What ESG is and why it matters

We have seen crucial changes in our world to date. The COVID-19 pandemic-induced lockdown alone had an immediate and negative impact on business activities. A Philippine enterprise survey conducted by the Asian Development Bank (ADB) from 28 April to 15 May 2020 shows that two-thirds of businesses closed temporarily, while 29% reduced operations. 

As the effects of the pandemic and climate crisis become increasingly clear, businesses need to adapt with new strategies to help them continue to succeed. Companies must recognize the need to reorient strategic directions in these challenging times to protect their profitability and enhance business reputation.

Focus on ESG factors

Forward-thinking businesses identify sustainable opportunities that will benefit them in the long run. They seize related opportunities to innovate and reduce costs. This leads to a more comprehensive focus on the Environmental, Social and Governance (ESG) factors in assessing the sustainability of business operations. Companies integrate these factors into their business strategies to mitigate unprecedented risks.

For many, the term “ESG” suggests environmental issues like climate change and resource scarcity. While these are elements of ESG, the term means much more. How a business consumes energy, interacts with natural resources, and handles its waste are main factors in accounting for its environmental footprint. Social impact includes a company’s interface with the community and other institutions, how it conducts business in a broader social context, and even its labor relations. The final component, a company’s governance, includes its internal culture and ethics, whether it adheres to the laws and regulations, promotes diversity, and considers all stakeholders in the decision-making process.

Initially, the ESG factors were only used by investors to determine potential investments. Nowadays, ESG gains more recognition among investors because it raises public awareness on the environmental and social influence of companies. Investors want to know that a company is creating long-term value. They are looking for businesses that have sustainable paths and a sustainable strategy that considers these factors. In fact, sustainability itself will become a license to operate for most businesses.

ESG and regulatory reporting

Majority of the large publicly traded companies overseas publish reports about their ESG initiatives. Locally, public companies need to comply with the Philippine Securities and Exchange Commission’s (SEC) Sustainability Reporting Guidelines for Publicly Listed Companies through SEC Memorandum Circular No. 4, series of 2019, which outlines information that covered companies will have to disclose in relation to their non-financial performance across the economic, environmental and social aspects of their businesses. SEC requires, on a “comply or explain” basis, publicly listed companies to submit sustainability reports starting 2020, as part of efforts to help them assess and manage their economic, environmental and social impacts.

Still, some companies have not dedicated significant attention to how ESG factors might impact their businesses. They avoid the extra work in adapting to the realities of ESG but little do they know that its benefits far outweigh its costs.

How ESG works for businesses

Take, for example, a logistics company in Canada. Shipping and delivering goods are carbon intensive. By relying solely on traditional forms of energy, the company might lose its business due to inefficiencies, especially when oil prices are high. The company could be tagged as a carbon polluter and garner negative reactions from consumers. So, the company obtained third-party advisory assistance to improve its sustainable practices and provide recommendations over the measurement and reporting of its fuel consumption data. With an effective ESG strategy, the company capitalized on electric vehicles and other alternative sources of fuel such as renewable energy sources that have become more readily available and cost efficient, rather than being overly dependent on oil products, to reduce its carbon footprint.

The company is also labor intensive. It faces the risks of labor shortages and disruptions due to the high demand of deliveries. So, the company invested in the development of new technology available in delivery drones. This investment then pays off as deliveries become faster and more efficient. With these innovations, the leaders must further govern its company from any possible violations that may occur in the future. It is therefore important to consider and identify any ESG-related risks and opportunities alongside the occurred changes. All this significant data and information should then be reflected in a cohesive and transparent report for investors’ and stakeholders’ review when evaluating the success of the new and innovative activities in which the company engages. Seeking external assurance support from experts to make necessary recommendations for improvements on report assessment will give additional comfort to investors and stakeholders. 

Investors and business owners perceive ESG as a form of social responsibility - a broader obligation to society as they reinforce a more sustainable future for the world. Environmental, social and governance concerns may seem new to local business but this year proves that we need to embrace it now more than ever. ESG will continue to be essential even in the post-pandemic world as it amplifies a company’s resiliency to unforeseen global or local crises.

Paul Chester U. See is a partner at Isla Lipana & Co., as well as the general manager at PricewaterhouseCoopers Business Services Philippines Co., Ltd. Both entities are member firms of the PwC network.