CORPORATE GOVERNANCE MANDATORY ESG REPORTING The SEC's decision to require the disclosure of ESG practices in the 56-1 One Report not only indicates investors' interests in a company's ESG practices but also creates a unified approach for listed companies undertaking the ESG reporting duty in Thailand in accordance with the SEC laws and regulations In recent years, there is a growing...
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CORPORATE GOVERNANCE MANDATORY ESG REPORTING
The SEC's decision to require the disclosure of ESG practices in the 56-1 One Report not only indicates investors' interests in a company's ESG practices but also creates a unified approach for listed companies undertaking the ESG reporting duty in Thailand in accordance with the SEC laws and regulations
In recent years, there is a growing demand for transparency on sustainable and socially responsible practices of companies by stakeholders with an interest in evaluating a company's impact on the world. An increasing number of companies have been making disclosures in the three main fundamental areas - environmental, social and corporate governance - in their Environmental, Social, and Governance ("ESG") reports to reflect on their impact on sustainability issues, and enhance their transparency about the risks and opportunities that they face in these areas. With ESG reporting practice, companies can gain credibility in the eyes of stakeholders and entice socially-conscious investors.
There are many benefits to engaging in ESG reporting practices. One benefit is that it is a useful risk management tool in the sense that ESG performance reports can show investors how a company mitigates risks and generates sustainable long-term financial returns. ESG reporting can also serve as a tool for investors in screening potential investments by providing an analysis of performance across these ESG factors, and allows investors to avoid investing in companies that might pose a greater financial risk due to their poor environmental performance or social or governmental practices. Furthermore, companies with strong ESG performance often demonstrate higher returns on their investments, with fewer risks and improved resiliency during a crisis.
Thailand's Securities and Exchange Commission (the "SEC") has hopped onto this global trend by adopting the Investment Governance Code for Institutional Investors (I Code) to promote sustainable investment and requiring Thailand-listed companies to disclose their ESG performance to boost confidence of socially-responsible investors in the Thai capital market.
1 ESG Reporting Obligations for Listed Companies
Under Thai law, a company issuing securities is generally required to prepare financial statements and reports (consisting of an annual report and any other report as specified in the notifications of the Capital Market Supervisory Board) concerning the financial condition and the business operation of the company and to submit them to the Office of the SEC by virtue of Section 56 of the Securities and Exchange Act B.E. 2535 (1992) (the "Securities and Exchange Act"), whereby prior to 2021, there was no requirement for such reports to contain details on the ESG practices of a listed company.
However, as of the end of 2021, the SEC requires information on ESG practices to be included in the annual filing of the above reports which are now codified into a single report called the "56-1 One Report" by virtue of Sections 6 and 7 of the Notification of the Capital Market Supervisory Board of Thailand No. Tor Chor 55/2563 re: Criteria, Conditions, and Procedures on Reporting Information Relating to the Financial Conditions and Operations of a Company Issuing Securities (No. 20) (the "Notification of the CMSB"). This decision to codify the reports (consisting of the annual registration statement (Form 56-1) and the annual report (Form 56-2)) into a single report mainly derives from the SEC's decision to reduce the filing and reporting burden under Section 56 of the SEC Act. This newly integrated "56-1 One Report" is to be submitted by listed companies to the SEC within three months from the end of the accounting period, and the information to be included in the "56-1 One Report" are as prescribed in the 56-1 One Report Form annexed to the Notification of the CMSB.
1.1. Organization Structure and Operation of Companies
In relation to the organizational structure and operation of companies within the same corporate group, an overview of the vision, objectives, goals and business strategies of the company or the group of companies (as specified by the company's board of directors) must be provided in the 56-1 One Report, along with information on the directions and the determination to drive the business towards sustainability, in order to allow investors to understand and monitor the future business directions of the company.1
1.2. Risk Management
In terms of risk management, the information to be included in the 56-1 One Report shall prescribe the current and emerging operational risks associated with the company or the group of companies, and the factors that may cause material risks on the business operation, financial conditions, and the operating results of the company or the group of companies, which shall include risk issues in the environmental and social areas, namely respect for human rights and good corporate governance.2 Specific examples of risk issues in environmental and social areas include climate change risk, disputes with the community risk, corruption risk, among other types of risks.
1.3. Business Sustainability Development
In relation to business sustainability development, the information to be included in the 56-1 One Report must include the company's policy and objectives relating to the sustainable management of the company, whereby such policy and objectives shall take into consideration environmental and social issues, as well as respect for human rights and good corporate governance. Such policy and objectives may be disclosed in full on the company's website and companies shall undertake to update and provide brief explanations of the updated sustainability management policy/objective to the investors on a regular basis.3
1.4. Management of Environmental Sustainability
In terms of management of environmental sustainability in its business operations, the company shall describe the environmental policy and guidelines of the company in accordance with the applicable environmental laws, rules and regulations and indicate how the company is committed to mitigating negative impacts on various environmental issues (such as energy, water, garbage, waste, pollution and greenhouse gas problems) in the 56-1 One Report.4 Such environmental management policy and guidelines may be disclosed in full on the company's website, and where such policy and guidelines have been updated, the company shall inform the changes to investors on a regular basis.
Besides, the company shall also describe the operating results of environmental management in relation to the business operation process of the company (such as management of energy, water, garbage, waste and pollution).5 The company may also disclose information on its greenhouse gas emission (according to international standards or its equivalent), and in case where the company has not prepared the greenhouse gas emission information, the company shall specify the reasons thereof. In addition, if the company and its subsidiaries are being investigated by authorities for violation of environmental laws or regulations, or where the company and its subsidiaries are accused of causing a negative impact on the environment, in a manner that may affect the business operation, image, reputation and assets of the company, the company will need to disclose the full details of the investigation or accusation and the steps taken to mitigate it as well.6
1.5. Social Sustainability Management
In relation to social sustainability management, the company will need to provide information in the 56-1 One Report on its internal policy and guidelines which are in accordance with the laws and regulations pertaining to social sustainability management in the business operational process, which specifically includes respect for human rights throughout the supply chain (such as in relation to fair labor practices, providing responsible production and services for customers, and participating in social and community development). Such social sustainable management policy may be disclosed in full on the company's website to provide investors with a guideline for monitoring the future business directions of the company, and where such policy has been updated, the company shall communicate such changes to the investors on a regular basis.7
Moreover, the company shall also describe the operating results of social sustainability management in relation to the business operation process of the company, as well as the action plan of the company that shows the company's ability to manage and mitigate social sustainability issues.8 If the company and its subsidiaries are being investigated by authorities for violation of laws and regulations pertaining to social areas (such as violation of labor law), or where the company and its subsidiaries are accused of causing a negative impact on a societal or social issue, in a manner that may affect the business operation, image, reputation and assets of the company, the company will need to disclose the full details of the investigation or accusation and the steps taken to mitigate it as well. In addition, in the case where the company was involved in labor disputes during the past three years, the company must provide the reasons and actions taken in that dispute, including the relationship between the executives and the labor union (if any).
2 ESG Reporting Obligations on Non-Listed Companies
In respect of non-listed companies, there is currently no law that mandates such companies to be subject to mandatory ESG disclosure or reporting requirements. Nonetheless, despite the absence of a legal requirement, some companies may choose to voluntarily publish such information on their website for good corporate practice. However, in many parts of the world, the mandatory ESG disclosure or reporting requirement tends to only be imposed on listed companies such as seen under the Thai legal system.
3 Future Outlook on ESG Reporting in Thailand
The SEC's decision to require the disclosure of ESG practices in the 56-1 One Report not only indicates investors' interests in a company's ESG practices but it also creates a unified approach for listed companies undertaking the ESG reporting duty in Thailand in accordance with the SEC laws and regulations. While the prescribed 56-1 One Report Form annexed to the Notification of the CMSB sets out a general framework as to what information is to be included in the 56-1 One Report, there is still room for companies to carry out their ESG disclosure duty in any manner they deem appropriate as the prescribed form only serves to give the bottom line of the reporting requirement. In this respect, as this mandatory requirement is a fairly recent phenomenon, it is uncertain whether companies will go beyond the legal requirement in making their ESG disclosure or whether they will put in minimal effort to meet the bare minimum requirements of the ESG disclosure requirement.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.