New EU environmental, social and governance (ESG) regulations that affect the whole value chain of companies are expected to put increase pressure on majority of Philippine companies, which have poor awareness of the hard standards and are yet struggling to get onboard in the global supply chain.
An industry report “ESG Study: The Effects of EU Sustainability Regulations in the Philippines” co-published by the Employers Confederation of the Philippines (ECOP) and the Danish Industry (DI), Denmark’s largest business and employers’ organization, said that a number of EU’s ESG legislations address the entire value chain of companies, wherein EU firms that have suppliers in the Philippines may have to launch new specific sustainability requirements to ensure compliance with ESG standards.
Among these directives seen to have the biggest impact on Filipino companies are the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD), EU Battery Regulation, EU Deforestation Regulation (EUDR), and Carbon Border Adjustment Mechanism (CBAM), according to the joint report. Also relevant EU policies for the Philippines include the EU Forced Labour Regulation and the EU Taxonomy.
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The CSRD mandates companies with activities within the EU to disclose their ESG impact across the whole value chain. This law is seen to put pressure on Filipino companies to deliver data and report on how they manage and govern potential ESG risks and impacts.
The CSDDD requires large companies operating in the EU to proactively identify, prevent, and report on adverse human rights and environmental impacts across their operations and value chains.
“Philippine suppliers and those in the value chain of EU companies may need to implement stricter sustainability due diligence practices to demonstrate how they manage social and environmental impacts,” the report said.
The EU Battery Regulation aims to reduce environmental and social impacts throughout the life cycle of the battery. Philippine companies exporting products that contain batteries to the EU will need to disclose the origin of raw materials used in battery production.
“Since many [Philippine] exports involve machinery and electronics, this regulation will likely increase the burden on local suppliers,” the document continued.
On the other hand, the EUDR aims to prevent seven products sold in the EU from contributing to deforestation or forest degradation. Philippine exporters of these goods, namely, rubber, palm oil, soy, coffee, cocoa, wood, and cattle, as well as the products made with these commodities, must verify that they are not sourced from land deforested or degraded after December 31, 2020.
Additionally, companies must also remain observant about CBAM, the EU tool that puts a fair price on the carbon emitted during production. Exporters of carbon-intensive goods may incur extra costs if their production processes have high carbon emissions.
The EU Forced Labour Regulation, adopted just this month, will effectively eliminate products made using forced labor from the EU market.
Under the EU Taxonomy, Philippine businesses seeking EU investments may need to prove that their products, production processes and activities meet the sustainability criteria outlined by this legislation.
It is imperative that Filipino industries stay updated and compliant with new EU legislative changes and requirements as bilateral trade continues its rapid growth and discussions about a Philippines-EU free trade agreement have resumed, said the report.
Moreover, the EU has become a more important trading partner for the country, becoming the Philippines’ fifth largest export partner. Currently, trade with the EU accounts for 12% of total Philippine exports, with the EU importing around EUR10.7 billion worth of goods last year, largely comprised of machinery and electronics as well as agricultural products.
