September 2024 Articles - Suits the C-Suite | SGV & Co. | EY

16 September 2024

Bonar A. Laureto

Navigating Change: 10 Key Shifts Shaping Sustainability in the Philippines

IN BRIEF: As a signatory to the Paris Agreement, the Philippines is advancing towards a low-carbon economy with the proposed Low Carbon Economy Investment Act, incentivizing decarbonization plans and carbon pricing.New legislation, including the Carbon Rights Act and BSP Circulars on Environmental and Social Risk Management Systems, is set to redefine sustainable investment and risk management in the financial sector.The SEC's upcoming sustainability reporting form aligns with global standards, enhancing transparency and aiding investors in assessing climate-related risks and opportunities. PULL QUOTE: “Philippine regulatory reforms are catalyzing a sustainable transformation, positioning businesses for resilience and investors for informed decision-making.” The Philippines is at a pivotal moment in its sustainability journey, driven by a blend of regulatory reforms, market dynamics, and heightened climate awareness. These developments create both risks and opportunities for businesses operating in the country and global investors interested in sustainable investments. As the nation confronts the realities of climate change and its potential impacts, there is a growing consensus among policymakers, business leaders, and civil society on the need for a strategic and coordinated approach to sustainability. This collective push towards environmental stewardship is shaping new business models and investment strategies that prioritize long-term resilience and ethical practices. The Philippines' commitment to this transition is reflected in a series of progressive policies and initiatives that aim to align economic development with sustainable outcomes.This first part of the article explores the first five key shifts that are shaping the sustainability landscape in the Philippines, focusing on the implications for businesses and the opportunities for investors in this emerging low-carbon economy. It explores the upcoming Low Carbon Economy Investment Act, the proposed carbon rights legislation, BSP Circulars 1128 and 2022-042, BSP Circular 1187, and the upcoming Philippine SEC sustainability reporting form. Upcoming carbon pricing policy – Low Carbon Economy Investment Act (HB 7705)The proposed Low Carbon Economy Investment Act, or House Bill 7705, is poised to be a transformative force in the Philippines' shift towards a low-carbon economy. This bill mandates that covered enterprises with substantial contributions to the country’s greenhouse gas (GHG) emissions develop decarbonization plans aligned with a pathway to limit global temperature rise to below 2°C. Additionally, it introduces a carbon pricing mechanism for emissions that exceed established milestones, creating a decarbonization fund. This fund will be reinvested into viable low-carbon projects, presenting significant opportunities for enterprises and investors committed to sustainable development.Proposed carbon rights legislationThe Philippine Congress has introduced the Carbon Rights Act (HB 10635), which aims to address the barriers to investing in carbon forestry and other carbon projects. This legislation seeks to define ownership of carbon rights and establishes mechanisms for their transfer. By clarifying these ownership rights and enabling corresponding adjustments, the bill facilitates the Philippines’ participation in global carbon markets under Article 6 of the Paris Agreement. For investors, particularly those focused on nature-based solutions, this bill presents new opportunities to invest in carbon projects that are critical to achieving global emission reduction targets.BSP Circulars 1128 and 2022-042 on Environmental and Social Risk ManagementThe Bangko Sentral ng Pilipinas (BSP) has implemented Circulars 1128 and 2022-042, which mandate financial institutions to integrate Environmental and Social Risk Management Systems (ESRMS) into their credit risk assessments. These regulations compel banks to conduct climate risk assessments, including stress testing, as part of their underwriting processes. Companies with strong sustainability and climate risk management practices are likely to benefit from easier access to finance, while those slower to adapt may face higher borrowing costs. These circulars also ensure that climate risks are systematically integrated into the financial sector, promoting long-term resilience and stability.BSP Circular 1187 – Sustainable Finance TaxonomyBSP Circular 1187 introduces the Philippine Sustainable Finance Taxonomy Guidelines (SFTG), a framework that classifies economic activities based on their environmental and social sustainability. The taxonomy uses a "traffic light" system—green for aligned activities, amber for transitional activities, and red for non-aligned activities. This classification is crucial for guiding banks and investors in directing capital toward projects that support climate change mitigation and adaptation. By preventing greenwashing, the SFTG ensures that sustainable finance practices in the Philippines are both transparent and credible.Upcoming Philippine SEC sustainability reporting formThe Philippine Securities and Exchange Commission (SEC) is set to introduce a mandatory sustainability reporting form for publicly listed companies, requiring disclosures aligned with International Financial Reporting Standards (IFRS) S1 and S2. These standards emphasize the identification and management of climate-related risks and opportunities, encouraging companies to integrate sustainability into their core business strategies. For investors, these reporting requirements will provide critical insights into the sustainability practices of Philippine companies, facilitating more informed and responsible investment decisions.Charting a sustainable pathThe Philippines stands at a crossroads in its sustainability journey, with recent regulatory reforms and evolving market dynamics steering the nation towards a greener future. As climate change becomes an increasingly pressing global issue, the country is responding with innovative and comprehensive legislative measures and initiatives that aim to reduce carbon emissions and promote sustainable practices, while fostering economic growth, enhancing community resilience, and ensuring environmental justice.The impending introduction of the Philippine SEC's mandatory sustainability reporting form marks a significant step towards greater transparency and accountability in corporate environmental practices. By aligning with international standards, this move propels Philippine companies toward more sustainable operations and equips investors with the requisite information to make responsible decisions. As the nation forges ahead with these regulatory changes, businesses can play a pivotal role in the transition to a sustainable economy, with the potential to set a precedent for other emerging markets in the region.The second part of this article will discuss the roadmap for IFRS S1 and S2 adoption, the severity of rising climate-related loss and damage, rising growth in electric vehicle (EV) adoption, emergence of green steel in construction, decarbonization of the aviation industry, and the innovative approaches and opportunities that are emerging for businesses ready to adapt and thrive in this new landscape. Bonar A. Laureto is an Assurance Principal and leads Climate Solutions under the Sustainability Services team of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

09 September 2024

Marie Stephanie C. Tan-Hamed

What matters to APAC boards in 2024

IN BRIEF: 60% of Asia-Pacific board directors identify economic conditions as their top concern for 2024Despite the increasing severity of climate-related risks, only 21% of Asia-Pacific board directors consider climate change a priorityDemand for data analysts in the Philippines outpaces graduate supply, creating a skills gap due to misalignment between education and industry needs PULL QUOTE: “Boards must keep their finger on the pulse of economic indicators to be able to pivot strategies effectively—and quickly—across multiple fields of play when required.”The Asia-Pacific region is proving its mettle amidst increasing economic and geopolitical complexities. However, for boardrooms across the region, maintaining a competitive edge will require more than just resilience. It calls for an agile, globally interconnected approach that can quickly adapt to the shifting landscape.While much of the world braces against economic headwinds, the Asia-Pacific region is positioned to lead the charge and expected to contribute nearly 60% of global GDP growth in 2024, surpassing pre-pandemic benchmarks. Underpinned by robust performance across national economies, this optimistic outlook has nearly three-quarters of Asia-Pacific CEOs forecasting higher revenue growth and profitability for the year ahead.However, this promising forecast comes with its own set of challenges. Boardrooms are under pressure to navigate a mix of pressures — with inflation, rising labor costs, and geopolitical tensions topping the list of concerns. The latest 2024 EY Asia-Pacific Board Priorities survey shows that economic conditions are the primary agenda of 60% of board directors this year. Beyond these economic pressures, capital allocation and talent shortages are also emerging as key pain points that boards need to tackle head-on. Given these dynamics, boards must keep their finger on the pulse of economic indicators to be able to pivot strategies effectively—and quickly—across multiple fields of play when required. This article will discuss the critical challenges Asia-Pacific boards face in 2024 and strategies to turn them into competitive advantages in the evolving global marketplace. Capital allocation pressureAs inflation, rising operational costs, and diminishing pricing power bite the bottom line, Asia-Pacific boards are moving their focus from growth-at-all-costs strategies to a more nuanced focus on financial discipline. The survey reveals that two-thirds of directors are increasingly concerned about capital availability, with 56% grappling with the complexities of mergers and acquisitions, restructuring initiatives, and divestiture decisions.Despite the unique challenges of the current economic landscape, boards can still rely on fundamental oversight practices in capital strategy. These practices include regular reviews of capital budgeting and strategic plans to ensure agility and alignment with corporate objectives, maintaining a competitive edge in the global marketplace. Boards should also prioritize the right metrics, balancing short-term key performance indicators with long-term value creation goals and using a balanced scorecard that integrates financial, non-financial, and qualitative indicators.The rise of Gen Z workforceTalent management is one of the most crucial priorities for Asia-Pacific boards as they prepare for an AI-driven future. By 2025, Generation Z—those born between the mid-1990s and 2010—is expected to make up 27% of the region’s workforce. This generation is characterized by being digital savvy, having a purpose-driven mindset, and a preference for flexibility.Given these traits, boards are challenged to reimagine their approach to talent development. Those that successfully integrate the unique perspectives and skills of this generation can gain fresh insights, enhancing their capacity to innovate and stay competitive. However, achieving this requires more than merely recognizing the value of younger talent. Boards must foster an organizational culture that prioritizes innovation and embraces diversity, equity, and inclusion. AI-fueled people-centric futureAsia-Pacific boards are rapidly embracing Generative AI, with 40% of directors prioritizing digital transformation and business model changes in 2024. As AI-generated data becomes more prevalent, boards must ensure executives exercise proper oversight, making data governance a key priority. Companies must establish guardrails and ensure compliance with evolving regulations.Meanwhile, the growing reliance on data-driven decision-making and AI is sharply increasing demand for specialized skills in data science and AI. A report by the Philippine Institute for Development Studies (PIDS) highlights a rising demand for data analysts in the country, but higher education institutions are currently falling short in producing enough graduates to meet this need. The report highlights that data science and analytics skills remain underdeveloped within the Philippine workforce due to a disconnect between educational institutions and industry requirements. Although several undergraduate degrees, such as computer science, business administration, statistics, and others, serve as pathways for data science and analytics (DSA) careers, they currently lack specific training tailored to industry demands. This highlights the need for boards to recognize the strategic value of these skills and take proactive steps to develop the talent essential for long-term growth and innovation.Thriving in Asia's green economyAs Asia continues to position itself as a key player in the global green economy, businesses across the region have a unique opportunity to capitalize on this shift. The Philippines, for instance, has made significant strides in climate action, ranking sixth out of 67 countries in the 2024 Climate Change Performance Index (CCPI) and fifth out of 10 countries in the Southeast Asia Green Economy Index. These feats underscore the country's progress in reducing greenhouse gas emissions and developing renewable energy. However, both highlight the country's ongoing challenges in climate policy and ambition, revealing a significant gap in government and corporate decarbonization strategies.For businesses to thrive in Asia’s burgeoning green economy, boards must adopt a long-term, strategic approach. While current returns on clean energy investments may lag behind traditional sectors, the potential for future growth is immense. As highlighted in the 2023 EY Global Board Risk Survey, the most resilient boards are those willing to sacrifice short-term financial gains for the long-term benefits of environmental, social, and governance (ESG) commitments.To truly capitalize on Asia’s green economy, businesses must align their capital allocation with ESG objectives, ensuring that their strategies are not just reactive but proactive in driving sustainability. This requires a commitment to meticulous planning, sustainable investments, and the integration of ESG into the core business model.The climate urgencyDespite the urgency of the climate crisis, it remains a secondary concern for many Asia-Pacific boards, with only 21% of respondents identifying it as a critical issue. Nearly half of these directors cite insufficient information as a barrier.The recent EY Sustainable Value Study reveals that some organizations are scaling back their commitments to net zero and modestly reducing investments in sustainability. Larger organizations, particularly those with revenues exceeding USD $5 billion, are more likely to prioritize climate action (47%) compared to their smaller counterparts (13%). However, this shortsightedness threatens the long-term sustainability and resilience of these businesses.To thrive in a decarbonizing economy, boards must recognize climate action as essential to long-term value creation rather than a mere compliance issue. By embedding ESG considerations into their strategies, boards can move sustainability from aspiration to committed action.What it means to be future-fit Asia-Pacific boards must embrace a transformative mindset and develop tailored governance models to navigate 2024 and beyond. While the need for change is evident, the path forward will vary by organization, depending on their current state, maturity, and strategic vision. Prioritizing key issues, reassessing long-term purpose, and defining what it means to be future-fit will be essential for boards. Marie Stephanie C. Tan-Hamed is a Strategy and Transactions (SaT) Partner and the PH Government and Public Sector leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

02 September 2024

Ryan Gilbert K. Chua

How digital transformations can drive organizational success

IN BRIEF:Companies can keep pace with rapid technological advancements by embracing digital transformation, upskilling employees to work with AI, and ensuring cybersecurity to protect digital assets.The success of digital transformation is closely tied to human emotions, necessitating leaders who prioritize empathy and a people-focused approach. Organizational agility, clear governance, and data governance are key to navigating the complexities of digital transformation. PULL-QUOTE: “Successful digital transformations require effective leadership, talent enablement, organizational agility, cybersecurity, and clear governance policies. By prioritizing these pillars, organizations position themselves for success and ensure their sustained growth and competitiveness.” In this fast-paced digital age, businesses are compelled to continuously innovate and adapt to maintain their competitive edge. The advent of groundbreaking technologies is disrupting traditional practices, compelling companies to undergo digital transformation—a complex process that requires substantial investment.This transformation goes beyond merely adopting the latest technologies; it necessitates bridging the skills gap. As artificial intelligence (AI) gains prominence, there's a growing need for a workforce adept at integrating AI into their workflows, mirroring the agility of startups that rapidly modify apps based on user feedback.Cybersecurity is equally critical, with data breaches underscoring the importance of safeguarding digital assets as fervently as one would secure a physical storefront. Furthermore, robust governance policies provide the strategic direction needed to navigate the digital domain, akin to a CEO's decisive investment in blockchain for enhanced supply chain transparency.Digital transformation is a concrete shift in business operations, using technology to transform processes and services. EY exemplifies this with its EY Digital Audit, which integrates three platforms: EY Canvas, EY Helix, and EY Atlas.These platforms have transformed EY's auditing process. EY Canvas facilitates global team and client collaboration, EY Helix employs advanced analytics on financial data, and EY Atlas acts as a digital repository for current accounting standards and insights. The EY Digital Audit helps ensure that EY firms around the world provide a consistent audit across more than 150 countries, linking over 120,000 EY professionals.When executed effectively, digital transformation reshapes the entire business ecosystem, yielding enhanced results for clients and stakeholders.Unpacking the Digital Investment Index (DII)The EY-Parthenon Digital Investment Index reveals a surge in digital investments as companies race to launch tech-driven offerings. A significant 55% of executives report digital upgrades boosting customer experience. From 2020 to 2022, firms reaping benefits from cloud and Internet of Things (IoT) technologies jumped by 54%, reflecting a trend towards AI and machine learning to enhance customer interactions and gather insights. However, those lagging in adapting strategies risk falling behind. These findings highlight certain factors that underpin successful digital transformations: leadership, capacity, agility, data and cybersecurity, and clear governance.Human-Centric Leadership in Digital ChangeEY Teams and Oxford's Saïd Business School research highlights the crucial role of human emotions in digital transformation success across various sectors. It points to the importance of empathetic leadership that prioritizes people to enhance performance and drive growth. Leaders should champion technology while ensuring its smooth incorporation into everyday tasks. They must foster innovation, adopt new technologies, and safeguard employee well-being to stimulate change from the ground up. EY exemplifies this by embracing remote working technologies, with leaders integrating tools like Microsoft Teams to facilitate seamless remote collaboration, mirroring the effectiveness of in-person engagement. EY wavespace™ centers embody EY's commitment to innovation, providing a collaborative space for teams to explore technologies like AI and blockchain, fostering a culture that values tech integration and employee well-being for digital transformation.Empowering the Workforce for the AI RevolutionThe EY 2023 Work Reimagined Survey reveals that a significant 84% of employers expect their employees to engage with generative AI (GenAI). To capitalize on GenAI's capabilities, companies must prioritize extensive training, ensuring their teams not only use new tools but also possess a comprehensive understanding and proficiency in them. In the face of digital evolution, closing the skills gap and providing upskilling avenues is essential for enhancing workforce competencies. This investment in human capital is crucial for maintaining a competitive edge. Customized learning and development (L&D) programs are key, preparing employees to adeptly manage and exploit digital advancements like GenAI. Cultivating a culture of ongoing learning and flexibility enables organizations to become more robust and positions them to navigate the future of work with a workforce that is agile and digitally savvy.Recognizing and unlocking the full potential of their workforce is essential for any organization's digital evolution. This leadership approach ensures that technology serves people and not the other way around, paving the way for a transformation that is both progressive and human-centered.Cultivating Agile EnterprisesIn the face of technological evolution, the agility of an organization is paramount for successful digital transformations. Companies must be adaptable and forward-thinking, swiftly converting emerging trends into chances for growth. Agility is also anchored in data-centric decision-making. By harnessing data analytics, organizations can discover valuable insights that inform strategic choices and propel digital initiatives.A flexible business and tech framework is essential for supporting transformation efforts. However, many companies grapple with legacy systems, inflexible structures, and compartmentalized operations. Leaders must focus on harmonizing their tech infrastructure with their overarching business goals to foster a responsive and integrated environment.EY demonstrates agility through its adaptive approach to business and technology. The firm actively replaces legacy systems with scalable cloud-based solutions, allowing for a more flexible and integrated tech infrastructure. This shift enables EY to respond quickly to market changes and client needs.Maximizing Data Potential with Robust SecurityAs digital strategies advance, organizations face increased risks of cyber threats and data breaches. To counter this, they must deploy comprehensive cybersecurity measures, robust data protection tools, and stringent privacy protocols. Data is the cornerstone of technological progress and must be managed with strategic care and caution.Safeguarding data is only part of the equation—effective data governance is also essential for organizations to unlock the full value of their digital assets. This means not only protecting data from external threats but also ensuring its quality, accessibility, and ethical use within the organization. With the right governance framework, companies can confidently leverage their data to drive innovation and maintain a competitive edge in the digital landscape.Implementing Clear Governance FrameworksThe intricate nature of any transformation demands substantial resources. Amidst this complexity, there's a danger of straying from the initial business goals, potentially slowing progress or even sidetracking the entire transformation effort. To mitigate this risk, it's crucial for organizations to define their desired business outcomes from the outset.Leaders play a pivotal role in crafting and enforcing detailed governance policies and a decision-centric operating model. By doing so, they provide a clear roadmap that aligns the transformation process with the organization's strategic objectives, ensuring that every step contributes to the momentum needed to achieve a successful transformation.Charting the Digital CourseIn today's digital landscape, staying competitive means embracing innovation. Leaders must ensure digital transformations are in sync with their immediate and future objectives, including a commitment to long-term strategies and a focus on people. Awareness of employee well-being, tech progress, and emerging cybersecurity threats is key to adapting digital strategies amid new challenges.Crucial to this journey are effective leadership, talent empowerment, agility, cybersecurity, and definitive governance. By valuing these elements, organizations can navigate the digital terrain, secure ongoing success, and maintain a competitive edge. Ryan Gilbert K. Chua is the Business Consulting Leader and Technology Assurance Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

September 2024

Navigating Change: 10 Key Shifts Shaping Sustainability in the Philippines

What matters to APAC boards in 2024

How digital transformations can drive organizational success

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