The Philippine Securities and Exchange Commission (SEC) has announced a new regulation of ‘comply or explain’ which requires publicly-listed companies to start disclosing their environmental, social and governance (ESG) performance by 2019. Otherwise, companies have to provide reasons to account for their failure of disclosure.
According to the SEC, a new Code of Corporate Governance was released in 2016 which started to advise and encourage companies to disclose sustainability performance for the purpose of improving corporate governance. However, Rose Carmela Gonzalez-Austria, assistant director at SEC, acknowledges that the development of ESG reporting in the Philippines is behind its counterparts including Thailand, Indonesia, Malaysia and Singapore.
Therefore, various international standards, such as the G20/OECD Principles of Corporate Governance and the ASEAN Corporate Governance Scorecard, have been taken as reference when formulating the new regulation, so as to improve the Philippines’ corporate governance standards and to enhance its competitiveness.
It is pointed out that companies may need some time to adjust their reporting strategies at the beginning of the implementation process of the new rules, so the ‘comply or explain’ approach is adopted and will last for a few years to serve as a buffer period, while mandatory requirement of ESG disclosure remains as the long term goal which is expected to be enforced in the foreseeable future.
Moreover, it is believed that the ‘comply or explain’ approach allows flexibility for enterprises to adopt various management and reporting strategies which are suitable to their own company, and would directly affect the decision-making of its stakeholders, such as the decision of investors to buy and sell their shares, such that companies would face the penalty imposed by stakeholders, instead of the regulators, in case of bad performance in ESG disclosure.
As in Hong Kong, the situation is similar to that in the Philippines. The Hong Kong Exchanges and Clearing Limited (HKEX) introduced ESG reporting as a recommended and voluntary practice since 2012, and the ‘comply or explain’ approach was adopted in 2016. There have been more calls for a stricter regulation to be implemented in order to increase the responsibility and transparency of Hong Kong’s listed companies.
