In the last few years, a growing number of companies have been publishing sustainability reports and have started integrating environmental, social and governance (ESG) considerations into their strategic frameworks because of regulatory developments and increasing demand from investors and customers.
Locally, a key driver for sustainability reporting is Memorandum Circular No. 4, series of 2019, issued by the Securities and Exchange Commission (SEC) in 2019. This requires publicly-listed companies (PLCs) to submit an annual sustainability report under a “comply or explain” approach. The SEC recognized the relevance of ESG disclosures not only to support global and local sustainability goals, but also to encourage transparency and accountability from companies by requiring public disclosure of their sustainability performance.
After a year of implementation, we conducted a review on how listed firms responded to the mandate. We then published a report containing a review of listed companies’ 2020 sustainability reports, known as “Beyond the Bottom Line 2nd Edition: Sustainability Landscape in the Philippines.”
IMPROVED QUALITY AND COVERAGE
The number of reviewed sustainability reports increased from 73 in 2019 to 118 in 2020. Consistent with the 2019 review results, the 2020 review revealed that 66% still applied the SEC’s template, while 52% released stand-alone, glossy sustainability reports and 53% included sustainability content in their annual reports, which shows that PLCs are gradually adopting more formats than just using the SEC’s template. The most widely adopted (79%) standard remained the Global Reporting Initiative (GRI) Standards.
However, there was a notable increase in the use of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations (41%), which suggests that listed companies are recognizing the need to identify potential impacts of climate change to their businesses and mitigate climate risks. Companies in the construction and power & utilities industries covered most of the TCFD disclosures, showing their awareness of their exposure to the adverse impacts of climate change. Meanwhile, holding firms and listed companies in the banking, mining, retail and transportation industries had some climate-related disclosures, whereas the food, beverage and tobacco companies had little to none.
Only 10% of the listed firms we reviewed obtained limited assurance, and 56% did not disclose their sustainability vision and strategies or provided only high-level statements of intent relating to sustainability. Sixty-two percent disclosed their materiality assessment process, while biodiversity-related topics like watersheds, marine and International Union for Conservation of Nature Key Biodiversity Areas (IUCN/KBA) remained the least reported. Knowing that the Philippines is one of the most megadiverse countries globally, biodiversity loss is a crucial issue. This makes it imperative for companies to report on biodiversity, especially for industries with direct impact such as mining and power & utilities.
Overall, there has been improved quality and coverage in the 2020 sustainability reports compared to the previous year, and ESG disclosures are expected to improve further especially since the “comply or explain” approach ended in 2021. We also anticipate changes in the global and local reporting landscape to address the call to harmonize sustainability reporting standards and frameworks.
The IFRS Foundation, through the International Sustainability Standards Board (ISSB), has released the first two exposure drafts of the IFRS Sustainability Standards Disclosures. Comments on the exposure drafts are due on 29 July 2022, and we are expecting the official publication of these standards before 2022 ends.
POLICY LANDSCAPE OF SUSTAINABILITY REPORTING
Sustainability reporting is just one of the growing regulations that aim to accelerate sustainable development in the country. The growing concern over ESG risks, compounded by the impacts of the COVID-19 pandemic, are driving stronger sustainability efforts from the government and companies.
The government has developed and released several policies and frameworks to support decarbonization and the transition to a cleaner energy source through climate funding and action plans. Multiple regulatory and reporting developments are underway to address ESG issues: sustainable finance, extended producer responsibility (EPR), sustainable mining, and biodiversity protection. Investors are also paying more attention to ESG and are saying they are now attaching greater importance to companies’ ESG performance because of the pandemic, as revealed in EY’s 6th Institutional Investor Survey.
Despite the current gaps in ESG disclosures as observed in the 2020 review, we see a potential acceleration in the incorporation of ESG considerations into corporate strategies and investment on resources as companies begin to realize that gains from their sustainability efforts outweigh the related costs and are not just an added expense to the business.
Currently, the SEC only requires listed companies to submit sustainability reports, but this will soon be extended to other types of corporations, as they have announced in several webinars. Considering the multiple, fast-paced global and local developments around ESG, businesses should reinforce their sustainability journey as soon as possible and consider the following actions:
• Define sustainability governance at the management and board levels
• Integrate sustainability into the enterprise risk management system and corporate strategies
• Invest in systems and processes that will support reliable and timely ESG reporting
• Obtain third-party assurance on ESG disclosures
• Keep tabs on the developments around sustainability reporting standards, especially on the IFRS Sustainability Standards Disclosures
• Build internal capacity to support the organization’s sustainability thrust
Sustainability reporting is one of the best ways to boost stakeholder confidence as it demonstrates transparency and accountability. However, it is not enough for companies to produce sustainability reports for compliance purposes alone.
Instead, determining material ESG issues for the business is essential to disclosing relevant information to stakeholders and to manage the risks these issues bring. A company’s sustainability journey may also entail business model changes, portfolio rebalancing and investments in new technologies and capabilities. Thus, corporates should start realigning their resources and strategies and understanding what they need to ensure accurate and timely ESG disclosures.
Bold sustainability commitments and goals with defined metrics will be necessary to drive impactful actions that help accelerate the country’s sustainable development.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Benjamin N. Villacorte is a partner from the Climate Change and Sustainability Services team of SGV & Co.