SEC’s vision on sustainability reporting
Credit to Author: KELVIN LESTER LEE | Date: Tue, 22 Oct 2019 16:20:20 +0000
In February, the Securities and Exchange Commission (SEC) released the Sustainability Reporting Guidelines for Publicly Listed Companies through SEC Memorandum Circular 4, Series of 2019 (SEC MC 4, s. of 2019), amid a growing focus on the business sector’s role in addressing the economic, environmental, social and governance challenges we face today.
The guidelines mandate publicly listed companies (PLCs) to submit sustainability reports as part of their annual reports. It serves as a baseline for improvement for PLCs toward achieving the universal targets of sustainability, through the measurement of their significant economic, environmental and social and governance (EESG) impacts.
I have previously written about SEC MC 4, s. of 2019 in an article published on April 24, emphasizing how sustainability reporting has become a common practice for companies globally as more investors put emphasis on sustainability.
Forbes found that investor interest in sustainability reporting has significantly increased in recent years. It claimed that investor interest will continue to increase with over 90 percent of the largest companies adopting sustainable practices and reporting, and with $22.89 trillion dollars of assets now being managed under responsible investment strategies. This amount exceeds the gross domestic product of the entire US economy.
The SEC believes there is indeed a positive correlation between good, sustainable business practices and business profit. I have been informed that many PLCs are pressured by institutional investors to embrace sustainable reporting because they demand more information on their investments, plus the risks that they are exposed to over the medium and long terms.
In the recent 2019 Autumn Vol. 4/No. 01 Nomura Journal of Asian Capital Markets on Emerging Trends in Environmental and Social and Governance (ESG) Investing and Sustainable Finance, Krizia Pauline Felice S. Ferrer of the SEC’s Markets and Securities Regulation Department and Karen G. Arias-Rocha of the SEC’s Corporate Governance and Finance Department, elaborated on the sustainability initiatives of the commission, the future of ESGs, as well as its challenges to drive ESG initiatives in the Philippines.
The article stated that effectively creating awareness of sustainability reporting for the boards and management teams of PLCs is one of the key challenges that the SEC needs to address. It noted: “It is ideal for a Sustainability Champion to come from the board level. Leadership and commitment should come from the top for the initiative to have a trickle-down effect on the employees. It is easier for the organization to push forward with its ESG reporting if there is full support from the board.”
The article also explained: “The ESG initiatives that the SEC has been promoting so far are critical tools in helping to ensure a resilient Philippine economy. These initiatives represent the SEC’s understanding that markets will flourish when transparency requirements enable investors to make informed governance, management and investment decisions.”
PLCs are therefore encouraged to engage in sustainable business practices and reporting. And the SEC is hopeful that majority of companies in the Philippines, whether publicly listed or not, would soon embrace sustainability reporting.
In promoting sustainability reporting, the SEC will adhere to the state policy of creating a socially conscious and free market that regulates itself (Section 2, Securities Regulation Code). This shall be the pillar of the commission’s short-term and long-term visions for sustainability reporting in the Philippines.
Within the three-year transitory period (2020 to 2023) for the implementation of the guidelines on sustainability reporting, the SEC intends to achieve the following short-term goals under a “comply or explain” approach:
• Make sustainability reporting relevant and value-adding for Philippine PLCs;
• Help PLCs to identify, evaluate and manage their material EESG risks and opportunities;
• Help PLCs to assess and improve their non-financial performance across EES aspects of their organization to optimize business operations, improve competitiveness, and long-term success;
• Provide a mechanism that would allow PLCs to communicate with its stakeholders, including investors or its potential investors;
• Enable PLCs to measure and monitor its contributions toward achieving universal targets of sustainability, such as the United Nations Sustainable Development Goals
(UN SDGs), as well as national policies and programs.
In the long term, the SEC aims to:
• Adopt a mandatory approach to sustainability reporting for PLCs, three years after the implementation of the sustainability reporting guidelines, for PLCs to determine their material impacts and provide relevant data thereon. Currently, the SEC has monitored around 170 PLCs’ I-ACGR submissions for 2018. Based on the monitored reports, there is already an increase in the number of companies with sustainability reports compared to the 2017 findings;
• Require the submission of sustainability reporting on a “comply or explain” basis, not just for PLCs, but for all types of corporations;
• Adopt a mandatory approach to sustainability reporting for all types of corporations by issuing. This may include, among others, the issuance of MCs to adjust the approach (from ‘comply or explain’ to ‘mandatory’) and coverage of compliance with the sustainability reporting guidelines (from ‘initially covering PLCs’ to ‘covering all corporations’);
• Strengthen its professional partnership with the Philippine Stock Exchange and other non-governmental organizations advocating for sustainable business practices and reporting; and
• Adopt the UN SDGs in the sustainability reporting template.
To achieve its short- and long-term goals, the SEC will continue formulating action plans toward the effective implementation of good sustainable business practices. In the meantime, SEC MC 4, s. of 2019 should provide a good jumping board.
The SEC is positive that, with the release of the guidelines on sustainability reporting, the number of PLCs complying with the sustainability reporting guidelines and taking an active stance in implementing their own sustainability policies will grow. After all, sustainability is everyone’s responsibility.
Kelvin Lester K. Lee is a commissioner of the Securities and Exchange Commission (SEC). He is the co-chairperson of the SEC Committee on Memorandum Circular/s To Operationalize Revised Corporation Code Provisions. The views and opinions stated herein are his own. You may email your comments and questions to oclee@sec.gov.ph.