Bernardo M. Villegas
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Is Sustainable Reporting Worth It? (Part 2)

 In general, however, the study of Ms. Regina Padojinog is inconclusive as regards the business case of sustainability reporting and practices considering the imperfections of the current data set.  This result is more or less understandable considering that comparability issues were already pointed out in the content analysis, in which only a very small percentage of the indicators are disclosed in a uniform way as regards the SEC template.  Furthermore, only about half of the dataset had complete cases and could be used for the model.  These comparable reports also had some inherent problems as regards methods, geographic coverage or operation coverage which were not uniform either.  Do the difficulties in measurements mean that we should give up on sustainability and governance reporting?  The writer gives a definitive No to this question.

For some time now, Sustainability Reporting bodies have been trying to mend the gap such as in the integration of both Integrated Reporting Framework (IR) and Sustainability Accounting Standards Board (SASB) through the value reporting foundation and the continuous improvements from the likes of Global Reporting Initiatives (GRI) and Task Force on Climate-Related Financial Disclosure (TFCD).  The International Financial Reporting Standards (IFRS) also issued the IFRS S1 last June 2023 for implementation starting January 2024.  Through this, companies are obliged to disclose information regarding the sustainability risks and opportunities that “could reasonably be expected to affect the entity’s cash flows or its access to finance or cost of capital over the short, medium or long term.  Government intervention can also speed up this process as is the case in Europe, where disclosures became mandatory for over 11,700 large companies in the European Union.  The Philippine context is also moving toward the same goal.  As of writing, there are no penalties or rewards in terms of adherence to the template but discussions on updated sustainability reporting rules are now ongoing in the SEC.  These are to be implemented in the third of quarter of 2023 or in 2024 with one of the goals being to make some parts of the template mandatory, thereby improving comparability while considering the disparity in how difficult it is for smaller PLCs who are less equipped compared to bigger companies to disclose.

Some individual cases have found that sustainability can generate financial returns or that sustainability can be a distinctive value proposition.  Those who have found financial returns in relation to sustainability reporting and practices are those who include ESG/sustainability in their Vision-Mission as a core part of their operations and not just an afterthought.  These companies shift their entire scale of operations towards goals that include a central ESG team, tying compensation to ESG Performance indices and designating an executive focused on the sustainability aspect of the company among many other goals. Prominent Harvard Business School academics have gone on to say that “Emerging evidence, although still limited and company-specific, suggests that companies that successfully implement strategies to create shared value can deliver superior shareholder returns.   Capturing that value, however, will require very different practices on the part of both corporate leaders and investors.  This implies that for sustainability efforts to have significant impact, there has to be a large shift in how companies and industries operate.

The study ended with some policy recommendations.  The most important one is to improve the rules for disclosure in sustainability reporting for better comparability and actual usability. If possible, standardize the units of measurement especially as regards environmental indicators.  In the metric for materials used, the template suggests using “kg/liters”, but companies often do not specify whether they use kilograms or liters.  It would also be desirable to push through with the plan to create a base of indicators mandatory for comparability.  This may be achieved either through scientific means or in relation to the sustainability goals in which the Philippines is involved.  This would make it possible to easily compare performance objectively and to properly set a roadmap to achieve goals set for the country as a whole.  The most outstanding example of this is the set of 17 Sustainable Development Goals which the Philippines is committed to implementing by 2030.  Another is the Nationally Determined Contribution that the Philippines pledged in the Paris Agreement.

            The Philippines pledged to cut and avoid GHG emissions by 75% for the whole economy by 2030. At present, the clock is clearly ticking to meet such goals.  It may also be possible to align it with the goals of specific government departments such as those of the Department of Labor and Employment which could take action in matters related to forced or child labor.  The newly created Department for Migrants also has a lot of room for establishing very specific goals to promote the welfare of the Overseas Filipino Workers (OFWs) who can be subjected to so many types of abuses on the part of the recruiters and of the overseas employers.  Large-scale miners and agribusiness ventures have also many opportunities to incorporate ESG considerations in their dealing with small miners and small farmers, especially among indigenous (IP) people in such resource-rich provinces as Palawan and Oriental Mindoro.  A database can be generated using these sustainability indicators for easier research and policy development.  These decisions, however, should be made in consideration of the materiality of disclosures in varying kinds of Publicly Listed Companies. 

            At the macro level, the cautionary stance taken by this study of Ms. Padojinog is matched by a recent article by L. Casanova et al entitled “For emerging markets, ESG will not work without economic growth.”  The writers caution that an overemphasis on ESG may be counterproductive in emerging markets where a large part of the population lives below the poverty line.  While developed countries worry about rising temperatures, people in emerging economies are more concerned about basic needs for food, water, clothing and shelter.  For them and for their nations, growth matters more.  To address this dilemma, a group of social scientists at the Cornell University’s Emerging Market Institute added a “D” to the usual ESG acronym.  The EMI D-ESG Framework (D refers to Development) provides a way to measure sustainable growth that is inclusive, environmentally friendly and also focuses on governance.  China and Vietnam have performed well under this framework.  Malaysia and Indonesia are doing well on economic growth and social and governance but lagging behind in environment.  In the case of the Philippines, lagging ESG ratings offset fast economic growth.  This could imply that despite the unclear relationship between sustainability reporting and financial performance, we should support the conclusion  of Ms. Padojinog that we should continue encouraging our leading business conglomerates to report their efforts on seeking ESG goals.  For comments, my email address is bernardo.villegas@uap.asia.