With PFRS, sustainability disclosures can become a competitive edge

IN BRIEF:

• The SEC’s new guidelines require companies to report sustainability and climate-related financial information starting FY 2026, specifically disclosures on governance, strategy, risk management and metrics and targets.

• Effective reporting and sustainability practices can enhance corporate governance, attract investors, and improve long-term business resilience by integrating sustainability into core business strategies.

In today’s fast-changing business environment, the demand for consistent, comparable, and transparent sustainability reporting is crucial for investment decisions. The International Sustainability Standards Board (ISSB) has introduced IFRS S1 General Requirements for Sustainability-related Financial Information and S2 Climate-related Disclosures, which provide crucial sustainability-related information alongside financial statements, catering to investor demands for transparency.

These standards offer businesses a chance to enhance corporate governance and investor protection through globally aligned regulations.

Following the adoption of IFRS S1 and S2, on Dec. 22, the Securities and Exchange Commission (SEC) issued Memorandum Circular No. 16, Series of 2025 requiring publicly-listed companies (PLCs) and large non-listed companies (LNLs) to adopt Philippine Financial Reporting Standards (PFRS) on Sustainability Disclosures starting in FY2026 with limited extensions of transition reliefs under a tiered approach.

Mandatory external limited assurance of Scope 1 and Scope 2 Greenhouse Gas (GHG) emissions by an independent assurance practitioner will also be required two years after the initial implementation of these standards for each tier.

The standards focus on four core areas:

• Governance: governance processes, controls and procedures a reporting entity uses to monitor, manage and oversee sustainability- and climate-related risks and opportunities

• Strategy: approach the entity uses to manage sustainability- and climate-related risks and opportunities

• Risk Management: processes the entity uses to identify, assess, prioritize and monitor sustainability- and climate-related risks and opportunities

• Metrics and Targets: information used to manage and monitor the entity’s performance in relation to sustainability- and climate-related risks and opportunities over time

Adopting the standards allows companies to shift sustainability from a mere compliance requirement to a fundamental part of their corporate strategy, driving long-term value and resilience. These reporting obligations can serve as a catalyst for organizational improvement and bolster investor trust.

Organizations often struggle to integrate sustainability across all levels. According to EY’s 2023 Sustainable Value Study, only half of Chief Sustainability Officers (CSOs) feel empowered to hold C-suite peers accountable for sustainability initiatives. Furthermore, 41% of organizations aim to strengthen collaboration between the C-suite and the board to effectively implement climate strategies.

With the new reporting obligations, effective sustainability disclosures can influence corporate governance structures and strategic decision-making processes. In their disclosures following the PFRS on Sustainability Disclosures, companies need to set out their governance processes, controls and procedures that they use to monitor, manage and oversee sustainability-related and climate-related risks and opportunities. This includes considering trade-offs associated with sustainability risks and linking remuneration policies to performance metrics. In addition, companies need to identify responsible governance bodies and ensure they have the necessary competencies.

In addition, the standards ask the board to disclose how sustainability-related and climate-related risks and opportunities are considered when overseeing overall strategy, the company’s decisions on major transactions and its risk management processes and related policies. With these obligations, organizations that have not yet integrated environmental, social, and governance (ESG) factors into their strategies will need to reassess their approaches to meet these new expectations. By doing so, they can enhance governance, meet stakeholder expectations, and leverage sustainability for revenue growth.

Local adoption of the IFRS Sustainability Disclosure Standards paves the way for a consistent sustainability reporting framework applicable across companies, making it easier for companies to communicate their sustainability efforts. Standardized disclosures on climate-related risks can also enable investors to assess how well companies are managing these risks. Between companies who disclose their exposure to extreme weather events in a similar manner, investors can better evaluate which company has a more robust risk management strategy.

Mandatory and standardized disclosures help ensure comparability of company data, improving understanding of performance and potentially financial information that translates towards better capital access. When companies disclose the financial implications of their sustainability initiatives, stakeholders can better understand how these initiatives contribute to overall financial performance, improving investor confidence and potentially lowering capital costs.

Transparent sustainability practices have the potential to attract a broader range of investors, including those focused on ESG criteria. Companies that can outline sustainability goals, progress, and metrics consistently can foster trust and attract investors who prioritize ESG criteria. Reporting under the standards, in compliance with the SEC Memorandum Circular, provides covered entities the opportunity to inform senior-level decision-making while enabling them to hold themselves accountable over their sustainability targets — and be held accountable by others.

To truly realize the value of sustainability, boards must adopt a long-term perspective. Sustainability should not be treated as an isolated initiative; it needs to be seen as an essential pathway for successful businesses. By effectively integrating sustainability strategies into their operations, companies and boards can enhance performance. Sustainability and business must work hand in hand and should not treated as a separate endeavor.

Adopting PFRS on Sustainability Disclosures allows companies to shift sustainability from a mere compliance requirement to a fundamental part of their corporate strategy, ultimately driving long-term value and resilience in an increasingly unpredictable environment.

To prepare for the adoption of the new sustainability standards and related reporting developments, companies can consider the following actions:

Integrate sustainability into governance frameworks. Ensure a shared vision at the leadership level for integrating sustainability into business practices. Governance roles should oversee strategy, major transactions, and risk management, setting the tone for the organization.

Build capacity. Develop capabilities across different functions to meet the new standards. Every department should understand the importance of sustainability and its business benefits.

Adopt a mindset of continuous improvement. Embrace a culture of continuous improvement in sustainability practices and reporting. The company’s initial report does not need to be perfect; however, as capabilities, skills, and resources improve over time, so too should the quality of the report.

Regularly monitor and assess the evolving risk landscape through tailored board insights and discussion sessions. In addition, be prepared to revisit sustainability targets based on the latest scientific data, and leverage insights from peers to drive innovation. This proactive approach enables leadership teams to make informed decisions and implement strategies effectively.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Crystal Aleli Cornell, Joyce Anne Soriano And Zoe Aurora Romero are managers from the Sustainability Team of SGV & Co.