ESG laws in the Philippines

Under the Philippine Development Plan (PDP) for 2023-2028, the National Economic and Development Authority aims to position the country as a prime destination for foreign investment in environmental, social and governance (ESG) investments and mitigating climate change.

As such, ESG regulations have been steadily gaining traction to foster ESG awareness and involvement by the private sector. The ESG regulations strive to keep up with global trends on sustainability reporting and raise corporate governance standards with global best practices.

Key government regulators such as the Securities and Exchange Commission (SEC), the central bank, Bangko Sentral ng Pilipinas (BSP), Insurance Commission (IC) and the Department of Environment and Natural Resources (DENR) are at the forefront of strengthening ESG compliance by the private sector.

Disclosure requirements

Sustainability reporting is covered by the Revised Code of Corporate Governance for both public and publicly listed companies (PLCs), namely SEC Memorandum Circular (MC) No. 19, series of 2016, and MC No. 24, 2019.

The SEC recommends disclosure of how covered companies manage ESG issues. PLCs, in particular, are required to attach an appropriate sustainability report together with annual reports (SEC MC No. 4, 2019).

A globally recognised standard or framework in reporting sustainability and non-financial issues is likewise recommended, such as the G4 Framework by the Global Reporting Initiative, the Integrated Reporting Framework by the International Integrated Reporting Council, and/or the Sustainability Accounting Standards Board’s Conceptual Framework (principle 10, SEC MC No. 19, 2016).

A “comply or explain” approach is implemented where covered companies are required to identify any areas of non-compliance, and explain reasons for non-compliance. The IC adopts the same approach in requiring IC-regulated entities – such as insurance/reinsurance companies and brokers, pre-need companies and health maintenance organisations – to disclose its ESG compliance (IC Circular Letter No. 2020-71).

In the banking sector, banks are expected to embed sustainability principles – including those covering environmental and social risk areas – in their corporate governance framework, risk management systems and strategic objectives. These should be consistent with their size, risk profile and complexity of operations.

Under the BSP’s Manual of Regulations for Banks (MORB), banks are required to approve Environmental and Social Risk Management System policies, procedures and tools to identify, assess, monitor and mitigate exposures to environmental and social (E&S) risks.

The central bank requires banks to disclose in their annual reports an overview of the E&S risk management system, a breakdown of E&S risk exposures and their impact on the bank, and the progress of initiatives undertaken to integrate sustainability principles in their governance framework, a risk management system, business strategy and operations (section 153, MORB).

Greenwashing

Aware of the appeal of companies’ ESG commitments to investors, the SEC has taken a protective stance to ensure that investors are safeguarded from greenwashing.

No investment company other than a Sustainable and Responsible Investment (SRI) Fund shall use the term “ESG”, “sustainability” or words of similar import in its name and/or marketing materials, unless otherwise permitted by the SEC (section 2 c.ii, SEC MC No. 11, 2022).

To qualify as an SRI fund, the investment company must adopt one or more sustainability principles or ESG factors as its key investment focus and appropriately reflect such in its registration statement or prospectus (section 2.a, SEC MC No. 11, 2022).

One or more strategies may be adopted by the investment company to achieve its investment objective. However, an investment company shall not qualify as an SRI fund if a negative or exclusionary screening or ESG integration is adopted only for financial returns and not accompanied by other sustainable investment objectives (section 4, SEC MC No. 11, 2022).

The SEC sets the expected exposure or minimum asset allocation percentage that is consistent with the SRI fund’s sustainable investment objective to at least two-thirds of its net asset value (section 2.b, SEC MC No. 11, 2022).

Breach of such ESG investment threshold – or inconsistency of the fund’s underlying investments with its sustainable investment objective – is reportable to the SEC. The fund manager is expected to rectify such breach or inconsistency within 30 business days from the date of discovery. Failure to rectify may disqualify the investment company as an SRI fund (section 9, SEC MC No. 11, 2022).

Meanwhile, investments that do not wish to be a qualified SRI fund but intend to include sustainability or ESG factors or considerations in marketing materials are required to disclose additional information, including the percentage of the non-SRI investment company’s net asset value expected to be allocated to ESG investments, and how the non-SRI fund has attained its ESG or sustainable investment objectives during the reporting period (section 12, SEC MC No. 11, 2022).

Violating these rules can result in imposition of a monetary penalty accumulating daily over continuing violation, depending on the nature and extent of the violation. The investment fund may likewise be suspended and its registration statement revoked, without prejudice to any other actions and sanctions that may be taken or imposed under other applicable laws or regulations (section 13, SEC MC No. 11, 2022).

Sustainable financing

The BSP has approved measures to scale up sustainable finance in the Philippines. In 2023, the BSP increased the single borrower’s limit (SBL) to eligible green or sustainable projects by an additional 15% on top of the prescribed SBL of 25% (BSP Circular No. 1185, 2023). In 2024, the central bank established the Philippine Sustainable Finance Taxonomy Guidelines for banks to observe when extending credit or sustainable financial products and services (BSP Circular No. 1187, 2024).

Producer responsibility

The Extended Producer Responsibility (EPR) Act of 2022 obliges enterprises that generate plastic packaging waste to register and submit to the DENR-led National Solid Waste Management Commission – an EPR programme for plastic packaging to achieve efficient management of plastic packaging waste and plastic neutrality through efficient recovery and diversion schemes (section 44-E, Republic Act (RA) No. 9003, as amended).

Among information to be included in the programme are the specific type of packaging materials and product brands for which they are used, the plastic packaging footprint, plastic waste diversion target, status of implementation, geographic implementation or rollout plan, and the status of compliance.

Tax incentives may be given to incentivise initiatives under the EPR system and exact compliance from obliged enterprises subject to standard processes in the identification of qualified activities under the Strategic Investment Priority Plan.

The EPR programme costs are considered as necessary business expenses, which are deductible from annual gross income in accordance with the National Internal Revenue Code (section 45, RA No. 9003, as amended).

The regulations also require submission of an annual EPR Compliance Audit Report prepared by an independent third-party auditor to certify the veracity of the reporting plastic product footprint generation, recovery and EPR programme compliance (section 19.1.1, DENR administrative order No. 2023-02).

Failure to register an EPR programme or comply with the targets for recovery of plastic products shall be penalised with monetary penalties ranging from PHP5 million (USD86,000) to twice the cost of recovery and diversion of the footprint or its shortfall, as well as automatic suspension of the obliged enterprise’s business permit in the event of a third offence (section 49, RA No. 9003, as amended).

Low carbon bill

Under the current 19th Congress, a Low Carbon Economy Bill has been filed and is pending deliberation. Section 19 of the proposed legislation seeks to impose a yearly cap on greenhouse gases (GHG) of the covered sector with the highest GHG and most cost-effective opportunities to avoid or reduce emissions.

If the bill is passed into law, GHG emissions allowances will be allocated by the DENR to covered sectors. The allowance shall authorise the emission of one metric tonne of carbon dioxide, or equivalent in the case of global warming pollutants other than carbon dioxide (section 20 of the bill).

The Low Carbon Economy Bill also seeks to establish a carbon trading system under which allowances issued pursuant to law may be sold, exchanged, purchased or traded, subject to further policy guidelines.

Outlook

Although government regulators have issued various ESG-related regulations in recent years, it is evident that the majority of these regulations are focused on reporting and disclosure requirements.

ESG awareness across corporations and organisations in the Philippines may be further enhanced by laws and regulations that would require them to take a more active approach towards ESG.

The EPR Act of 2022 and proposed Local Carbon Economy Law are steps in the right direction towards this end.

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