Mandatory ESG disclosure seen to raise credibility; foreign investor impact minimal

By Alexandria Grace C. Magno

THE SECURITIES and Exchange Commission’s (SEC) push for mandatory environmental, social, and governance (ESG) disclosures aligned with international standards could enhance credibility and modest trading for some companies, while broader governance and external risks may limit changes in foreign investment, analysts said.

“The reporting alignment to international standards could bring select companies an extra layer of credibility that could have been initially overlooked by ESG investors,” AP Securities, Inc. Equity Research Analyst Shawn Ray R. Atienza said in a Viber message.

He noted that companies achieving compliance may experience a modest uptick in trading volume once the changes take effect.

However, the true outcome is unclear, according to Mr. Atienza, since foreign investors could be focused on broader issues fueling recent repatriation of funds.

“At best, we see minimal to no material change on foreign investors’ perception,” he said.

Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said the commission’s move would increase transparency for local listed companies and “further uphold the best interest of the investing public.”

He noted that if anti-corruption measures, reforms, and policy priorities for improving governance standards are taken seriously, this could be the missing link to boosting investor confidence in the economy and financial markets and potentially alter foreign investors’ views of Philippine Stock Exchange index (PSEi) companies.

The commission has issued a memorandum adopting the Philippine Financial Reporting Standards (PFRS) on sustainability disclosures, setting clear guidelines to help covered companies prepare and submit sustainability reports in line with international standards.

Memorandum Circular (MC) No. 16, Series of 2025, implements PFRS S1, which sets general requirements for disclosure of sustainability-related financial information, and PFRS S2, which covers climate-related disclosures, repealing the Commission’s MC No. 4, Series of 2019, which had required only publicly listed companies (PLCs) to submit sustainability reports.

“The adoption of the PFRS on sustainability disclosures underscores our commitment to high-quality, comparable, and globally aligned sustainability reporting,” SEC Chairman Francisco Ed. Lim said in a statement on Friday.

“By elevating the standards of sustainability reporting in the Philippines, we hope to enable more companies and stakeholders to better understand the financial impacts of sustainability-related risks and opportunities, supporting long-term value creation and improved capital allocation decisions,” he added.

Under the memorandum circular, PLCs and large non-listed companies (LNLs) under Section 17.2 of Republic Act No. 8799 must attach board-approved sustainability reports to their annual reports, while other LNLs submit them with audited financial statements.

Adoption of PFRS S1 and S2 will be phased in starting fiscal year 2026. Tier 1 PLCs with market capitalization over P50 billion as of Dec. 31, or listing date thereafter, must start PFRS-based sustainability reporting in 2027 for fiscal year 2026.

Tier 2 PLCs with market capitalization from over P3 billion to P50 billion as of Dec. 31, or listing date thereafter, adopt PFRS in 2028 for fiscal years beginning on or after Jan. 1, 2027.

Tier 3 includes PSE-listed PLCs with market capitalization of P3 billion or less, PLCs with debt-only listings on the Philippine Dealing & Exchange Corp., and LNLs with over P15 billion in prior fiscal year revenue from ordinary activities, consolidated for parent companies, which will adopt PFRS in 2028 for fiscal years beginning on or after Jan. 1, 2028.

Covered companies may also use other recognized international frameworks alongside PFRS S1 and S2, provided they do not conflict with these standards, obscure material information, and are properly disclosed.

“They also implement a mandatory limited assurance on Scope 1 and 2 greenhouse gas (GHG) emissions by an independent assurance practitioner two years after the implementation of PFRS S1 and S2 for each tier, in line with the International Standard on Sustainability Assurance (ISSA) 5000, to ensure a consistent and high-quality sustainability assurance engagement,” the commission said.

To ease compliance, the SEC issued transitional reliefs through the memorandum circular.

“MC 4 remains in force until a PLC reaches its adoption year, while companies may continue using any recognized framework for their submission of sustainability reports for fiscal year 2025,” it said.

Tier 1 and 2 companies have one year to disclose climate-related risks and opportunities, while Tier 3 companies have two years.

“All covered corporations will be given one year to submit their sustainability report after the publication of their related financial statements, at the same time as their next second-quarter or half-year interim financial statements, or within nine months from the end of the reporting period, if there are no interim financial statements issued,” the SEC added.

“All tiers will also not be required to disclose comparative information and will be allowed to use methods other than the GHG Protocol: a corporate accounting and reporting standard for one year. Covered corporations will not be required to submit Scope 3 GHG emissions for two years.”