SEC chair Aquino: ‘Sustainability’ no longer mere buzzword

Seventeen years ago, a global financial crisis saw the United States and other major economies taking their worst downturn since the Great Depression in the 1930s, with millions losing their jobs and public trust in financial institutions eroding.

For Emilio Aquino, the current chair of the Securities and Exchange Commission (SEC), an economic disaster of such scale happened largely because some companies, in an increasingly interconnected environment, “did not care about the risk that will happen to their people.”

“As far as they’re concerned, [the top executives] had bonuses and they were able to make a lot of money,” Aquino told the Inquirer, giving his take on the debacle felt between mid-2007 and early 2009. “In the end, everyone sank and we had a financial crisis … They were so hungry looking for profits without considering what it could do to their employees and communities.”

The painful episode has since been blamed on a confluence of factors, notably including market inefficiency, greed and the corrosive lack of ethics among the decision makers.

And it is because of these hard lessons, Aquino said, that “sustainability” is now taken more seriously and no longer just a buzzword tossed around in the corporate world.

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Investors have become pickier with their choices of where to put their money, forcing companies big and small to do a rethink and adopt the so-called triple bottom-line concept: people, planet and profit.

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In other words, the checklist of virtues and credentials that appeal to potential investors includes not just the ability of a business to rake in cash, but also its sensitivity to its own human capital, to the community it engages, to Mother Earth which either gifts it with resources or absorbs its waste, and to the rules of integrity, transparency and fairness.

This is where the concept of environmental, social and governance (ESG) comes in, said Aquino, the country’s chief corporate regulator since 2018.

The SEC is one of the national bodies promoting—if not mandating—ESG as a standard for good corporate citizenship, starting with publicly listed companies. The commission does this by requiring companies to make a regular report on their initiatives that fall under the three ESG criteria:

• “Environmental” generally deals with climate change and emission reduction, energy efficiency, waste management and related concerns.
• “Social” covers employee welfare, human rights, sound labor practices, gender and racial equality, community engagement.
• “Governance” is generally about transparent accounting, measures against corruption and political lobbying, board diversity, executive compensation and accountability.

Corporate governance

Reporting ESG initiatives is now among the key factors being evaluated both by regulators overseeing companies and fund managers abroad looking for investment outlets. Just like the triple bottom-line concept, ESG is a framework that measures a company’s commitment to long-term sustainability, Aquino added.

The International Finance Corp., a member of the World Bank Group whose sustainability framework has been adopted by many institutions, underscores the importance of the governance aspect of ESG in making large firms accountable and transparent to investors as they “operate more efficiently, improve access to capital, mitigate risk and safeguard against mismanagement.”

For the SEC chief, good governance can be as simple as making minutes of meetings accessible to all shareholders, even those with minority interest or small shareholdings.

Some corporations have also adopted hybrid setups for their annual stockholders meetings, allowing even the most minor shareholders to attend and have access to vital company updates.

In 2019, the SEC issued Memorandum Circular No. 4, or the Sustainability Reporting Guidelines for Publicly Listed Companies, in response to the growing need for transparency among such corporations. The commission followed in the footsteps of its international counterparts in issuing standards for sustainability reporting.

Before the guidelines were issued, Aquino said, only 22 percent of companies listed on the Philippine Stock Exchange actually filed reports on their sustainability initiatives.

Five years later, compliance with the reporting requirement now stands at 95.41 percent.

But it does not stop there: Aquino explained that these “compliant” firms still need to explain the numbers in their reports, such as the level of their greenhouse gas emissions.

“We have to give them sufficient time to gather data because it’s also hard when there are no experts who will be able to supply you data about greenhouse gas emissions,” he said. “International investors want complete sustainability reports, so it incentivizes [companies] to be very particular about their compliance and about how they are able to meet the ESG framework.”

Best practices

In the Philippines, it is still the largest companies—like the Sy family’s SM Group and the Zobels’ Ayala Corp.—that have been recognized for engaging heavily and consistently in ESG-related efforts, particularly in governance.

Smaller companies do not yet figure much, Aquino said, as they “just want to earn money” and regard sustainability efforts as something that can come in later once they have attained financial stability.

The Institute of Corporate Directors (ICD), a body that monitors corporate governance, confers awards on companies that put serious effort in achieving diversity, maintaining fair labor practices and upholding minority interests.

Last year, companies either headed or supported by the Zobel family—Ayala Land Inc. and Globe Telecom Inc.—as well as China Banking Corp. and SM Prime Holdings Inc. of the Sy family, bested 126 other companies and received the highest award from the ICD’s Asean Corporate Governance Scorecard.

Other local industry giants like SM Investments Corp., International Container Terminal Services Inc. and PLDT Inc. were also recognized

A look at their governance initiatives posted on their websites shows that these companies have focused on diversity, professional development and anticorruption mechanisms.

All of them, for example, have “whistleblower policies” that encourage employees to report violations of human and labor rights and incidents of corruption.

A major challenge

But while the number of compliant companies has increased, a major challenge remains in the ESG reporting system: the lack of third-party experts who can verify what is being reported.

These independent bodies should supposedly function like the corporate equivalent of the government’s Commission on Audit, and check if the initiatives or results listed on paper were actually being implemented, described or measured accurately. Who can check, for example, things like energy savings, greenhouse gas emissions, etc., in this setting?

“That’s the challenge. We’re still working on it,” Aquino said.

For now, the SEC is developing a system powered by artificial intelligence (AI) to detect discrepancies in the company reports.

“When companies submit their reports to us, AI can see whether their inventories, sales have a sudden spike, for example,” the SEC chief explained.

The commission currently doesn’t have enough resources to thoroughly check the reports one by one, a situation it wants to address through a bill it has proposed to Congress.

Aquino declined to talk at length about the bill, only saying that the SEC was again adopting what Western countries were already doing to promote long-term sustainability.

“It’s one of those bills that we are trying to convince Congress to pass,” he says. “We want the issue of climate change and sustainability practices to be addressed immediately.”

Must trickle down

In the end, the goal for the SEC is for ESG awareness to trickle down to even the smallest companies.

While conglomerates dominate the stock exchange, Aquino noted that small and medium enterprises make up 95 percent of the thousands of companies registered with the SEC.

To increase awareness and change mindsets, the SEC engages in networking and holding mounting ESG events for small companies, rather than simply sending them emails and newsletters to get them onboard.

“We have to bring it down as well to the ordinary firms because sustainability is our collective responsibility,” he says. —WITH A REPORT FROM ERICA ANN C. VILLASORDA 

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