Demystifying ESG: What It Is and Why It Matters for Philippine Businesses

The 21st century’s global sustainability challenges have redefined the business bottom line, pushing stakeholders to reconsider how they evaluate organisations. While turning in steady profits is always good, it no longer suffices as the end point of doing business. 

Below, we delve into the intricacies of the ESG (Environmental, Social, and Governance) framework, what it means for business, and how it can benefit your bottom line now and in the future. 

What is ESG?

ESG represents a comprehensive framework investors use to assess a company’s non-fiscal performance. As such, each criterion – environmental, social, and governance – helps shape modern organisations’ operations and overall approach toward responsible and sustainable business practices. 

Here’s a closer look at these criteria:

Environmental 

These refer to a company’s ecological impact, such as energy efficiency, greenhouse gas emissions, waste management, and resource conservation. Companies with strong environmental performance often have more efficient processes and lower operating costs. They may also be less likely to face regulatory penalties or reputational damage from environmental incidents. 

Social

This criteria focuses on how an organisation interacts with people, communities, and stakeholders. They also evaluate whether businesses hold their suppliers, vendors, and partners to their ESG standards. 

It involves aspects that include the following:

• Fair labour practices

• Employee well-being, health, and safety

• Charitable programs

• Community engagement

Companies with strong social performance are often more attractive to investors, employees, and customers. They are also more likely to innovate and adapt to changing social trends. hese factors measure how well the organisation meets its human obligations in operations, global supply chains, and local communities.  

Governance

Governance factors refer to how an organisation is run. Companies with sound governance practices are often more transparent and accountable. This criteria also involves an organisation’s corporate governance practices, such as:

• Board composition

• Executive compensation

• Shareholder rights

Depending on the industry, ESG practices may also require a company to avoid appointing board members and executives with conflicts of interest and building relationships (by making political contributions, for example) that can lead to preferential treatment. 

Beyond CSR: Why ESG is Important for Philippine Companies

Implementing ESG practices goes beyond fulfilling corporate social responsibility (CSR) obligations. Increasingly, organisations are recognising that embedding ESG into their ethos is a smart business move. Let’s take a closer look at how this manifests:

1. Addressing Climate Vulnerability

A World Bank report found the Philippines as one of the countries most affected by extreme climate events, with annual losses from typhoons estimated at 1.2% of the GDP (gross domestic product). By integrating measures to minimise their carbon footprint, organisations can contribute to the country’s climate change mitigation efforts while future-proofing operations against climate-related risks. 

2. Fostering Inclusive Growth

While the Philippines has done well to temper the impacts of recent economic downturns, poverty and social inequality remain significant challenges to the country’s development. By prioritising fair labour practices, community engagement, and overall customer welfare, businesses can nurture a system that benefits both society and their bottom line. 

3. Enhancing Investor Interest

Investors are increasingly valuing ESG factors as indicators of a company’s long-term sustainability. By implementing strong ESG practices, organisations can unlock access to capital and attract a wider range of investors. 

This is exemplified by the Philippine financial technology sector, which has seen around USD$8.8 billion in investments. According to a study by Digido, this can be traced to the fintech microfinance sector’s role in fuelling sustainable development.

4. Foreign Supply Chain Compliance

Many countries are enforcing stricter ESG standards, influencing global supply chains. As such, adhering to robust ESG practices becomes crucial for sustained partnerships and operational continuity. 

For example, the German Act on Due Diligence in Supply Chains imposes a host of human rights and ecological obligations on corporate entities operating in Germany. Beyond internal compliance, the mandate also forces organisations to ensure their direct and indirect suppliers adhere to human and environmental rights. 

Corporations face similar obligations in other jurisdictions, including the Netherlands, France, the UK, and the US. These due diligence obligations are crucial, as Philippine global exports have grown significantly within these territories.  

5. Local Legal Compliance 

In the Philippines, there are several laws and regulations designed to promote and mandate ESG practices. These include the following:

• 1999 Philippine Clean Air Act

• 2004 Philippine Clean Water Act

• 2000 Ecological Solid Waste Management Act

• 1990 Toxic Substances and Hazardous and Nuclear Wastes Control Act

In addition, 2019’s Energy Efficiency and Conservation Act provides fiscal and non-fiscal incentives to organisations that develop and design energy efficiency measures, including renewable energy adoption. 

Beyond ecological concerns, 2022’s Expanded Anti-Trafficking in Persons Act prevents forced child labour and involuntary servitude. Meanwhile, the Revised Corporation Code has given the Securities and Exchange Commission (SEC) the power to dissolve or impose sanctions on corporations engaging in graft and corrupt practices. 

Understanding these regulations is pivotal for companies to align their policies and operations with evolving ESG standards. 

ESG Trends in the Philippines: How Local Companies Adopt ESG

Below, we take a closer look at Philippine companies leading the way in implementing innovative ESG strategies. 

Shift to Renewable Energy Sources

In November 2022, the Ayala Group’s energy platform, ACEN, completed a landmark transaction enabling the early retirement of its coal plant in Batangas. The world’s first energy transition mechanism (ETM) deal halves the 50-year operating life of the coal plant, with the massive conglomerate’s commitment to transitioning to cleaner energy. 

Developed by the Asian Development Bank (ADB), the ETM is a concept that aims to leverage low-cost and long-term funding geared towards early coal retirement. It also facilitates the reinvestment of proceeds to enable renewable energy projects. ACEN’s commitment could potentially reduce up to 50 million metric tons of carbon emissions. 

Reducing Supply Chain Emissions

Businesses’ carbon emissions are divided into three scopes, which include:

• Scope 1: Emissions from own operations

• Scope 2: Emissions from third-party purchased utilities

• Scope 3: All other emissions in the entire value chain

Del Monte Philippines is shifting third-party delivery transport to double-decker trucks to help realise net zero carbon emissions. The company also set the goal of reducing production facility emissions by 3% per year, installing solar power infrastructure in their plants and plantations to aid the cause. 

According to SAP Philippines Managing Director Rudy Abrahams, committing to sound ESG practices can ultimately improve organisations’ profitability. Reducing emissions lowers energy costs while increasing brand value for shareholders, customers, and employees. 

Embracing Digitalisation

Embracing technology is critical to implementing ESG initiatives. In addition to leading the charge in adopting renewable energy, ACEN implemented SAP S/4HANA on Azure to create a unified digital business platform. This allows them to formulate and execute strategies for increasing solar and wind plant capacities while reducing inefficiencies and waste. 

Globe, for its part, migrated to SAP S/4HANA to improve fragmented processes, manual workloads, inefficiencies, lack of insights, and delayed decision-making. As one of the country’s top telco and digital solutions companies, Globe has various entities with different processes and reporting formats. The migration will streamline these processes, resulting in fewer reconciliations and error-free reporting.

These and similar digitalisation efforts foster ESG initiatives by enhancing operational efficiencies, optimising resources, and aligning technological advancements with sustainability goals. 

Workplace Diversity and Inclusivity

According to a study, companies in the top quartile for ethnic and cultural diversity were 36% more likely to outperform their competitors in terms of profitability. This uptick is associated with productivity boosts and a more harmonious work environment. 

Global healthcare company, MSD, has been prioritising diversity, equality, and inclusion (DEI) to nurture its talent pool and better serve its stakeholders. According to MSD Philippine President and Managing Director Andreas Riedel, championing DEI initiatives cultivates a more inclusive work environment, unleashing the workforce's full potential. 

ESG: A Roadmap for Sustainable Growth 

As the world continues to move towards a more sustainable future, embracing ESG practices is no longer an option but a necessity for Philippine businesses. Leadership must ensure the entire organisation understands its core principles to capitalise on emerging trends and position the company for success in the green economy. 

By prioritising ESG initiatives, Philippine enterprises can contribute to a better world while fortifying their positions as responsible, resilient, and competitive entities in the ever-evolving global marketplace.