Embracing ESG: Why is IT important?

With greater demand to act responsibly against climate-induced problems, corporate entities globally, including those in the Philippines are urged to embrace environmental, social and governance (ESG) measures.

ESG was used in a 2004 report titled Who Cares Wins, a joint initiative of financial institutions at the invitation of the United Nations. Currently, it has grown beyond corporate social responsibility (CSR) initiatives into a worldwide development. 

What is ESG?

ESG represents non-financial factors that are used to measure the sustainability of companies or financial products such as mutual funds or bonds. 

Environmental refers to the impact of resource use on the environment, including fossil fuels and generated carbon footprint, among others.

Social criteria looks into how businesses relate and interact with their employees, consumers, suppliers, and the communities.

Governance relates to policies and practices that lead to effective decision-making and compliance. 

What does ESG mean for Business

In 1998, John Elkington published Cannibals with Forks: the Triple Bottom Line of 21st Century Business. He identified other considerations in determining a company›s equity value. He coined the term “triple bottom line,” referring to the financial, environmental and social factors included in computing new valuation. 

Today, many of the  corporate strategies focus on these three pillars and have equipped businesses to become more resilient. 

According to the article Why Is ESG More Important Now Than Ever For Your Business? benefits include the following:

Businesses have an easier time entering new markets, and widening their present operations, thus adding to their top-line growth.

Companies that utilize sustainable methods of production tend to be more efficient and reduce their costs. 

Businesses are affected by some form of regulations. ESG allows them to effectively manage regulatory compliance while allowing consumers to also prefer their brands. 

Companies with sustainability agenda are able to hire younger generations of employees with stronger commitment toward society. 

ESG in the Philippines

Last February 2019, the Securities and Exchange Commission (SEC) issued Memorandum Circular No. 4 or the Sustainability Reporting Guidelines for Publicly-Listed Companies that requires all publicly-listed companies to assess, manage and submit an annual report on their ESG performance. 

The SEC also mandated enterprises to attach sustainability reports starting 2020, in order to help businesses assess and manage economic, environmental, and social impacts. 

Presently, several Philippine banks, insurance companies, and mutual funds are offering Sustainability Bonds and products for the public to invest in, after the Bangko Sentral ng Pilipinas issued Circular No. 1085, series of 2020 or the Sustainable Finance Framework.

Meanwhile, local companies participate in the annual Sustainalytics’ ESG Risk Ratings, intended to assess their performance and how they can benefit from opportunities and manage risks in the middle to long term. 

Quo Vadis?

Based on a 2020 Gallup Survey,  48 percent of US investors are interested in sustainable investing, but only 25 percent have heard much about it while a limited 10 percent say they are actually into sustainable investing.

Many investors still give more priority to stock and investment performances than ESG factors, as 78 percent of investors said “they give a lot or a fair amount of thought to the expected rate of return when choosing which companies or funds to invest in.”

Nonetheless, ESG bonds and mutual funds have exhibited lower volatility and good returns. These have made both policymakers and investors appreciate that there is greater opportunity to invest in businesses with excellent ESG emphasis.

References include: Environmental, social, and corporate governance (en.m.wikipedia.org); Is ESG Investing Here to Stay or Just a Fad? (wedbush.com); SEC Memorandum Circular No. 4, Series of 2019 (sec.gov.ph); Where U.S. Investors Stand on ESG Investing, by Lydia Saad (news.gallup.com)and Why Is ESG More Important Now Than Ever For Your Business? (regask.com)

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Henry L. Yap is an architect, environmental planner, former real estate practitioner and senior lecturer. He was recently appointed as one of the Undersecretaries of the Department of Human Settlements and Urban Development.