Experts: Applying 'ESG' standards grants investors more reliable data

The expert economic director of the session, Khaled Rababeh, said that the discussion about sustainability standards is no longer about the reasons for their application, but about how to translate the code into a practical reality within listed companies, so that compliance becomes a driver of growth and an attractor of capital, instead of being viewed as an additional cost.

He added that the recent directive of His Majesty the King to the government to develop an integrated national strategy for climate and green financing, in cooperation with the private sector, requires legislative and market tools, pointing out that the Securities Commission's code forms an executive tool in the capital market, helping companies to prepare reliable environmental, social, and governance disclosures.

The Director of the Technical and Strategic Affairs Department at the Securities Commission, Deema Tahtamani, said that the legal basis for issuing the code is based on the Securities Commission's powers to regulate governance of entities under its supervision, noting that the governance path in the financial market began with instructions in 2008 that included some guiding articles, before the issuance of instructions for corporate governance of listed companies in the financial market in 2017 to keep pace with international practices and enhance market competitiveness regionally.

She explained that the Commission continued to develop this path in light of international standards for financial reporting and sustainability and climate disclosures, as it concluded a cooperation agreement with the International Finance Corporation, after the approval of the Council of Ministers and with government representation from the Ministry of Planning and International Cooperation.

She added that the preparation of the code took about two years, and included physical and virtual meetings that brought together the Commission's team and experts from the International Finance Corporation, with the aim of formulating a code that responds to the objectives of the Commission in protecting investors and creating an attractive investment environment in the financial market.

She confirmed that the Commission adhered to the participatory approach during the preparation of the code, as it published its draft on the communication platform and received comments, and held meetings with companies, experts, and the International Finance Corporation, before studying the feedback and officially adopting the code by the Commission's Board of Commissioners.

She pointed out that the Commission issued circulars to introduce companies to the contents of the code and the obligations arising therefrom, confirming that the application will be carried out gradually and in a participatory manner, in a way that ensures the achievement of the desired objectives and takes into account the reality of companies and the market.

For his part, the Director of the Exporters and Products Affairs Department at the Commission, Saleh Al-Raqqad, said that the objective of issuing the code is not to burden companies with additional burdens or require them to make new, separate disclosures, but to transform disclosure from scattered initiatives into an integrated system according to international standards that link a company's performance with its environmental and social risks and opportunities, and introduce it into the management system and the accountability of the board of directors.

'IFRS S1' general sustainability disclosures and 'IFRS S2' climate-related disclosures require those managing companies to provide clear answers to investors about the risks that may affect cash flows, the mechanism for managing these risks, and the progress made in addressing the gap between current performance and future goals of companies.

He added that the response of the boards of directors to these requirements requires the provision of reliable data internally and disclosure to investors, which enables them to read the company's financial situation and assess the impact of environmental and social risks on its performance, and increases the level of credibility and comparability between companies.

He pointed out that individual investors may not pay the same attention to these aspects, but institutional, strategic investors, and international funds attach increasing importance to sustainability disclosures, in line with the rapid growth in the volume of sustainable financing globally.

He confirmed that the application of international standards increases the reliability of the information provided by companies, and enhances the opportunities for the transformation of the Jordanian capital market into a market more capable of attracting investments, especially institutional investments and global investment funds interested in sustainability.

The Director of Planning and Institutional Development at the Amman Stock Exchange, Dr. Rasha Diat, said that the Amman Stock Exchange's journey in the field of sustainability began with its joining in 2016 to the United Nations Sustainable Stock Exchanges initiative, and then the issuance of the first sustainability report for the Exchange in 2020.

She added that one of the projects of the Exchange's strategic plan is to require companies making up the 'ASE20' index to issue sustainability reports, with the application to be gradual and later extend to other companies.

She pointed out that the Exchange then moved to cooperate with the International Finance Corporation to launch a climate disclosure guide, where three key documents were issued, namely the regulatory framework, policy, and guidance manual, noting that the Amman Stock Exchange was the first in the region and the 22nd globally when the guide was launched.

She confirmed that the most important lessons learned are that success is not measured by the mere issuance of a sustainability report by a company, but by the extent of the change that occurs within its management, thinking, and strategy.

She said that some companies have rich experiences in the field of sustainability, but they did not document them, while other companies dealt with the reports from a regulatory compliance perspective only, before the understanding gradually evolved from 'writing the report' to 'managing the impact'.

She pointed out that intensive training and follow-up were key factors in achieving this transformation, as the Exchange held six comprehensive workshops for 'ASE20' companies on the climate disclosure guide, in addition to meetings, workshops, electronic meetings, and continuous follow-up with companies.

She explained that despite the current period of optional application for companies, three banks have issued their reports, while the Exchange expects the number to rise to between five and six companies by September or early October, with mandatory application to begin next year.

She confirmed that the presence of a clear role for the board of directors and executive management raises the level of actual interest in sustainability, and helps to include it in strategic plans and risk management, which reflects on investor confidence and company competitiveness.

For her part, the governance and sustainability expert, Ma'ali Khader, said that the transition of sustainability reports from formality to strategy requires first understanding the reasons why some of these reports are not usable in decision-making, confirming that this does not necessarily result from bad intentions on the part of companies.

She identified three main reasons, the first being the absence of clarity of responsibility for the report within the company; whether it follows the board of directors or a specific department or specific individuals, and the extent to which the entity responsible has the authority and ability to manage the file.

She added that the second reason is related to the reports not producing results that the company can build on or use in developing its performance and making decisions, while the third reason is related to the lack of clarity of the source of sustainability data and the mechanism for collecting it and the entity responsible for it.

She explained that the importance of the code lies in the fact that it does not just require a report, but rather establishes an integrated sustainability framework, transferring its concept from measuring the impact made by the company only to studying how this impact reflects on its performance, and how to modify work methods in light of the results.

She pointed out that the International Finance Corporation has developed new training materials for board members in the field of 'ESG', explaining how to practice their role and integrate environmental, social, and governance issues into strategic decision-making, alongside developing the work environment and mechanisms for collecting, analyzing, and determining information and those responsible for it.

Regarding the data, Khader confirmed that they originate from within the company and are related to its performance, and technical tools and systems can be used to help collect them, but they remain information specific to the company and its responsibility.

She pointed out that 'IFRS S1' and 'IFRS S2' standards, unlike some other sustainability frameworks, deal with information from the perspective of risk and audit, and link economic, environmental, social, and governance issues with what may affect the company's financial and economic situation.

Regarding the legal and temporal scope of the application of the code, Tahtamani said that the Commission, in cooperation with the International Finance Corporation, studied the appropriate legal form for its issuance, the entities that will be subject to it, and the timeline for implementation.

She explained that the Commission amended the scope of application of the 2017 instructions for corporate governance of listed companies, so that the code will be applied in phases to the twenty companies making up the Amman Stock Exchange index 'ASE20', with the aim of gradually expanding its scope to include all companies listed in the financial market.

She pointed out that the Commission's Board of Commissioners has the authority to issue decisions to expand the scope of application, based on market reality, studies, and performance indicators, while companies not currently subject to the obligation can apply the provisions of the code on a voluntary basis.

It confirmed that the application to ASE20 companies starts from January 1, 2027, with its results appearing in the financial statements and reports issued during 2028.

It added that the code clearly defined the implementation mechanism, the internal obligations required from companies, the responsibilities of their boards of directors, the form of reports and the mechanism for issuing them, explaining that the sustainability report will be separate from the annual report, while the governance report is integrated into the annual report.

It pointed out that the code took into account the gradual implementation and granted companies exemptions during the first year, including comparative information related to the IFRS S1 standard and the disclosure of greenhouse gas emissions within the third scope in the IFRS S2 standard, to facilitate the transition towards full compliance and achieve the goal.

Regarding the possibility of developing a sustainability index, Al-Raqqad said that building indices and determining their methodologies falls within the responsibility of the Amman Stock Exchange, considering, from his point of view, that developing an index at the current stage may be premature due to the novelty of the application and the lack of sufficient reports and data to evaluate companies.

He added that limiting the application in its first phase to 20 companies makes the sample limited, expecting that the creation of the index will be possible in the medium or long term, after two or three years of applying the code and having sufficient data and expanding the scope of the obligated companies.

For her part, Diat confirmed that building a sustainability index limited to ASE20 companies will not achieve the desired goal, because the included companies will be the same as those currently composing the index.

She said that the project to build a sustainability index was included in the strategic plan of the Amman Stock Exchange, but it was postponed at the current stage as it requires preliminary steps, primarily expanding the scope of application to include, for example, the companies of the primary market, which number about 57 companies.

She explained that one of the possible methodologies is to create a platform through which companies enter their sustainability-related data, and then a specific score is given according to an approved methodology, so that companies that exceed a certain limit, such as obtaining 70 points or more, are included in the index sample.

She added that the selection of companies will also take into account other elements approved in building indices, such as market value and the number of trading days, confirming that this requires expanding the base of companies beyond the components of ASE20.

In explaining the difference between previous sustainability reports and the reports required under the new code, Khader said that the reports of the Global Reporting Initiative (GRI) focus on the company's impact on the environment and society, and how governance is practiced and decisions are made related to these aspects.

She added that the reports based on IFRS S1 and IFRS S2 standards answer a different question, related to the impact of the environment, society, governance, and economic conditions on the company itself, its performance, and its financial risks, which is the aspect that investors and financiers are interested in.

She confirmed that the link between the code and financial reports means that the information contained in them must be consistent with financial data, and must not be general, formal, or undocumented.

She explained that the data and figures are subject to review by the internal and external auditor and the board of directors, which gives the information in the reports a different level of reliability, confirming that GRI reports and IFRS S1 and IFRS S2 reports answer different questions and are used for multiple purposes, but they are all important and necessary for companies.

The fundamental difference between previous sustainability reports, which focused more on social responsibility, and the disclosures required under the new code, particularly in terms of their link to financial impact and direct risks.

Khader said that it is important for companies to understand that each type of report answers a different question; GRI reports focus on the company's impact on the environment and society, and how it practices governance and makes decisions related to these aspects.

She added that the disclosures based on IFRS S1 and IFRS S2 standards start from a different perspective, as they examine the impact of environmental, social, and governance factors, along with economic variables, on the company, its performance, and its risks, which is of interest to investors and financiers.

She explained that the link of these disclosures to financial reports requires that the information contained in them be consistent with financial data, documented, and auditable, and not general or formal, as the figures and data go through levels of internal and external audit and the board of directors.

She confirmed that the two types do not differ in importance, but differ in purpose, use, and the questions each answers, and both are important and necessary for companies.