Tax Articles

Understanding ESG (1st of 2 Parts)

By: Atty. Jomel N. Manaig

Environmental. Social. Governance. These are the three (3) pillars of an increasingly relevant corporate concept: ESG Compliance.

Locally, ESG Compliance has not yet caught steam. Worse, ESG may not even be in the radar of a significant number of our corporate leaders. However, obliviousness to ESG does not mean that one will be spared from its effects. This is not a case of “what you don’t know, won’t hurt you.”

In this two-part article, we will take an elementary stroll into what ESG is, its importance, and possible consequences due to non-compliance. For this part, let’s take a slow approach and sink our teeth into what ESG is.

So, the question: What is ESG?

Simply put, ESG is a corporate concept designed to assist organizations in identifying specific issues faced by it and determining the impact of its business to others with respect to the environment, to society, and corporate governance.

The Environment aspect establishes the impact of the business of the organization to nature and the environment. The Social aspect deals with the impact of the organization to the society which includes its employees, stakeholders, customers, and the public in general. Lastly, the Governance aspect delves into how the organization is run.

From a corporate standpoint, ESG is the result of the various shifts and developments in the environmental, social, and corporate governance landscape. It ultimately boils down to another important corporate aspect: corporate responsibility.

The Paris Agreement on climate change and the recent COP27 climate conference highlighted the urgent and real need to set climate goals to mitigate and adapt to climate change. Dwindling natural resources and mounting waste and pollution have also ushered in herculean conservation and clean-up efforts.

Corporations are no stranger to this for their business have significant impact on the environment. The way they do business affects the environment, both directly and indirectly. The environmental impact of a corporation is not limited to its actual and direct operations but also include the environmental impact of those within its supply chain.

Aside from making sure to walk the lines of environmental care, corporations must also do a tenuous balancing act with labor movements and advancement, social trends, and policy developments on one hand and corporate actions on the other. Social factors have the ability to affect an organization’s profitability and sustainability while an organization’s business can affect society through different ways like job and wealth creation for employees and stakeholders, respectively.

Unlike environmental and social factors, corporate governance is an internal matter. It covers company policies, disclosures, management structures, controls, and standards, among others. A robust corporate governance structure and mechanism reduces exposure to corporate mismanagement and dishonesty. It also enhances a corporate value and makes the organization more attractive.

Knowing the nature of ESG is just half the battle. Corporate leaders must now understand why ESG is important to their business and what they must do to prepare.

For the second part of this article, we will discuss the importance of ESG compliance to corporations and the possible pitfalls and consequences due to non-compliance.