ESG’s advantage for Philippine businesses

By Kristine I. Aguirre, Advisory Partner and Head of ESG, KPMG in the Philippines (R.G. Manabat & Co.)

SUSTAINABILITY HAS become a driver to what shapes corporate behavior and decision-making for companies not just in the Philippines, but also globally. According to the “KPMG 2023 CEO Outlook,” as much as 69% of CEOs have fully embedded ESG into their business as a means to value creation.¹ As awareness of climate change and sustainable development rises, companies face increasing pressure to adopt more responsible business practices. The same survey mentions that 68% of CEOs deem that their current ESG progress is not strong enough to withstand potential scrutiny.¹ This has shifted how organizations now approach environmental stewardship and social responsibility with ESG and transparency emerging as a key element in building public trust.

The business world is changing as leaders in sustainability drive positive change in their respective organizations. Companies are reducing their environmental footprint and creating efficient and responsible systems. However, this transition is not without challenges, ranging from the implementation of new and complex practices to the need for high-quality data to measure and report on progress.

Over the years, the Philippines has taken significant steps to promote Environmental, Social, and Governance (ESG) practices. In 2019, the Securities and Exchange Commission (SEC) issued Memorandum Circular No. 04, which requires publicly listed companies (PLCs) to submit sustainability reports. These reports aim to assess and manage non-financial performance across the economic, environmental, and social aspects of organizations and enable PLCs to measure and monitor their contributions towards achieving universal targets of sustainability as well as national policies and programs.²

The Philippine government is actively working to enhance its ESG regulatory framework, thus the country has also expressed its intention to adopt the International Sustainability Standards Board (ISSB) standards, indicating a commitment to align with international best practices.³ Last October 2021, the Sustainable Finance Taxonomy Guidelines (SFTG) for the Philippines were developed through cooperative efforts between the Securities and Exchange Commission (SEC), the Bangko Sentral ng Pilipinas (BSP) and the Insurance Commission (IC). The Financial Sector Forum (FSF) has developed these guidelines extensively drawing on the ASEAN Taxonomy’s Foundation Framework. The SFTG will initially focus on the objectives of climate change mitigation and climate change adaptation, with a view to adding ecosystems and biodiversity, and circular economy, as well as potential social objectives in future iterations.⁴ The SEC is also planning to fully implement the Association of Southeast Asian Nations Sustainable and Responsible Fund Standards (ASEAN SRFS) to enhance transparency and uniformity in reporting.⁵

Addressing environmental issues, particularly the Philippines’ plastic pollution problem, the Extended Producer Responsibility Act (EPRA) of 2022 requires large, obliged enterprises to establish programs for the effective recovery of plastic waste. Under EPRA, companies must meet target recovery rates, 40% in 2024 and increasing by 10% annually until 2028.⁶ These are just some of the mandates that reflect the growing emphasis on sustainability in the Philippine landscape.

CREATING SUSTAINABLE VALUE
While implementing ESG initiatives can seem costly, this should be seen as long-term investments in creating sustainable value for organizations. Companies face many obstacles in implementing these new practices and measuring sustainability progress. However, compliance can bring benefits such as fostering a motivated workforce and increasing public and investor interest.

ESG reporting has gained prominence over the past decade, with a growing trend towards integrating ESG information into mainstream financial reporting. According to “KPMG’s 2022 Global Survey of Sustainability Reporting,” 79% of leading companies in surveyed countries report on sustainability, while this figure rises to 96% among the world’s top 250 companies.³ The demand for ESG information from investors and stakeholders has increased, with 69% of CEOs reporting significant stakeholder demand for increased transparency and reporting on ESG matters.³

Companies have encountered challenges in gathering and validating data, particularly for ESG reporting. Despite the growing demand for ESG information, a recent KPMG survey on readiness revealed that only 29% of companies have a clear audit trail to support their non-financial disclosures.⁷ As the amount of reported data increases, ensuring the accuracy and reliability of ESG disclosures has become increasingly difficult. To address this, companies are relying on third-party assurance and verification services. These services validate ESG data, increasing investor confidence and supporting companies’ compliance processes. Assurance standards are used to evaluate reporting procedures, controls, and data-gathering processes. This process allows companies to validate their claims and enhance their credibility, ensuring compliance with jurisdictional requirements.

DRIVING POSITIVE CHANGE
Companies are increasingly recognizing the critical importance of assessing and managing ESG risks and integrating it into already existing systems. The climate crisis and recent global pandemic have heightened interest in ESG issues, prompting companies to reevaluate how they conduct business. According to the “KPMG Global Survey on Sustainability Reporting,” companies acknowledging that climate change is a risk to their business has increased significantly, with 64% of the G250 and 46% of N100 companies reporting on environmental risks in 2022. Nearly all of the world’s top 250 companies (G250) report on sustainability, reflecting the growing realization that ESG matters are not separate but integral to achieving long-term value creation.⁸

Companies that prioritize ESG have been found to have a positive correlation with financial performance and attractiveness to investors. Many business leaders are aware of the importance of having strong ESG governance, oversight and accountability. There is a growing consensus that sustainability risk is also a financial risk. Company strategies need to consider this expanding scope. By integrating ESG, companies can future-proof their operations against climate-related risks and promote inclusive growth.⁹ By embracing these principles, businesses can drive real and positive change.

Commitments to ESG principles are also driving positive innovation — one example is through the convergence of AI and sustainability efforts. In the Philippines, AI-powered solutions are helping businesses tackle environmental challenges like deforestation, pollution, and climate change through enhanced monitoring and management. Companies are using AI to bridge social gaps by improving access to education and healthcare, further advancing their ESG commitments.¹⁰

The Commission on Audit of the Philippines has started using AI and data analytics to detect anomalies in government transactions.¹⁰ Their proactive approach helps curb corruption and promote good governance, fostering synergies between technological progress and sustainable development.

This ESG shift impacts how companies now view long-term value creation, helping them attract responsible investors and fostering stakeholder trust. While businesses continue to face new challenges in implementing sustainability, measuring progress, and navigating the complex regulatory landscape, this change remains crucial as part of future-proofing operations.

Technology will play a significant role in advancing ESG, enhancing reporting, scalability of impact, and the effective management of risks. Companies are focusing on preparing accurate and reliable reports as a measure of progress and accountability, often verified by third-party assurance.

ESG is driving a holistic approach to business, emphasizing sustainability, ethics, and long-term resilience. This trend is here to stay and will continue to shape responsible business practices not only in the Philippines but globally.

REFERENCES
[1] https://kpmg.com/xx/en/home/insights/2023/09/kpmg-global-ceo-outlook-survey.html#esg

[2] https://www.sec.gov.ph/mc-2019/mc-no-04-s-2019-sustainability-reporting-guidelines-for-publicly-listed-companies/

[3] https://kpmg.com/ph/en/home/insights/2023/07/get-ready-for-the-next-wave-of-esg-reporting.html

[4] https://www.sec.gov.ph/wp-content/uploads/2024/03/2024MC_SEC-MC-No.-5-S.-of-2024-Guidelines-on-the-Philippine-Sustainable-Finance-Taxonomy.pdf

[5] https://www.sec.gov.ph/mc-investment-companies/sec-mc-no-04-series-of-2023/

[6] https://emb.gov.ph/ra-11898-extended-producer-responsibility-on-plastic-packaging-waste/

[7] https://kpmg.com/xx/en/home/insights/2024/05/the-journey-continues-navigating-the-road-to-readiness.html

[8] https://assets.kpmg.com/content/dam/kpmg/sg/pdf/2022/10/ssr-executive-summary-small-steps-big-shifts.pdf

[9] https://kpmg.com/ca/en/home/insights/2023/04/embed-esg-risks-opportunities-into-business-strategies.html

[10] https://www.philstar.com/business/2024/07/02/2366989/innovation-and-convergence-ai-and-esg-philippines

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Kristine I. Aguirre has 20 years of experience in External Audit, Internal Audit, Internal Control over Financial Reporting, Sarbanes-Oxley Assistance Services, Enterprise Risk Management, Board Advisory, Forensic and Sustainability Services. She graduated from University of Santo Tomas with a degree in BS Accounting. She then went on to become a Certificate Public Accountant both in the Philippines and USA. She is also a Certified Internal Auditor.