Awareness of the importance of mandatory environmental disclosures in ensuring climate resilience has risen worldwide. This global trend is also being supported by the formulation of stronger guidelines as well as international standards. To strengthen associated regulations, the Carbon Disclosure Project (CDP), an international non-profit organisation, had published ten principles for high quality mandatory disclosure (HQMD) in September 2023. These principles are aimed at helping policymakers to create more holistic and effective regulations. Some of these principles include addressing risks and opportunities, dependencies and impact on people and the planet; ensuring consistency and interoperability of disclosures across jurisdictions and building global baseline disclosure standards; ensuring policy consistency in disclosure requirements across policies within a single jurisdiction; and being rooted in science; among others. Additionally, seven policy recommendations were released by the Global Commission of the Economics of Water at the United Nations 2023 Water Conference. One of these recommendations laid emphasis on the need for disclosure to steer capital and consumer preferences towards sustainable practices.
The Southeast Asia (SEA) region is experiencing a fast changing regulatory landscape with a growing economy and its strategic position in supply chains globally. The region is inhabited by more than 675 million people, according to the International Monetary Fund, and has the highest gross domestic product in the world. Owing to these factors, the region demands a careful examination of its environmental regulations.
The CDP’s policy note highlights the evolutionary developments and current state of environmental disclosure in specific SEA countries like Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. It focuses on the requirements of water-related disclosures. It also assesses the prevalent regulatory landscape in the markets of these countries and highlights the trends and shortcomings in their disclosure mandates.
Rise in awareness and ambition for climate-related disclosure
SEA countries are moving towards climate resilience and adopting stronger climate-related corporate disclosure norms. For instance, Singapore initiated the adoption of mandatory climate-related disclosure requirements in 2016. These are aligned to the Task Force on Climate-Related Financial Disclosures (TCFD). Similarly, comprehensive guidelines for listed companies are being developed in the Philippines currently. It is also making efforts to integrate it with global reporting frameworks such as the International Financial Reporting Standards (IFRS) S26.
The adoption of reporting requirements by financial institutions is still limited in SEA. At present, only Indonesia and Singapore have mandatory environmental disclosures for these institutions.
State of water-related disclosures and their frameworks
Companies and financial institutions globally have higher access to guidance for water-related disclosures. This has helped in their gradual adoption. In line with this, the CDP is making efforts to enable higher standards and high quality corporate water disclosure frameworks globally. It has highlighted its views on a few key parameters of such a framework.
Governance
The framework must disclose the governance mechanisms adopted by organisationsfor managing the risks related to the water sector and the associated opportunities and impacts.
Strategy
Organisations must lay out their business strategies and financial planning for the impact caused by events in the water sector. The comapny must report whether it has already been impacted by such issues or not and what are its short-, medium- and long-term strategies to tackle these.
Risk management
Companies must also disclose the ways and the processes that they have undertaken to assess risks in the sector and whether they carry out various scenario-based analyses for future outcomes of the sector and collect data associated with exposure to water-related risks and opportunities.
Metrics and targets
The framework should disclose specific metrics and targets set by an organisation. It must collate data linked to water consumption at the enterprise and facility levels, and water withdrawal and discharge. The value of the risk involved must also be included and the number of assets in water-stressed locations and the financial value of these assets must be specified. Further, the goals and the progress against these metrics must be mapped.
Early stage of water-related disclosures in SEA
There has been a gradual uptake of water-related disclosures in the SEA region. According to CDP data from 2022 and 2023 on water disclosures in SEA, companies are taking more active measures to integrate voluntary reporting systems, although these need to be improved.
Most countries in the region are still developing and improving these regulations. Such regulations include enterprise-wide metrics in countries where mandatory water disclosure requirements related to water consumption in the direct operations of companies and water pollution exist. These regulations have limitations in their defined scope, some of which are as follows:
- Water-specific governance disclosure requirements are absent. They are an important part of understanding how water-related risks and opportunities are managed through corporate governance mechanisms.
- Quantitative metrics like potential financial value at risk are not mandated for reporting by companies. These parameters are important for ascribing financial value to water-related risks and opportunities.
- Value chain engagement exists in some countries like the Philippines and Singapore. According to the 2019 SEC Memorandum Circular Number 4, Sustainability Reporting Guidelines for Listed Companies, regulations that mandate disclosures concerning the impact on the upstream and downstream value chain are being developed in the Philippines. However, listed companies cover a broad scope in their reporting as per the Singapore Exchange’s (SGX) sustainability reporting guide. This is neither pertinent to the water sector nor mandatory.
Role of comprehensive environmental materiality assessments in the development of HQMD
It is expected that more comprehensive environmental materiality assessments can offer support in the development of HQMD. Such assessments profoundly influence the depth and breadth of water reporting. It is possible that the organisations will disclose metrics other than the minimum requirements of water accounting, once they have recognised the material risks and opportunities. In fact, companies have explored four times more water-related opportunities by adopting water-related long-term business strategies, according to CDP Global Data 2022. Similarly, companies are also seven times more likely to report supply chain risks if they integrate suppliers into their risk assessments, as per CDP Global Data 2023.
In this context, SEA’s current guidelines recommend or mandate a limited set of water metrics. In a few countries, there is a major gap in these guidelines related to the mandate for companies to disclose their procedure to identify the material risks involved. For instance, Singapore does not require water reporting if the company does not detect any materiality. This could pose a challenge if guidelines and requirements for materiality assessments become open-ended. The SEA region may also face thisissue in developing its reporting systems.
Narrowing regulatory gaps with use of water data
There is a growing need for the use of sector-specific water data to ensure high-impact business activities. Based on a sample of 156 disclosers in the SEA region, it was found that additional data for each sector is needed (barring manufacturing) to assess the actual adoption of existing regulations. To this end, many SEA countries have initiated related regulations. For instance, listed companies in various sectors like construction, consumer products and services, energy, healthcare, industrial products and services, transportation and logistics, etc., in Malaysia have to report the total volume of their effluent discharge. Similarly, listed companies in Vietnam are required to report the amount of water supplied to them, the amount of water used and the amount that is recycled while Singapore has initiated mandatory TCFD-based disclosures, beginning with listed companies in a few specific sectors.
Going forward, it is expected that more robust private sector-wide disclosure requirements will be adopted in the SEA region along with the use of sector-specific water data. This approach will also help bridge the regulatory gaps in the region along with the maturing of material assessments.
Conclusion
The extreme water crisis in the SEA region underlines the need for corporate disclosure of water data. Such disclosures, along with the measurement of dependencies, impact, risks and opportunities in a sector, will make it easier for companies to achieve water resilience. However, as the CDP policy note indicates, water reporting provisions in SEA are inadequate at present, making it difficult for investors to accurately assess risks in a particular sector, which is why it recommends the adoption of HQMD principles by policymakers and financial markets to formulate policy and regulations in SEA countries.
Extract from a policy note by CDP on ”Environmental Disclosure in Southeast Asia: Regulatory Landscape and Regional Trends for Water-related Requirements.”
