September 22, 2026 l Manila Bulletin
For many years, investors primarily looked at financial statements before deciding where to put their money. They examined revenues, profits, cash flows, assets, liabilities, and returns on investment. These numbers remain fundamental, but today’s investors are increasingly interested in another question: How sustainable is the business behind those numbers?
This is where ESG comes in. ESG—which stands for Environmental, Social, and Governance—has recently become a popular and even necessary component of reporting, especially for listed and large corporations. These three areas provide investors with additional information about how a company operates, manages risk, deals with its stakeholders, and prepares for the future.
The Environmental component looks at matters such as energy use, waste management, pollution, resource consumption, and exposure to climate-related risks.
The Social component considers how a company treats its employees, customers, suppliers, and communities. Issues may include employee safety and development, customer welfare, and relationships with the communities where the company operates.
The Governance component examines how a company is directed and controlled. Investors may look at the board of directors and officers, management accountability, internal controls, business ethics, transparency, executive compensation, shareholder rights, and measures against fraud and corruption.
Why should investors care about matters that do not immediately appear on the income statement? The answer is risk.
Imagine two companies generating similar profits. One has strong internal controls, an effective board, diversified suppliers, good employee relations, responsible environmental practices, and transparent reporting. The other has governance problems, frequent employee disputes, regulatory violations, environmental exposures, and weak internal controls. Their profits today may look similar, but are their risks the same? Certainly not.
This is why investors increasingly examine information beyond traditional financial statements. Environmental problems can eventually result in remediation costs, operational disruptions, regulatory penalties, or damage to reputation. High employee turnover can lead to significant recruitment and training expenses. Weak governance can increase exposure to fraud, conflicts of interest, regulatory violations, and poor management decisions. In other words, ESG information can help investors identify risks that may eventually have severe financial consequences.
ESG is moving closer to mainstream financial reporting. For accountants, perhaps the most significant development is that sustainability information is becoming increasingly connected with general corporate reporting. The International Sustainability Standards Board (ISSB) issued IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2, Climate-related Disclosures. These standards are designed to provide investors with information about sustainability-related risks and opportunities that could affect a company’s prospects. This is an important development because sustainability is no longer being treated simply as corporate philanthropy or public relations. Increasingly, the discussion is about information that may affect enterprise value, access to capital, business strategy, risk management, and ultimately financial performance.
The Philippines is also moving in this direction. The Securities and Exchange Commission has adopted the Philippine Financial Reporting Standards on Sustainability Disclosures and issued reporting guidelines for publicly listed companies and large non-listed entities. This sends an important message to Philippine businesses: sustainability reporting is gradually becoming an essential part of the broader financial reporting and governance environment.
But what exactly is an ESG score? An ESG score or rating generally attempts to assess a company’s performance or exposure across environmental, social, and governance factors. Different rating organizations may use different methodologies, indicators, weightings, and sources of information. This means that investors should not treat an ESG score like an audited financial figure or assume that one rating tells the complete story. Two rating organizations can assess the same company differently because they may measure different factors or assign different importance to them. The score, therefore, should be viewed as one analytical tool rather than the final investment decision.
Investors still need to understand the underlying business itself: Is it profitable? Does it generate cash? How much debt does it carry? Does it have competent management? What are its growth prospects? What risks could threaten those prospects? ESG information supplements rather than replaces traditional financial analysis.
What does this mean for SMEs? Owners of small and medium enterprises may think: ESG is for listed companies, so why should I be concerned about it? This thinking may eventually prove shortsighted. Even when an SME is not directly required to prepare extensive sustainability disclosures, it may be part of the supply chain of a larger corporation. Banks, institutional customers, multinational companies, investors, and business partners may increasingly ask suppliers about their environmental practices, labor standards, governance, and other sustainability matters.
A small business, therefore, does not need to establish an expensive ESG department or issue a hundred-page sustainability report. It can start with practical measures such as reducing unnecessary energy and waste, enforcing proper human resource policies, complying with regulations, strengthening internal controls, maintaining ethical business practices, documenting policies, and ensuring transparency in financial reporting. These are not merely ESG exercises; they are simply the core elements of running a responsible and sustainable business.
Both big and small businesses are affected by ESG. Furthermore, to provide added value in their services to clients, audit firms—whether big or small—should help monitor the sustainability compliance of their clients. No one is exempt.
***The views expressed herein are her own and do not necessarily reflect the opinion of her office as well as FINEX. For comments, email wimiranda@inventormiranda.com. Photo is from Pinterest.