Companies must develop a more urgent mindset toward environmental, social, and governance (ESG) compliance if they want to remain competitive and continue to attract investors, according to a legal expert.
Lawyer Jomel N. Manaig, a junior partner at Du-Baladad and Associates Law Offices (BDB Law), in a recent newspaper column said that in the Philippines, ESG discussions are barely there and application close to nonexistent. This chill attitude comes even as the world has been recognizing and acting on the urgent need to set climate goals to mitigate and adapt to climate change.
Manaig in his two-part column called on Philippine corporations to begin working on their ESG compliance now. Two potential major consequences of noncompliance are lost opportunities for investment and the imposition of higher green taxes, he said.
ESG refers to a set of standards measuring an organization’s impact on society and the environment, as well as the enterprise’s level of transparency and accountability. Most socially responsible investors check companies out using ESG criteria to screen investments.
Manaig said that one serious setback of noncompliance is the loss of opportunities for attracting investment. He noted that a 2021 survey by Deutsche Bank Research showed that for 75% of its investor-respondents, ESG has some impact on their investment process.
He warned that noncompliance with ESG requirements “may remove Philippine companies from any preferential investment list. Worse, they may be considered as undesirable investment destinations.”
Among the three pillars, environmental factors are more important for European entities, while US firms are relatively more focused on social factors. Nonetheless, the respondents still perceive increased importance of ESG, as a whole, in the future, he said.
In evaluating ESG compliance, investors would rely on ESG disclosures in the financial statements of potential investee-companies. Some Asia-Pacific economies like Hong Kong, Japan, and Singapore have adopted various regulatory guidelines for mandatory ESG disclosure requirements. Similar requirements are also under various stages of discussion and adoption in the United States and the European Union, said the lawyer.
Manaig noted how independent agencies are now providing ESG rating services to quantify the qualitative ESG aspects of each corporation. “Compliance then, at least in this aspect, is certainly not beyond reach,” he said.
Lack of ESG regulation initiatives may likewise cause multinationals to forego investing in the Philippines as operating here may cause them compliance issues.
Aside from loss of investment opportunities, “green taxes”—tax impositions computed on the basis of pollution, emissions, consumption of fuel and other natural resources, and carbon footprint, among others—are also a growing concern with regards to ESG compliance.
Should ESG disclosures become mandatory, businesses can be levied green taxes by tax authorities commensurate to the environmental harm they have caused. On the other hand, enterprises may also be granted incentives to encourage them to reduce environmental harm.
Manaig pointed out that green taxes, such as carbon and pollution taxes, are not limited to the pollution created directly by a corporation. They may include the pollution caused by those within the supply chain of the organization.
But he believes there is still time for the Philippines to get its act together since everyone is still getting familiar with ESG. He urged local companies and regulatory agencies alike to be “more proactive to emerging trends” or risk lagging behind other countries and firms that have already rolled out ESG programs.