Philippine companies badly need more support to prepare them to meet the growing demand for sustainability, as domestic firms have turned out to have among the lowest awareness levels of the European Union’s environmental, social and governance (ESG) legislation, a new international study has found.

The report, commissioned by the Danish Industry (DI) in cooperation with the Employers Confederation of the Philippines, assessed the impact of EU sustainability regulations on companies in 12 emerging economies, among which is the Philippines.

The overall readiness of these 12 countries to meet upcoming EU sustainability demands is generally considered low. SMEs are particularly vulnerable to the new requirements, as their capability to understand, prioritize and address sustainability demands appears limited.

“In light of this, the study underscores the need for support measures to prepare companies for increased demands, enabling local firms to better benefit from upcoming opportunities and ensuring that EU companies meet their supply chain impact targets,” said the paper entitled “ESG in Emerging Markets: The effects of EU sustainability regulations on non-EU companies.”

More knowledge desired

The report, released in July 2024, added that while financial support is an important enabler for enhancing sustainability work, companies surveyed also desired more knowledge, implementation guidance, practical hands-on support and technical assistance to better understand and apply the concept of sustainability.

“Given the low awareness and understanding of ESG and EU sustainability legislation, there is a strong need to increase knowledge across all markets. Many smaller companies find ESG language intimidating, and business association can play an important role in bridging this gap,” according to the report.

“This involves implementing introductory ESG training for SMEs to establish a foundational understanding of what ESG entails and the business opportunities it presents. Given the significant gaps in this basic understanding identified in the study, scalable training programs using digital learning platforms would be advantageous,” it further stated.

The study also took a closer look at the country participants in terms of the following: awareness and prioritization, customer demands and business impact, and readiness and support.

Lowest awareness of EU ESG legislation

In the case of the Philippines, it was found that in awareness and priority, “companies in the Philippines have amongst the lowest awareness of EU’s ESG legislation, with 72 percent of the companies stating that they are unfamiliar with all the listed EU legislation.”

Despite this, the companies polled, mostly members of the Philippine Exporters Confederation, Inc., still placed a relatively high priority on sustainability, with 94 percent anticipating that sustainability would become a higher priority for them in the next three years.

For Filipino enterprises, sales and business opportunities as well as regulatory compliance are the key drivers for prioritizing sustainability.

In the area of customer demand and business impact, 61 percent have experienced receiving customer sustainability demands, with 22 percent of companies noting a significant increase over the past few years.

“However, compared to the average company in the study, Philippine firms appear to face fewer demands, which may explain the lower awareness of EU ESG legislation,” said the study.

While 48 percent of Filipino enterprises stated that environmental demands remain the most common request, a large number — 37 percent— highlighted customer requests regarding social sustainability as dominant.

Environmental demands are dominated by requests related to sustainable production processes and products and packaging, followed by environmental certification. Sustainability requests relating to GHG emissions are not that frequent and, surprisingly, this holds true as well for climate risk assessments, despite the climate exposure of the Philippine islands.

Occupational health and safety, adequate wages, and working hours are predominant requests in terms of social sustainability, with a majority of the surveyed firms receiving such requests.

For governance-related demands, data protection and confidentiality are ranked highest, followed by business ethics policies and supplier management. Protection for whistleblowers and handling reported violations are ranked lower in priority.

High business impact

Meanwhile, 65 percent of the companies also reported a high to significant business impact from new sustainability demands. The top three impacts include increased business opportunities, higher costs, and enhanced brand reputation.

Finally, on readiness and support, the paper said that despite the low ESG maturity, 49 percent of the surveyed companies view increasing sustainability demands as a potential business opportunity, but the report cautioned that “this optimistic outlook is likely influenced by their limited understanding of upcoming EU ESG legislation.”

On the other hand, 49 percent also consider sustainability demands as either a trade barrier or a combination of both a trade barrier and a business opportunity.

Compared to the other surveyed participants, Philippine companies also appeared significantly less experienced in handling sustainability demands across all surveyed areas, including reporting, human rights due diligence processes, and implementing green production processes.

Meantime, they seemed to be slightly more experienced in handling requests related to sustainable products, also one of the areas where they reported receiving the most demands. Regarding barriers to progress, Philippine companies stated that a lack of knowledge and resources is their top hurdle, followed by financial constraints and technological solutions.