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Because of changing investment and consumer norms and a shifting global policy and regulatory landscape,

sustainability and environmental, social and governance (ESG) concerns have become a compelling issue for

businesses, and responding to these concerns have turned into an important performance metric and part of business

agenda. In this bulletin, the Firm's Sustainability & ESG Group notes key legal developments in this area.

EXTENDED

PRODUCER

RESPONSIBILITY

BECOMES LAW

oncepts such as “circular economy”, “plastic neutrality”,

and “sustainable consumption and production” became

part of Philippine statutory law with the enactment of

Republic Act No. 11898 or the Extended Producer

Responsibility Act of 2022 (the “EPRA”). Extended Producer

Responsibility (“EPR”) refers to the environmental policy

approach and practice that requires producers to be

environmentally responsible throughout the life cycle of a

product, especially its post-consumer or end-of-life stage.

The EPRA requires product producers (which includes brand

owners and product manufacturers) to recover up to 80% of

their plastic packaging waste by 2028. Product producers

obliged to implement EPR are those enterprises that generate

plastic packaging whose total value of assets exceeds PhP100

million waste. Micro, small, and medium enterprises are not

covered by the EPRA but are encouraged to practice EPR

voluntarily.

Obliged enterprises must establish audit systems to determine

compliance with the EPRA and their own EPR programs. The

audit must be conducted by an independent third-party

auditor in line with uniform standards to be promulgated by

the Department of Environment and Natural Resources

(“DENR”).

Certified reports on plastic product footprint generated and

recovered by obliged enterprises will be made available to the

public through the website of the DENR.

Obliged enterprises may opt to organize themselves to form or

authorize a Producer Responsibility Organization) for the

purpose of establishing a viable platform for the

implementation of their respective EPR programs.

To motivate the development of an effective solid waste

management, the EPRA provides incentives, namely: (i) cash

and/or non- cash rewards and/or recognitions; (ii) tax

incentives; and (iii) deductibility of EPR expenses for income

tax purposes.

An obliged enterprise that fails to register its EPR program

with the NSWMC may be penalized with a fine ranging from

PhP5 million to PhP20 million, and automatic suspension of

business permit on its third offense.

The EPRA requires product

producers (which includes

brand owners and product

manufacturers) to recover up

to 80% of their plastic

packaging waste by 2028.

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The SyCipLaw ESG Bulletin | Issue No. 1 - October 2022

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On the other hand, obliged enterprises that fail to meet the

targets for the recovery of plastic product footprint may be

ordered to pay the above-mentioned fines or a fine twice the

cost of recovery and diversion of the footprint or its shortfall,

whichever is higher.

The Philippines joins countries such as Japan, Australia, and

some states in Europe and Latin America that have

institutionalized EPR to hold plastic producers accountable for

their plastic waste. It is a significant step for the Philippines,

which at present is the third-ranking contributor to plastic

pollution in the world, producing at least 2.7 million metric tons

of plastic waste every year.

DOJ: UTILIZATION OF RE

RESOURCES NOT SUBJECT TO

FOREIGN OWNERSHIP

RESTRICTIONS

The Philippine Department of Justice (“DOJ”) has issued an

opinion to the effect that the exploration, development and

utilization (“EDU”) of solar, wind, hydro and ocean or tidal

energy sources is not subject to the forty percent (40%) foreign

equity limitation under Article XII, Section 2 of the Philippine

Constitution.

Prior to the opinion, the Philippine Department of Energy

(“DOE”) has required that corporation applicants for

renewable energy (“RE”) contracts (subject to exceptions in

case of geothermal resources and biomass) be at least sixty

percent (60%) Filipino-owned. This is based on the

understanding that exploitation of RE resources constitutes

EDU of natural resources which, under Article XII, Section 2 of

the Philippine Constitution, may only be undertaken by the

State or by Filipino citizens or corporations or associations at

sixty percent (60%) of whose capital is owned by Filipino

citizens. This limitation has hampered foreign investments in

and, consequently, the development of, the RE sector in the

Philippines. Notably, where an industry or undertaking is

nationalized or partly nationalized, aside from equity

ownership limitations, foreigners are also prohibited

participating management, operation, control and

administration of the enterprise. Thus, foreigners have, to

date, been limited to the role of passive investors in RE

undertakings.

The DOJ opinion which was issued at the request of and is

addressed to the DOE. The DOJ cited the following as basis for

its opinion:

• Solar, wind, hydro and ocean or tidal energy sources

are inexhaustible and, therefore, not within the ambit

of the term “natural resources” in Article XII, Section 2

of the Philippine Constitution. The reason behind the

imposition of foreign ownership restrictions, i.e., to

prevent depletion of exhaustible resources by

foreigners, does not apply to inexhaustible energy

resources.

• While Article XII, Section 2 makes reference “all

forces of potential energy” as among the natural

resources subject to the restriction, such term should

be interpreted to exclude kinetic energy or “energy in

motion”.

• Its interpretation is consistent with the

Constitutional policies of advancing the right of the

people to a balanced and healthful ecology and

developing a self-reliant and independent national

economy, as the development of RE (which requires

foreign capital, technology and expertise) will provide

the country with clean energy not subject to price

fluctuations and market forces to which fossil fuels

are vulnerable.

The DOJ, however, noted that its opinion is subject to the

following limitations: (i) the forty percent (40%) foreign

equity limitation would remain unless the implementing

rules and regulations of the Renewable Energy Act (Republic

Act No. 9513), which restate the limitation, is amended; and

(ii) the use of hydro and ocean or tidal energy sources, if the

same is directly harvested from the source by foreign

nationals or entities, would still not be permitted based on

the Water Code and existing jurisprudence.

DOJ opinion paves the way for the issuance by the DOE of

amended implementing rules and regulations to remove

foreign equity ownership restrictions in respect of entities

engaged in the EDU of solar, wind, hydro and ocean or tidal

energy sources.

Solar, wind, hydro and ocean

or tidal energy sources are

inexhaustible and, therefore,

not within the ambit of the

term “natural resources” in

Article XII, Section 2 of the

Philippine Constitution. The

reason behind the imposition

of foreign ownership

restrictions, i.e., to prevent

depletion of exhaustible

resources by foreigners, does

not apply to inexhaustible

energy resources.

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The SyCipLaw ESG Bulletin | Issue No. 1 - October 2022

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BSP ISSUES GUIDELINES FOR

SUSTAINABLE INVESTMENTS BY

BANKS

The Bangko Sentral ng Pilipinas (“BSP”; the Philippine Central

Bank) issued BSP Circular No. 1149, series of 2022

(Guidelines on the Integration of Sustainability Principles in

Investment Activities of Banks). The Circular sets

expectations on the prudent conduct of investment

activities, as well as minimum practices that banks must

establish for the management and control of investment- related risks. It amends Section 614 of the Manual of

Regulations for Banks regarding the investment activities of

BSP-supervised financial institutions, and embeds

sustainability-related requirements therein.

Salient amendments include the following:

• Board and senior management oversight. A bank’s board of

directors must oversee the integration of sustainability

principles and objectives in the bank’s investment

activities and monitor the bank’s progress in attaining

such objectives. Meanwhile, portfolio objectives

developed by senior management pursuant to board- approved strategic objectives must provide how the

bank’s investment activities will be aligned with the

sustainability objectives of the bank.

• Policies, Procedures and Limits. A bank’s policies,

procedures and limits for managing investment

management activities must be consistent with

the organization’s broader business strategies, including

its sustainability objectives. Due diligence review must

cover, among others, the assessment of material

environmental and social (E&S) risk exposures of the

investment as well as the issuing company, and an

analysis of exit strategies for securities that are found to

have high E&S risks.

• Investment Strategies. A bank may adopt any or a

combination of the following approaches to investment:

integration approach (which involves an exclusive and

systemic inclusion of material E&S factors in investment

analysis); screening approach (which involves the

application of filters to lists of potential investments to

rule companies in and out of contention for investment);

or thematic approach (which refers to investing based on

trends, such as a social, industrial, or demographic

trends).

A bank may also adopt other approaches and global best

practices. The bank must adopt measures to ensure that

investments are channeled to companies that comply

with sustainability-related standards, laws and

regulations, as well as companies that do not engage in

greenwashing.

• Risk Measurement. A bank whose investments are

exposed to material E&S risk must adopt appropriate

tools and metrics to assess, measure, and monitor these

risks.

• Credit Risk Due Diligence. Factors that a bank may

consider as part of its credit risk due diligence review

include material E&S risks to which the issuer is exposed

based on criteria such as the level of greenhouse gas

emissions, vulnerability to extreme weather events, or

linkages to unsustainable energy practices.

The Circular is part of the BSP’s on-going reforms pursuant to

the Sustainable Finance Framework put in place in March

2020. Earlier, in October 2021, the BSP issued BSP Circular

No. 1128, series of 2021, which focuses on a bank’s E&S risk

management system, including its credit risk management

system and operating risk management system.

RE MARKET GOES INTO INTERIM

COMMERCIAL OPERATIONS

Under the Renewable Energy Act (Republic Act No. 9513)

(the “RE Act”), it is a policy of the state to increase the

utilization of renewable energy (“RE”) by institutionalizing

the development of national and local capabilities in the use

of RE systems. Towards this end, the RE Act instituted the

Renewable Portfolio Standards (“RPS”), a policy mechanism

that obliges electric power participant such as generation

companies, distribution utilities and retail electricity

suppliers (referred to as “Mandated Participants”) to

source or produce a fraction of their electricity

requirements from eligible RE resources.

To facilitate Mandated Participants’ compliance with the

RPS, the RE Act mandated the creation of the renewable

energy market (“REM”). The REM is the venue for the

trading of Renewable Energy Certificates (“RECs”)

equivalent to an amount of power generated from RE

resources.