Co-author: Kristine T. Torres l January 31, 2025 l Manila Times
In recent years, we have seen a transformative shift in how investments are evaluated by incorporating environmental, social and governance (ESG) factors in investment decision-making. Beyond profitability, investors look through a business’ sustainability by evaluating environmental and societal contributions, and governance practices as useful benchmarks in the investing world.
ESG investing considers, among others, a company’s carbon emissions footprint, source of energy, employee treatment, governance issues, and compliance with applicable laws and regulations. Investors around the world have realized that numbers alone do not paint the full picture, and that sustainability is a catalyst for long-term success.
According to a study conducted by Morgan Stanley Capital International, around 79 percent of investors in Asia-Pacific economies have increased their ESG investments, while 57 percent are expected to have incorporated ESG issues into their investment analysis and decision-making processes by the end of 2021.
The use of ESG principles in investing as a guiding tool is slowly but surely becoming more cemented as a global standard. This increasing trend of relying on ESG standards is attributed to the evolving political push and regulatory landscape, as well as the increased vigilance of consumers about the businesses they support.
With the prominent growth of ESG investing, demand has also increased for ESG disclosures and sustainability reporting. Transparency and disclosures are indispensable pillars of ESG reporting, bridging the information asymmetry between companies and investors. For the past several years, regulators around the world have imposed tighter mandatory disclosures of ESG information and practices, in response to higher expectations of non-financial disclosures and the development of ESG frameworks.
Recognizing the rising wave of ESG, the Philippine Securities and Exchange Commission (SEC) has also issued regulations pertaining to ESG disclosures and sustainability reporting. SEC Memorandum Circular 4, series of 2019, or the Sustainability Reporting Guidelines, requires publicly listed companies to submit sustainability reports together with their annual reports. The Sustainability Reporting Guidelines offer guidance on assessing and managing financial performance across economic, environmental, and social (EES) aspects of a company’s organization that will enable it to measure and monitor contributions toward achieving universal sustainability targets, based on globally recognized standards and frameworks.
This was followed by the SEC’s issuance of Memorandum Circular 11, series of 2022, or the Rules on Sustainable and Responsible Investment Funds. Memorandum Circular 11 imposes requirements on investment companies before they may validly be considered and identified as Sustainable and Responsible Investment Funds. Under this circular, covered entities are also required to disclose information on ESG investments, criteria, sustainable investment strategies and risks, among others. Together with the Sustainability Reporting Guidelines, these regulations aim to ensure disclosure of material ESG factors influencing companies’ operations.
The push to integrate ESG practices in businesses has also reached the Senate with the passage of Senate Bill 2765, entitled the ESG Reporting Act. If passed, the ESG Reporting Act will require all corporations (both stock and non-stock and not just publicly listed companies) to submit sustainability reports to the SEC. The SEC will also be the data collector and repository of ESG data submitted by all corporations.
At the cornerstone of sustainable financing is the adoption of Sustainable Finance Taxonomy Guidelines (SFTG) by financial regulators such as the SEC and the Bangko Sentral ng Pilipinas. The SFTG serves as a simplified approach to determine whether an activity qualifies as environmentally or socially sustainable. It helps provide a set of standards that will equip investors to allocate funds to sustainable projects and aid in investment decision-making.
In a nutshell, the framework established by SFTG will enhance investor confidence by minimizing the risk of greenwashing, or company policies or actions that can misleadingly promote environmentally friendly activities. Through SFTG, companies can ensure that their activities align with internationally recognized sustainability standards, making them more attractive to local and foreign investors.
Sustainability reporting, if integrated in businesses, will be more than mere basic regulatory compliance because of its potential to unlock corporate value. With ESG investing continuing to gain attention, a stronger regulatory push for more transparent and mandatory ESG disclosures — ensuring data quality and minimized greenwashing — will play a crucial role in helping shape the Philippine ESG investing landscape, creating opportunities for companies and financial market participants.
***The views expressed herein are their own and do not necessarily reflect the opinion of their office as well as FINEX. For comments, email msgorriceta@gorricetalaw.com and kttorres@gorricetalaw.com. Photo is from Pinterest.