Driving ESG Compliance in the Philippines

With the focus on environmental, social and governance, a clearer understanding will help businesses align with global frameworks

The venerated American economist Milton Friedman once said: “The business of business is business.” The only social responsibility of the corporate entity, the free-market godfather argued, is to maximise profits.

Yet, half a century later, a new wave of regulatory measures includes both shareholder values and stakeholder interests as proper subjects of business consideration. This evolutionary process of business philosophy has gone by many names: corporate social responsibility; business and human rights; or corporate citizenship. But today, the space where the shareholder and the stakeholder meet is perhaps best known through the environmental, social, and governance (ESG) framework.

ESG represents a set of criteria used to measure corporate performance in three specific areas. Environmental considers the company’s ecological footprint, taking into account aspects such as carbon emissions, responsible waste handling and pollution control. Social focuses on the company’s relationship with people, including its employees, customers and local communities. Finally, governance assesses the internal workings of the company, including the independence of directors, anti-bribery and corruption measures, and overall ethical stance.

This article examines how ESG factors are being incorporated into the Philippine legal order. But more than simply identifying the relevant regulations, the country’s ESG developments are considered within a broader global framework – addressing supply chain due diligence obligations seen in jurisdictions globally such as France, the Netherlands, the US, UK and EU, and upstream impacts these foreign regulations have on local enterprise.

Foreign Supply Chain

ESG compliance has taken compulsory form in various jurisdictions around the world. For example, the German Act on Due Diligence in Supply Chains, known as Lieferkettengesetz (LkSG), came into force on 1 January 2023.

The LkSG imposes on corporate entities headquartered or doing business in Germany – including foreign companies conducting business there – a host of human rights and ecological obligations. This includes prohibitions on child labour, forced labour, slavery, and compliance with workers’ rights and environmental standards. Notably, these rights and duties are also recognised under Philippine law.

But under the LkSG, it is not enough for companies to simply comply with ESG within their own internal systems. They must likewise ensure that their direct and indirect suppliers – regardless of where these suppliers are based – neither infringe nor contribute to an infringement of human or environmental rights. German companies, therefore, are obliged to look beyond their own business area and consider ESG compliance of their suppliers throughout the supply chain, from the collection of raw materials to delivery of the final product.

Should it be detected that a violation has occurred, the German entity is obliged to leverage its position to stop or minimise the violation; or, as a last resort and in serious cases of human rights violations, terminate the business relationship with the erring supplier altogether.

Similar obligations are found in other jurisdictions, such as the Dutch Child Labour Due Diligence Law of the Netherlands, France’s Loi de Vigilance (the French Duty of Vigilance Law), the Tariff Act of 1930 in the US, the Modern Slavery Act 2015 of the UK, and the Corporate Sustainability Due Diligence Directive of the EU.

These rules contemplate sustainability standards where private entities would be legally obliged to look into ESG performance throughout their supply chain. Suppliers upstream, therefore, even if beyond the direct jurisdiction of these laws, are indirectly bound to comply with ESG standards, if only to continue dealing with foreign businesses throughout their supply chain.

Upstream Impacts

Amid supply chain due diligence obligations abroad, foreign companies will look into the ESG performance of their suppliers. Their supply chain due diligence laws, although delimited in application, necessarily produce extraterritorial impacts upstream, such as for Filipino suppliers.

As of 2022, Philippine global exports grew into a substantial USD79 billion industry. Exports to the US accounted for USD12.5 billion, USD2.8 billion to the Netherlands, USD2.7 billion to Germany, and USD765 million to France, among others. British International Investment, the UK’s development finance institution, considers the Philippines one of its priority markets in Southeast Asia for climate finance, committing USD623 million.

The Philippines is also expected to attract more European investment as the Regional Comprehensive Economic Partnership enters into force in June.

As the only Asean country beneficiary of the Generalised Scheme of Preferences Plus (GSP+) trade scheme, the Philippines may be able to avail of GSP+ benefits by committing to 27 international conventions related to human rights, labour, good governance and environment – that is, matters that would fall within at least one of the ESG factors. Altogether, this means that businesses are constrained by the combination of legal and economic forces, as well as the upstream impacts of foreign supply chain due diligence laws.

The Philippines is, for example, a major exporter of coconut oil, electronic products, ignition wiring sets and nickel ore throughout Europe and the US. To continue enjoying a healthy bottom line, such suppliers must stand ready to speak about their ESG compliance.

Learn more: LawAsia