeholders/readers are unable to assess the PLC’s performance against clear & specific goals/ambitions/commitments.
Best Practice:
a)   Adoption of relevant indicators for each material sustainability matter to clearly demonstrate progress made/performance.
b)   Setting appropriate quantitative targets for each material sustainability matter, especially in relation to the indicators adopted.
c)   Narrative to provide deeper understanding of progress thus far against set performance targets.

QUESTIONS FOR BOARD CONSIDERATION

Basic/Getting Started
1.   Does the PLC disclose indicators for its material sustainability matters, or, if the underlying practices or measurements have yet to be established, expressed a commitment to do so for future reporting cycles?
2.   Does the PLC disclose any targets or commitments (be it qualitative or quantitative) for its material sustainability matters?
Advanced
1.   Does the PLC disclose sufficient information/data for adopted indicators to show progress over a significant period of time (i.e. 5 years or more, where possible)?
2.   Where possible, does the PLC link quantitative performance targets set to remuneration of the relevant directors and/or management?
Closing Remarks
Recent developments including the convergence of international sustainability reporting frameworks and increased interest from institutional investors are translating to an increase in demand for improved sustainability disclosures.
To aid sustainability reporters in improving their sustainability reporting practices, Bursa Malaysia will be organising a series of sustainability reporting workshops throughout 2021 that focus on providing guidance on the Scope and Materiality aspects of sustainability reporting.
Author
Corporate Governance & Sustainability, Regulation
Bursa Malaysia
Note:
All findings from the SDR 2020 are presented in an aggregated manner. Identities of sampled PLCs (including any details pertaining to individual PLC assessments) will be kept confidential.


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