Bernardo M. Villegas
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Is Sustainability Reporting Worth It? (Part 1)

             Those of us who have been long dissatisfied with the single-minded focus by some capitalists on the maximization of profit have celebrated the increasing introduction of ESG  (Economic, Social and Governance) criteria into investment decisions.  Even if  it is not easy to measure the exact contribution of any business to the economy (such as increase in national income and employment), or on sustainability of the environment, or on the attainment of good governance, the mere effort by people in business to consider other objectives of their operations beyond the maximization of profit is already a commendable trend that could cure the abuses of the extreme form of neoliberalism resulting from the dictum made popular by Nobel laureate Milton Friedman that the only business of business is to obtain maximum profit.

            It is important, however, to remember that economics as the science and art of allocating scarce resources to attain multiple objectives always requires a balancing act.  Stopping small scale miners because they destroy the environment can increase poverty in the countryside.  Unreasonably prohibiting nickel or copper mining in certain sites for environmental reasons may inhibit the growth of the digital economy because there is no digital devices (cell phones, laptops, etc) that does not require nickel or copper as an input.  Fragmenting land to attain social justice through agrarian reform may drastically reduce productivity in the sugar or coconut industries which require economies of scale.  I can go on and on.  E-S-G goals are not always compatible with one another.

            I would like to quote extensively from a columnist of the Financial Times, Stuart Kirk, who entitled one of his columns “Rebranding ESG won’t save it from its internal contradictions.”  My intention here is not to discourage laudable efforts in the business community to increasingly moderate its pursuit of maximum profits by incorporating into its Vision-Mission statements certain objectives that promote the common good of society related to protecting the environment or eradicating corruption and other corporate malpractices. I just want to inject some realism among crusaders for environmental sustainability or good governance so that they do recognize the internal contradictions in the so-called ESG strategy. 

            The article points out that somebody has to arbitrarily decide the relative weightings between “E” or “S” and “G”.  In debatable matters that do not involve absolute truths, everyone has his or her own view on what is good and bad.  For example, why are huge efforts made to exclude tobacco stocks from portfolios but not food companies who overload our meals with sugar, salt and saturated fats?  It is well known that nearly half a billion people suffer from type 2 diabetes around the world.  It is in America’s top 10 causes of death.  Greater realization of this fact may lead to coconut water displacing the existing carbonated drinks that are so popular especially among the young.    Or how come we hold companies to account over diversity and not work-related mental illness, which makes up half of all days lost to sick leave?  Some investors care about governance, others homelessness outside their office. It is important that business decision  makers are provided more quantifiable criteria for judging the merits of an ESG strategy or another.


            I was privileged to read a masteral thesis of one of our Magna Cum Laude graduates at the School of Economics of the University of Asia and the Pacific, Ms. Regina Padojinog.  She is now pursuing her Master in Management degree in the famous IESE Business School.  The paper has a long title: “The Relationship of Sustainability Practices and the Corporate Performance of Publicly Listed Companies in the Philippine Stock Exchange’s ‘Industrial Sector.”  Reflecting the greater insistence of today’s centennials (Generation Z) on evidence-based policy making, the thesis aims to answer the question “is there a business case for Sustainability Practices and Reporting for Public Listed Companies in the Philippines Stock Exchanges’ Industrial Sector?” “Industry” in this context includes not only manufacturing but also construction, mining, and public utility.  Some of the companies included in the study were ACEN Corporation, First Gen, Manila Electric Company ,  Pilipinas Shell and Manila Water in the Electricity, Energy and Water sector;  AgriNurture, Inc, Axelum, Century Pacific Food Inc., Emperador, Inc. D&L Industries, Max’s Group, Monde Nissen, and Vitarich Corporation in the Food, Beverage, and Tobacco sector; and CEMEX Holdings Philippines, EEI, PHINMA Corporation and Holcim Philippines in the Construction, Infrastructures and Allied Services sector. 

The study was prompted by a release of a memorandum last February 15, 2019 by the Securities and Exchange Commission (SEC) mandating that all Publicly Listed Companies (PLCs) should attach a sustainability report to their SEC Form 17-A submission, following a certain template in terms of sustainability disclosure.  The memorandum advertised several benefits associated with the reporting practice.  The scientific mind of the thesis writer motivated her to pose the question of whether sustainability reporting and practices are truly as beneficial to the company as claimed by the Memorandum.

            To answer the question posed, the thesis addressed three objectives:  (1) understanding the state of Philippine sustainability reporting in terms of disclosure behavior; (2) identifying the representative indicators that have an impact on ESG and how they translate into practices; and (3) finding the relationship of sustainability reporting and practices  to corporate financial performance. Corporate financial performance was in turn defined in terms of (1) return to the investors, (2) return to the business itself, and (3) the company’s efficiency and profitability, respectively.  These served as  the  dependent variables for the statistical models split into two main groups:  the first set of models monitoring the impact of sustainability  reporting and the second monitoring the impact of sustainability practices.  As such, three models were built per set, one for each of the three facets of corporate performance with a grand total of 6 models.

            There were two Important findings of the study.  First, the information gathered from the sustainability reports are difficult to compare. Only 28 out of 109 (25.7%) indicators, and 56 out of 99 (56.6 %) were comparable from the pooled set of reports during 2021 – 2022.  Meanwhile, in terms of disclosure, the most comparable indicators were those pertaining to economic value and employment whereas the least comparable were those pertaining to environmental metrics (most notable was the release of pollutants) and the company’s relationship with the community. Second, in terms of the impact of corporate performance, all three models of disclosure were significant, but only one model found significant indicators on the impact of disclosure.  For corporate practices on the other hand, only four models were significant across both transformed and untransformed models, with only a handful of social and environmental indicators being shown as significant statistically.          

            The study gives some very important support to the greater emphasis being given today by business enterprises to the reskilling, upskilling and retooling of their existing workforce.  The variable of training hours was significant in the model measuring the impact of sustainability practices on Return on Assets.  It stands to reason that average employee training hours generate better returns on the business itself:  if more training is associated with higher expertise or skills at their job.  Skilled workers mean better quality, thereby increasing returns as the assets they use are properly maximized.  The ongoing review of the K to 10 curriculum to align it more with the training in skills that are in great demand in the labor market (especially in construction and Information Technology) rather than fulfilling academic requirements to obtain a college degree is in the right direction.  To be continued.