Keeping PH companies on the path of sustainability

ILLUSTRATION BY RUTH MACAPAGAL

EDITOR’S NOTE

With this Earth Day supplement, the Inquirer begins a series of thematic content and activities as a founding member of the Asia Sustainability Impact Consortium (Asic), whose two other pillars are The Star Group of Malaysia and Kompas Gramedia of Indonesia.

Considered the first cross-border media alliance of its kind, the Asic can reach an audience of 123 million people across the region as it promotes environmental interests, especially in the business and industrial sectors – in the world of work.

The newspaper hopes to do its part through the Inquirer ESG Edge initiative. This special six-page project serves as a soft launch, so to speak, appropriately timed with Earth Day and published just one month after the company signed up 11 local partners—green groups, education foundations, think tanks, and business associations—to the advocacy effort. .

The Inquirer ESG Edge logo also makes its debut here and will henceforth highlight news and articles related to the initiative in future issues, as well as events or campaigns that will take it beyond the printed page and into communities, schools, etc.

ESG stands for environmental, social and governance. While there may not be a convenient standard or all-encompassing definition of ESG, it is the slogan for a movement that first came to prominence in the mid-2000s.

It is generally a set of aspects, a benchmark – a checklist, if you will – by which a company is assessed by regulators and potential investors based on its sensitivity to the impact it has on the environment and society at large.

For example, Investopedia.com explains the concept of ‘ESG investing’ and explains it as follows:

“ESG investing refers to how companies score on (a range of) responsibility measures and standards for potential investments. Environmental criteria measure how a company protects the environment. Social criteria examines how it manages relationships with employees, suppliers, customers and communities. Governance measures a company’s leadership, executive compensation, audits, internal controls and shareholder rights.”

Important questions can be asked under the ”environment” statistics: What is the company’s policy on energy consumption, waste and pollution, the conservation of natural resources or even the treatment of animals? Is it led by responsible managers who are aware of these concerns and truthfully report the company’s compliance with government regulations?

“Does the company donate a percentage of profits to the local community or encourage employees to volunteer? Do workplace conditions reflect a high level of concern for employee health and safety?” read a sample question from Investopedia under the ‘social’ measure.

Regarding the quality of “governance,” it added: “ESG investors may demand assurances that companies avoid conflicts of interest in the selection of board members and senior executives, do not use political contributions to obtain preferential treatment or engage in illegal behavior. ”

In the Philippines, the Securities and Exchange Commission is the main body promoting ESG in business. We therefore open this special supplement with a look at how it is done.

Today, investors are not just interested in getting a return on their investments, or ensuring that the money they put into companies and projects is worth it.

Regulators worldwide are ensuring that listed companies keep their promises to incorporate sustainability into their operations, as this is now a criterion considered by investors before spending money.

KPMG, a global organization that provides audit services and insights in 143 countries, finds in its 2022 Survey of Sustainability Reporting that investors take non-financial data, such as sustainability reports, “just as seriously as financial data.”

Such pressure has led to the creation of reporting standards around the world, including those of the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standard Board.

In the Philippines, the Securities and Exchange Commission (SEC) issued sustainability reporting guidelines for listed companies in 2019, following its international counterparts.

In issuing the guidelines, the local business watchdog noted that sustainability reporting, or the practice of publishing a company’s economic, environmental and social impact, can give companies a competitive advantage while attracting more investors and improving reputation.

But the SEC determined that reports should not contain solely figures related to sustainability.

7 reporting principles

Because environmental, social and governance (ESG) reporting covers a wide range of topics, the SEC has listed seven reporting principles.

These include materiality (reporting only on relevant topics); stakeholder inclusivity (taking into account the needs and interests of key stakeholders); balance (reflecting the positive and negative aspects of the company’s performance); completeness (the extent of the information required); reliability (reporting on the methodology to assess the quality of information); accuracy (correctly citing information sources); and consistency and comparability (ensuring that the report allows analysis over time).

Each component of ESG represents an essential piece of the puzzle in the overall picture that investors consider.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., tells the Inquirer that compliance with ESG standards is a sign of good business. Companies must ensure that their policies are environmentally friendly through sustainable practices, while promoting a better society by respecting and upholding human rights.

At the same time, governance policies must be in line with global best practices and “maintain the highest level of ethical standards and practices in conducting business and interacting with society,” Ricafort says.

For example, the SEC reporting template includes questions about energy efficiency initiatives, water consumption, air pollution, and solid waste management to measure climate-related risks and opportunities.

Sanctions for non-compliance

A closer look at the guidelines also shows that ESG reporting is not limited to sustainability.

There are indicators that look at the governance piece of the puzzle as the commission has also provided tables detailing “incidents of corruption” among officers and directors of the companies.

According to SEC guidelines, companies listed on the local stock exchange are required to file their sustainability reports along with their annual reports.

Companies that fail to comply will have their annual reports classified as incomplete and will face fines ranging from P30,000 to P60,000, as per Memorandum Circular No. 6, SEC 2005 Series.

When the reporting guidelines were published in 2019, the regulator found that only 22 percent of listed companies have published a report on sustainability impacts and performance.

But three years later, KPMG reported that the Philippines, one of its newest partner countries, now has among the highest compliance rates in the Asia-Pacific region at 87 percent.

FOR TRUE DISCLOSURE Guidelines issued in 2019 by the Securities and Exchange Commission (SEC) require publicly traded companies to make disclosures that can be used to measure their adherence to ESG principles. These templates give an idea of ​​the type and extent of information required. They are taken here in no particular order from the SEC website.

“These sustainability reporting requirements are just one of a growing number of regulations driving sustainable development in the country,” KPMG said in its 2022 report.

“This is resulting in better disclosures and initiatives among the Philippines’ (top 100 companies), with many now incorporating ESG considerations into their business strategies and investments,” it added.

Vietnam had the same percentage, while Thailand had 86 percent. Japan performed best, according to KPMG, as all its top companies met sustainability reporting requirements.

Main motivations

Beyond investor attractiveness and stakeholder engagement, the SEC said sustainability reporting also resulted in improved management systems, motivated workforces and effective management of sustainability risks and opportunities.

These may have been the main motivations for companies to become more transparent about their activities.

A look at the websites of the Philippines’ largest and oldest conglomerates reveals that they have dedicated pages detailing their sustainability initiatives.

But while these improvements are notable, the CFA Institute warns that the scope of global ESG reporting standards poses the risk of ‘greenwashing’, or deliberately misleading investors and stakeholders into thinking that their investments are being directed to the right projects go.

“Greenwashing could ultimately lead to an erosion of confidence in the investment management industry,” said CFA, a global association of investment professionals, in its 2021 Global ESG Disclosure Standards for Investment Products.

The most obvious solution to greenwashing, according to non-profit organization ClientEarth and the Asia Investor Group on Climate Change (AIGCC), is to tell the truth.

“Just be transparent about what you do, how decisions are made and on what basis you make these (sustainability) statements,” Anjali Viswamohanan, policy director at AIGCC, said at a media forum in Singapore last year.

AIGCC and ClientEarth published their Asia Greenwashing Report in 2023, finding that there is increased attention to greenwashing around the world, especially in Asia.

ClientEarth legal counsel Sean Tsung said journalists also act as watchdogs for greenwashing because they have access to corporate reports and can hold company executives accountable.

“We’ve talked about matching companies’ statements with past behavior… and making sure everything lines up. “If there is any suspicion that this is not in compliance, then there is room for investigation,” he said.

Overall, the SEC aims to ensure that its guidelines encourage companies to be more honest about how they respond to sustainability challenges, in addition to financial challenges, as both determine their “long-term viability and competitiveness.”

The guidelines recognize that sustainability reporting is a journey and that listed companies are at different levels in this journey,” the committee said.

“While some are well advanced, most are just getting started,” the SEC added. INQ