Sustainability Reporting in 2023: Preparations and Improvements in Conjunction with ISO 26000
Sustainability Reporting
Publicly-Listed Companies in the Philippines, starting April 2022, are now required to submit Sustainability Reports alongside their annual report to the Securities and Exchange Commission (SEC) in 2023.
Sustainability, in general, is the “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Brundtland, 1987). In relation to corporations, sustainability is the management of economic, environmental, social, and governance (EESG) issues of its business that ensure the company's long-term viability and its stakeholders. Note that the trends in corporate sustainability highlight the movement in corporate governance away from just maximizing shareholder value (a.k.a. maximizing profit for owners/ investors), but towards maximizing the value the company provides for all stakeholders (environment, employees, consumers, etc.).
ESG is an investment criterion that relies on independent ratings that help you assess a company’s behavior and policies when it comes to environmental performance, social impact, and governance issues.
'Sustainable Business Practices vs. Business Recovery: HR in the middle' Written by Thomas Mielke available at: https://hospitalityinsights.ehl.edu/sustainable-business-practices-vs-business-recovery
Global Reporting Initiative’s (GRI) Sustainability Reporting Standards generally include reporting on economic, environmental, social, and governance topics with materiality of chosen disclosures based on its impacts with regard to said topics and substantial influence on the assessments and decisions of stakeholders.
From 'Sustainability-Reporting'
May 9, 2018 by Karel Beckman
available at: https://energypost.eu/17708-2/sustainability-reporting/
Sustainability Reporting, on the other hand, is an organization’s practice of reporting publicly on its significant economic, environmental, and/or social impacts following the globally accepted standards. This is in line with the Philippine policy on disclosure of non-financial and sustainability issues (Principle 10 of the Code of Corporate Governance for Publicly-Listed Companies). Through such mandatory reporting, organizations are forced to measure and monitor their contributions toward achieving universal sustainability targets such as those set by the Global Reporting Initiative (GRI) and the United Nations Sustainable Development Goals (SDGs), among others.
Currently, only Publicly Listed Companies (PLCs) are mandated to submit their sustainability reports in 2023. PLCs are those companies with existing registration statements filed with the SEC and whose shares are listed and traded on the Philippine Stock Exchange. However, SEC Commissioner Kelvin Lester K. Lee stated, "We also want to introduce the same requirement to all types of corporations, meaning expanding it beyond publicly listed companies on a comply or explain basis,”. “And then later on, much, much later on, we want to adopt a mandatory approach to sustainability reporting for all types of corporations.” This indicates that other corporations will also be given their own SEC guidelines on sustainability reporting and will also eventually be required to submit the same.
How it Works and Challenges Faced
As of the time of writing, the SEC has not given guidelines on any changes to the template or mechanism for sustainability reporting. The previous regime implemented a “comply or explain” approach, which allows companies to explain the lack of data instead of strict compliance. This encourages voluntary compliance with the new mechanism and gives companies time to familiarize themselves with the requirements and identify the significant and material disclosures they have to make.
In brief, Sustainability Reporting requires PLCs to annually submit reports that (1) identify and explain the key EESG impact areas of their business, (2) identify through a materiality process which economic, environmental, and social disclosures need to be made to show such impacts, (3) identity contributions to sustainable development goals, and (4) show their management approaches and initiatives that explain such disclosures and illustrate what actions are being taken by the company. This can be done either through a separate integrated report based on internationally accepted frameworks or through the template on Sustainability Reporting provided by the SEC attached to their annual reports..
Failure to attach the sustainability report shall be subject to the same penalty as having an Incomplete Annual Report under SEC guidelines. Such provides that the company is given a reprimand and warning upon the first offense. Upon the second offense, the company is fined Php 30,000 plus Php 500 per day of delay in filing the amended report. Upon the third offense, the company is fined Php 60,000 plus Php 1,000 per day of delay in filing the amended report. Upon the fourth offense, such would be a valid ground for suspension or revocation of the company’s registration and licenses with the SEC, made after notice and hearing.
However, the framework poses certain challenges. Firstly, the comply or explain system is incompatible with the objectives of mandatory sustainability reporting. Such does not require a shift towards sustainability but only creates a guideline for sustainability. Even if corporations are mandated to submit such reports, they may explain away any lack of efforts toward sustainability. Furthermore, there are no strict parameters for what may be considered a sufficient explanation. This gives undue discretion on the part of the SEC to determine if compliance is sufficient.
“Greenwashing” was coined in the 1980s by environmentalist Jay Westervelt, who wanted to expose fraudulent “green” corporate claims he saw popping up all over the place.
From 'How to Defeat the Big, Dirty Greenwashing Lie' by By John O'Connor last May 10, 2017
available at: https://www.gearpatrol.com/outdoors/a334119/big-how-to-beat-the-greenwashing-lie/
Secondly, if no proper reliability and comparability measures are placed, companies may accrue the benefits of a perceived sustainable reputation without creating substantial value for their stakeholders. This is what is coined to be “greenwashing”. Since a side-effect of sustainability reporting is improved company reputation and brand value, greenwashing is when consumers are misled to believe that a certain product or manufacturing process is environmentally sound or sustainable when, in reality, it isn’t. This, in effect, creates a system that focuses more on perceived impact than actual impacts, which could lead to making sustainability a marketing tactic rather than a mode of broadening the reach of a corporation's value.
Moving Forward into 2023
While there is no word yet from the SEC on any changes in 2023 for the Sustainability Reporting requirements, they have acknowledged in their initial memorandum circular that the comply or explain shall only be implemented for the “first three years”, i.e. from 2019-2022. From this, it may be implied that in 2023, companies can no longer provide Sustainability Reports with incomplete data on material impacts and must provide all data available on required material disclosures. Failure to provide complete data by all PLCs on all required items for sustainability reporting would be subject to the same fines and penalties as incomplete annual reports.
Aside from regulatory penalties imposed by the SEC, non-compliant PLCs may now also face increased scrutiny from their shareholders and investors regarding their non-financial disclosures and sustainability contributions. Corporations are also at risk of a reputational hit for non-compliance with local regulatory standards and unsustainable or unethical practices. Future financing would be affected by such a reputational hit as it has already been shown in various studies that sustainability correlates to profitability and that investors consider sustainability a valuable criterion in determining a corporation’s investability.
While the possible improvements and expansion of the sustainability reporting system are still unclear, the regional practice on Sustainability Reporting in South East Asia shows permutations of the regulation that trade flexibility in compliance for improvements in reliability and comparability of the outputs. These include regulations, such as that of Indonesia, that require comparing previous reports across a 3-year time horizon to establish trends in non-financial performance. Another required facet of sustainability reporting that is not clarified as mandatory coming 2023 is the need for independent external assurance mechanisms for the sustainability report to increase its reliability, as seen in the guidelines of Malaysia. Lastly, another innovation from the Indonesian Sustainability Reporting framework is the creation of feedback and a mandated response mechanism for stakeholders of the corporation to ensure accountability in addressing previously raised concerns. ‘
Introducing the ISO26000 in conjunction with the GRI-based SEC Reporting Guideline
The current SEC Sustainability Reporting Guidelines are based on four of the globally accepted frameworks that companies use to report on sustainability and non-financial information:
The Global Reporting Initiative’s (GRI) Sustainability Reporting Standards contain reporting requirements on governance, economic, social, and environmental issues. Additionally, it complies with legislative frameworks and international norms such as the International Labour Organization and the United Nations Global Compact Tripartite Declaration.
The International Integrated Reporting Council’s (IIRC) Integrated Reporting Framework (IR) provides eight content elements, seven guiding principles, and six capitals for an integrated report, but it leaves out details about topic disclosures and evaluation methods. It seeks to track how the business model utilizes and generates capital and discloses the firms' strategies in light of risks and prospects.
The Sustainability Accounting Standards Board’s (SASB) Sustainability Accounting Standards has five general sustainability themes: environment, social capital, human capital, business model and innovation, and leadership and governance. In addressing sustainability issues, it provides a minimum set of topics to consider by each industry.
Recommendations from the Task Force on Climate-related Financial Disclosure (TCFD) were also considered for the SEC’s Sustainability Reporting guidelines. Its recommendations focused on climate-related risks, opportunities, and financial impacts, as well as scenario analysis.
Photo by Carlos Muza on Unsplash
These standards and frameworks were made to be complementary to each other, and as seen in the SEC’s guidelines, they were integrated to be used in a single document. However, despite the consolidation of these standards, the scope of the topic themes under the SEC Reporting guidelines is far too general. As it is primarily based on the GRI and SASB’s main topic themes: economic, environmental, social, and the SDGs – following the issue that reports are susceptible to “cheating” or greenwashing – the issue may be caused by the lack of extensiveness of crucial topic points in the sub-topics under each dimension. Moreover, how the SEC’s guidelines allow the reporters to identify the risks or issues they face on a topic leaves room for them to generalize and mollify the issues in their report.
The cover of a brochure about the ISO26000 aimed at introducing the standard. [Photo from ISO.org]
Meanwhile, the ISO 26000 is also an international standard created by the International Organization of Standardization that contains all the three dimensions covered in the SEC Guidelines. It is intended to support other instruments and activities for social responsibility by encouraging organizations to go beyond legal compliance and to establish shared understanding in the field of social responsibility. It is designed to be clear and instructive, even to non-specialists. It also guides the underlying principles of social responsibility – focusing on the organization’s responsibilities to society and the environment – and how they must contribute to sustainable development. The difference? The ISO 26000 is more about WHAT TO DO and HOW TO DO activities to improve a company’s social responsibility towards the path to sustainability. At the same time, the SEC Guidelines are more about reporting the current operations in the company and evaluating whether it reflects sustainability.
The point is not to compare which standard is better because none of them are foolproof when used alone. The point is to highlight that for a company to be ‘sustainable’, they have to engage in socially responsible behavior – which the SEC Guidelines fail to assist to, but the ISO 26000 can guide for. Hence, the difference in the range of topics could be a solution to the lack of comprehensiveness of the current SEC guideline.
An A2 poster that shows a schematic overview of ISO26000. [Photo from ISO.org]
The ISO 26000 can serve as a complementary but significant instrument to the SEC Reporting Guidelines for a more comprehensive topic guide – making it more relevant to each company – and include specific key issues to identify which can aid the company in accomplishing their report with full transparency and accountability. By integrating the ISO 26000 core subjects (Organizational Governance, Human Rights, Labor Practices, the Environment, Fair Operating Practices, Consumer Issues, and Community Involvement and Development) with the GRI-based SEC Guidelines, companies will be able to objectively show their performance on social responsibility, which in turn – through public reporting – can help them gain attention from internal and external stakeholders such as employees, local communities, investors, and regulators, and benefit their reputation. Moreover, companies will be provided with a more practical set of tools to measure and report on a company’s social responsibility issues and practices – where the ISO 26000 gives guidance on actions and expectations to address key issues. In contrast, the reporting guidelines provide whether or not the company had successfully engaged in socially responsible behavior to address these challenges.
[Photo by Lara Natalia Lone on Unsplash]
For instance, a corporation engaged in social responsibility — wants to maximize the value they bring to all its stakeholders, particularly the indigenous peoples and their community. Under the current SEC guidelines, indigenous rights are mentioned only under the “Diversity & Equal Opportunity” category, which asks for the number of employees from an indigenous community or vulnerable sector. It asks to identify the risks faced by the indigenous peoples with no guide questions or topics to understand what risks the community possibly faces. Moreover, indigenous peoples are also mentioned under the category “Relationship with Community (Significant Impacts),” which asks to report if operations are being done that impact the indigenous peoples and their community. Given this situation, the company could cheat and take advantage of the lack of guidelines and report zero activities that impact the indigenous community or produce a result that tranquilizes a potentially harmful impact from their operations.
But in the situation where the ISO 26000 is integrated into the SEC Guidelines where it covers the rights of the indigenous peoples through three categories – which include specific issues that the community is at risk of the proximity of operations to the community, illegitimate grounds for discrimination, upholding their collective rights (like self-determination), recognizing property rights, and respect on cultural traditions – companies will have to be transparent and accountable because they would have to disclose whether their operations are affecting any of the aforementioned. On top of the extensive list, the standard includes some related actions and expectations in addressing the risks – which could provide more assistance to the reporters in coming up with respective management approaches to introduce to the company’s operations to improve its social responsibility and work further towards sustainability.
[Photo by Victor on Unsplash]
Reporting on social responsibility with the relevant specifications from the ISO will not just serve as a mere guideline but will enhance the transparency and accountability of the company and further push it towards a socially responsible behavior. Moreover, it could help turn the perceived impacts of a company’s actions into actual impacts as they are specifically given possible solutions on how their operations can potentially impact a community.
While the ISO 26000 isn’t entirely the better guideline, it complements and improves the GRI-based SEC Guidelines by providing specific risks and possible indicators of impact per topic. Although this may pose a slight inconvenience for reporters to accomplish the report, the culture of convenience only hinders the path to social responsibility. On the other hand, with the extensive guidelines that help identify the impact of operations, reporters will have an easier time accomplishing the report and stray away from cheating or greenwashing tendencies which allow them to uphold transparency and accountability to the best of their capabilities.
Conclusion
Despite its challenges in implementation, the forwarding of sustainability reporting in the Philippines emphasizes the role of regulators in creating paradigm shifts in corporate governance and the importance of responsibility and reputation aside from shareholder value. Sustainability alongside social responsibility becomes a key principle for good corporate citizenship where shareholder value goes alongside shared value. With such a shift in focus, companies are now challenged to go beyond optimizing finances but must develop a means of consistently creating value for their constituents.
Regulators such as the SEC are then placed in a position wherein they can significantly affect the trajectory of corporations in the Philippines. As sustainability reporting is normalized in corporations, the line between stockholders and stakeholders begins to blur, highlighting the dynamic dependence between society, the environment, and corporations. Society would be receiving value from the corporation while at the same time providing its goodwill, manpower, and profit. The environment provides resources for the corporation while the corporation ensures sustainability and availability of such resources. It is the role of the regulators to ensure that such systems are properly balanced to maintain each industry's longevity.