COLLEGE OF BUSINESS AND ACCOUNTANCY

COURSE DESCRIPTION:
ü MAC 16 – Sustainability and Strategic Audit

TOPIC:
ü Sustainability Reporting Framework and Concepts

MODULE CODE:
ü SSA 02

LEARNING OUTCOMES:
At the end of this module, the student should be able to:
ü Differentiate sustainability reporting from financial reporting.
ü Know the provisions of SEC Memorandum Circular No. 4, series of 2019, including its guidelines
ü Discuss the nature of Global Reporting Iniative (GRI) Standards.

BIBLICAL VALUES INTEGRATION:

“Rejoicing in hope; patient in tribulation; continuing instant in prayer.”
-Romans 12:12

INTRODUCTION:
A sustainable strategy can lead to business resilience by enabling an organization to create value for its shareholders
while it also contributes to a sustainable society by meeting the needs of this generation without sacrificing future generations.
A truly sustainable strategy is one that integrates material sustainability issues, leading to business models that enable net
positive economic, environmental, and social impacts. For example, Ikea strives for resource independence by encouraging all
waste be turned into resources; energy independence by being a leader in renewable energy; and becoming more energy
efficient throughout its operations and supply chain.

BODY:
Sustainability accounting entails systems, methods, and processes of creating sustainability information for
transparency, accountability, and decision-making purposes. This includes the identification of relevant sustainability issues of
the company, the definition of indicators and measures, data collection, overall performance tracking and measurement, as well
as the communication with to internal and external information recipients.

Sustainability information includes both financial and non-financial information. Financial information has a direct link
with the financial accounting system and is expressed in monetary units. Non-financial information means that it is not
presented in monetary terms and is not based on an accounting standard. Non-financial information can be both quantitative,
such as tons (or units) of greenhouse gas, or qualitative, such as governance processes, the reputation of an organization or the
organization’s impact on the state of biodiversity. Non-financial information is often more difficult to handle compared with
financial information because there are generally no accepted reporting principles and the data can take many different forms.
It is often the case that this information is qualitative and can be difficult to measure and access. These difficulties should not
limit the use of non-financial information because this kind of information might be very relevant to information users, whether
citizens, investors or society at large.

A Dutch project has defined non-financial information in the public sector as information that comprises all quantitative
and qualitative data on the policy pursued, the business operations and results of this policy in the form of output or outcome,
without a direct link with a financial registration system. As noted above, sustainability information is not solely non-financial
information. Sustainability information may include financial information, although sustainability reporting practices show only
little use of monetary values in disclosures. Sustainability information, however, always includes some non-financial elements.

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Sustainability Reporting Guidelines for Publicly-Listed Companies
On 18 February 2019, the Securities and Exchange Commission (SEC) issued Memorandum Circular (MC) No. 4,
Sustainability Reporting Guidelines for Publicly-Listed Companies (the Guidelines), to promote sustainability reporting and make
it relevant for Philippine publicly-listed companies (PLCs). The Guidelines is intended to help PLCs assess and manage non-
financial performance across Economic, Environmental and Social aspects of their organization and enable PLCs to measure and
monitor their contributions towards achieving universal targets of sustainability, such as United Nations Sustainable
Development Goals, as well as national policies and programs, such as AmBisyon Natin 2040.

Submission with SEC Form 17-A

The reporting template (Annex A of the Guidelines) shall be submitted together with the company's Annual Report (SEC
Form 17-A). The first report shall be attached to the 2019 Annual Report to be submitted in 2020.

For companies who already have sustainability reports in accordance with internationally recognized frameworks and
standards, their reports shall already be considered as their compliance with the reporting template. Companies may choose to
attach the whole sustainability report to their Annual Report or just include a statement providing a link to said report.

Comply or Explain Approach

The Guidelines shall be adopted on a "comply or explain" approach for the first three years upon implementation. By
"comply or explain", it means the companies would be required to attach the template to their Annual Reports but they can
provide explanations for items where they still have no available data on.

Penalty for Non-attachment of the Sustainability Report to the Annual Report

Non-attachment of the Sustainability Report to the Annual Report shall be subject to the penalty for Incomplete Annual
Report provided under SEC MC No. 6, Series of 2015, Consolidated Scale of Fines. This SEC MC No. 4 shall take effect fifteen (15)
days after its publication in two (2) newspapers of general circulation.

Sustainability Reporting Framework

The sustainability reporting guidelines is crafted for PLCs operating in the Philippines with a goal of making
sustainability reporting relevant and value-adding for companies. The Guidelines focuses on economic, environmental
and social disclosures since governance disclosures are made in the Integrated Annual Corporate Governance Report
(I-ACGR) submitted separately to SEC.

Beyond the purpose of transparency, it is designed to help PLCs assess their non-financial performance across
environment, economic, and social aspects of their organization to optimize business operations, improve
competitiveness, and long-term success. Disclosures contained in these guidelines are those that contribute to
describing and measuring the company’s sustainability performance. Broadly, sustainability performance is measured
in the way the corporation conducts its business, and how it manages its key economic, environmental and social
impacts. It builds on the principles and metrics provided by the GRI Standards, SASB Standards, TCFD Recommendation
and other internationally accepted standards for non-financial reporting.

The over-all sustainability reporting framework for Philippine PLCs follows this structure:

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Global Reporting Initiative
Founded in 1997, one of the main developers of sustainability reporting has been the Global Reporting
Initiative (GRI), which is a non-profit organization that promotes sustainability reporting. The GRI currently provides
the most widely adopted sustainability reporting framework.

The GRI’s mission is to make sustainability reporting standard practice by providing guidance and support to
organizations. Its reporting frameworks are developed with private sector business in mind. The GRI, however,
emphasizes that public sector organizations can also use the same reporting principles. The GRI reporting framework
provides flexibility to the reporters so that they can connect reporting to their strategic targets and sustainability
impacts.

The GRI published the third version of its Guidelines (G3) in 2006. In 2011, the Guidelines were updated to
G3.1, expanding guidance on local community aspects, human rights and gender. The Guidelines cover both aspects of
how to report and what should be reported. In practice, what seems to be difficult for reporters is to consider the topics
that should be included in the report. This is related to the questions of which issues are material for the organization
and can advance sustainability performance.

Performance indicators are classified as core and additional indicators. Core indicators are identified to be of
interest to most stakeholders and assumed to be material, whereas additional indicators represent emerging practice
or address topics that may be material to some organizations but not, generally, for a majority. Economic performance
indicators illustrate the flow of capital among different stakeholders and the major economic impacts of the
organization throughout society. Environmental indicators reflect the inputs, outputs and modes of impact an
organization has on the environment. Social indicators are divided into four subgroups. First, labor practices and
decent work indicators deal with fair globalization, which aims to achieve both economic growth and equity through a
combination of social and economic goals. Second, society performance indicators focus on the impacts that
organizations have on the communities in which they operate, and how the organization’s interactions with other social
institutions are managed and mediated. Third, human rights performance indicators deal with the impacts and
activities an organization has on the civil, political, economic, social and cultural human rights of its stakeholders. And
finally, product responsibility indicators address the effects of products and services on customers and users. At the
time of finalising this report in May 2013, GRI launched a new G4 version of the guidelines
(https://www.globalreporting.org/reporting/g4).

The GRI Standards begin with three Universal Standards to disclose general information about an organization
and its approaches to sustainability management. Further topic-specific standards outline approaches to disclosing
qualitative and quantitative information deemed material to each reporting organization.

GRI 101: Foundation is the starting point for using the set of GRI Standards.
GRI 101 sets out the Reporting Principles for defining report content and quality. It includes requirements for
preparing a sustainability report in accordance with the GRI Standards, and describes how the GRI Standards can be
used and referenced. GRI 101 also includes the specific claims that are required for organizations preparing a
sustainability report in accordance with the Standards, and for those using selected GRI Standards to report specific
information.

GRI 102: General Disclosures

It is used to report contextual information about an organization and its sustainability reporting practices. This
includes information about an organization’s profile, strategy, ethics and integrity, governance, stakeholder
engagement practices, and reporting process.

GRI 103: Management Approach

It is used to report information about how an organization manages a material topic. It is designed to be used
for each material topic in a sustainability report, including those covered by the topic-specific GRI Standards (series
200, 300, and 400) and other material topics.

Applying GRI 103 with each material topic allows the organization to provide a narrative explanation of why the
topic is material, where the impacts occur (the topic Boundary), and how the organization manages the impacts.

Reporting Principles per SEC Memo No. 4 s, 2019 Guidelines

The Reporting Principles for defining report quality guide choices on ensuring the quality of information in a
sustainability report, including its proper presentation. The quality of information is important for enabling

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stakeholders to make sound and reasonable assessments of an organization, and to take appropriate actions. For more
information read GRI 101: Foundation.

Materiality
An organization is faced with a wide range of topics on which it can report. Relevant topics, which potentially
merit inclusion in the report, are those that can reasonably be considered important for reflecting the organization’s
economic, environmental, and social impacts, or influencing the decisions of stakeholders. In this context, ‘impact’
refers to the effect an organization has on the economy, the environment, and/or society (positive or negative). A topic
can be relevant – and so potentially material – based on only one of these dimensions.

A topic may be considered material if it falls into any of the following:

1. It is a KEY CAPITAL/ RISK/ OPPORTUNITY that impacts value creation
2. Your KEY BUSINESS ACTIVITIES impact the topic
3. Your SUBSISIARIES/ CONTRACTORS/ SUPPLY CHAIN contribute significant impacts to this topic
4. Your PRODUCTS/ SERVICES contribute impacts to this topic
5. There is a TREND that points to a future where this topic will become material to you

The assessment of materiality associated with sustainability issues should take into account their influence on
the stakeholders’ assessments and decisions and the significance of the company's economic, social and environmental
impacts.

In general, a disclosure is considered material if it reflects the significant economic, environmental, and social
impacts of the organization of the stakeholders, and the capacity of the stakeholders to influence the economic,
environmental and social impacts or activities of the organization.

Please see below the suggested materiality assessment process adopted from the Bursa Malaysia
Sustainability Reporting Guide:

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 Stakeholder Inclusiveness
The reporting organization should provide insight into the nature and quality of the organization’s
relationships with its key stakeholders, including how and to what extent the organization understands, takes into
account and responds to their legitimate needs and interests. Stakeholders provide useful insights about matters that
are important to them, including economic, environmental and social issues that also affect the ability of the
organization to create value.

Balance
Reporting must have no bias in the selection or presentation of information. The reported
information shall reflect positive and negative aspects of the reporting organization’s performance to enable a reasoned
assessment of overall performance. Reporting may also be compared against previously reported targets, projections,
and expectations

Completeness
The reporting organization should consider the extent of information disclosed and its level of specificity or
preciseness, which might involve considering potential concerns regarding cost/benefit, competitive advantage, and
future-oriented information.

Reliability
The reporting organization should gather, record, compile, analyze, and report information and processes used
in the preparation of the report (similar to maintaining an audit trail) in a way that they can be subject to examination,
and that establishes the quality and materiality of the information.

Accuracy
The reported information should be sufficiently accurate and detailed for stakeholders to assess the reporting
organization’s performance. Reports should include proper citation of information sources, including estimated data and
methodology for estimation.

Consistency and Comparability

The information in the report should be presented on a basis that is consistent over time and in a way that
enables analysis of any changes in the organization’s performance over time and comparison with other organizations
to the extent it is material to the organization’s own ability to create value over time.

MANAGEMENT APPROACH
Disclosures should also be accompanied by a management approach which describes the management of
material sustainability issues. This includes explaining how the organization (1) avoids, mitigates, or remediates
negative impacts to the economy, environment, and society, and enhances positive ones, and (2) addresses its climate-
related issues.

Management Approach Components

When reporting on the management approach for a material topic, the reporting organization should ideally
include a description of the following components, when applicable:
i. Policies.
ii. Commitments.
iii. Goals and targets
iv. Responsibilities.
v. Resources.

REFERENCES:
•Perlas, M.A, Instructional Material for Sustainability and Stratgeic Audit
• SEC Memorandum Circular No. 4, series of 2019, including its guidelines
• Global Reporting Iniative Standards
• Dow Jones Sustainability Index
• Sustainability Accounting Standards
• Sample Sustainability Reports/Annual Reports in the Philippines
• https://www.sec.gov.ph/
• https://www.globalreporting.org
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