2021 Articles - Suits the C-Suite - Page 6 | SGV & Co. | EY

11 January 2021

Benjamin N. Villacorte

Creating long-term value with sustainability and climate-related disclosures

There has been a radical change in the investment market in recent years with investors measuring business performance with traditional financial factors, and the way companies manage risks related to environmental, social and governance (ESG) issues. Economies and businesses are now more cognizant of the importance of decarbonization strategies, value creation, and climate-related investments in achieving long-term sustainable growth. Businesses that focus on ESG issues such as climate change are considered forward-looking and perceived as having a competitive advantage. Despite the economic pressures brought about by the ongoing pandemic, the philosophy of stakeholder capitalism has gained more support with these non-financial factors considered critical to business resilience and long-term recovery. This shift has increased the demand to make accounting for climate risks a mainstream measure of performance and not just a measure of corporate responsibility. Companies committed to sustainability may have a better-defined margin and may achieve a lower cost of capital. Financial reports no longer just focus on short-term financial parameters alone, but also consider the long-term importance of investing in clean technologies. When business leaders take into consideration market mechanisms like carbon pricing and emission caps, which can result in financial incentives as well as the lasting positive engagement with stakeholders, they can see that ESG factors now have a direct impact on a company’s cash flows, financial position and financial performance. CLIMATE-RELATED MATTERS IN FINANCIAL REPORTING The integrity of financial statements that provide transparency on climate-related matters are becoming increasingly critical for efficient resource allocation and sound decision-making. International Financial Reporting Standards (IFRS) require businesses to report climate-related matters when their effect is material to the financial statements. According to “Effects of climate-related matters on financial statements” published by the IFRS Foundation in November, information is considered material if “omitting, misstating or obscuring it could reasonably be expected to influence the decisions investors make on the basis of those financial statements.” For instance, the publication mentioned above states that companies must include in their report climate-related issues that may affect estimates of future taxable profits, estimates of recoverable amounts to assess impairment of goodwill and impairment of assets, levies imposed by governments, effects of climate-related matters on the measurement of expected credit losses and on the fair value measurements of assets and liabilities in the financial statements, among others. The use of narrative reporting or management commentary can likewise fill the gaps in financial statements. CHALLENGES IN CLIMATE RISK DISCLOSURES Unfortunately, despite the existing IFRS requirements and encouragement to adopt the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), which provides a framework to help companies more effectively disclose climate-related risks and opportunities through their existing reporting processes, a number of publicly listed companies still lack comprehensive and transparent climate risk disclosures, simply adopting a “check box” approach in reporting. Businesses need to realize that for many investors, transparency, quality and depth of disclosure warrant credit and not criticism. In addition, disclosing material information on climate change scenario planning enhances risk management, helps execute strategies, and leads to long-term increases in shareholder value. Although multiple disclosure frameworks and standards such as the Sustainability Accounting Standards Board, Global Reporting Initiative, International Integrated Reporting Council and the TCFD provide recommendations on climate risk accounting, there is still a lack of standardized metrics in ESG reporting. Investors require more information from the data presented to them while the complexity and costs of reporting ESG matters against multiple standards and frameworks are often frustrating to businesses. This situation calls for developing and adopting structured and universal reporting standards to measure corporate sustainability performance. Standardization will not only improve the clarity, comparability and consistency of figures and information but will greatly enhance dialogue between investors and companies. According to Erkki Liikanen, Chair of the IFRS Foundation Trustees, there is a growing demand for standardization and cooperability on sustainability reporting. A consultation paper on sustainability reporting was published by the Trustees of the IFRS Foundation on Sept. 30, and it sets out possible ways forward, including the plan to create a new separate Sustainability Standards Board. This entity will initially focus on climate-related risk disclosures and will work in parallel with the International Accounting Standards Board under the IFRS Foundation. Consultations are currently being conducted in order to determine global demand and develop possible interventions, with the aim of collaborating with existing national and regional initiatives to develop global standards in sustainability reporting. Globally applicable standards will guide companies in identifying and mapping out financially material climate scenarios and sustainability topics, as well as in assessing their implications on business risk management. These standards will also minimize complexity and provide the primary users of financial statements (existing and potential investors and creditors) and other stakeholders (customers, suppliers and employees) with a qualitative discussion of ESG topics and key performance indicators (KPIs) that are material to the company’s operations. In the absence of a globally accepted set of standards, EY and the Coalition for Inclusive Capitalism worked together in 2018 to prepare the Embankment Project for Inclusive Capitalism (EPIC) report to identify common metrics by which companies can measure long-term value. Leveraging the insights from 31 asset management participants from the US and EMEIA, the EPIC report focused on creating new metrics for demonstrating long-term value in four key areas, two of which were Society and Environment, and Corporate Governance. Uniform standards on climate-related disclosures will also enhance business confidence and efficiency as there will be a consensus on what constitutes an ESG investment. A standard ESG lens will also help companies translate theory into action since businesses will be guided on how their commitment to ESG goals will impact society and the planet. These standards are critical in assessing and communicating climate risks and opportunities as well as in developing strategies to build long-term resilience while facilitating the transition towards a low carbon economy. THE FUTURE OF SUSTAINABILITY REPORTING The undeniable strong connection between ESG performance and financial risk and returns calls on the corporate sector to take a huge leap towards securing long-term success by creating more climate-resilient portfolios, integrating holistic and sustainable solutions to the investment process, and ensuring transparency and compliance with reporting requirements. Through these efforts, companies can effectively manage risks and generate sustainable, long-term returns. As stakeholders seek to understand how companies manage ESG risks, transparent, credible and compliant ESG disclosures will be essential in building confidence in what is reported. Given the foreseeable impact of climate change, and the mounting pressure from investors, employers, leaders, consumers and policymakers to address it, companies, more than ever, are called upon to clearly and transparently integrate ESG considerations into their overall business strategy. As the global economy transitions to a decarbonized future, those who do not keep up will risk being outperformed by companies that embrace climate resiliency. 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. Benjamin N. Villacorte is a Partner of SGV & Co.

04 January 2021

Wilson P. Tan

Leading Now, Next and Beyond COVID-19

The lessons we learned in 2020 were undoubtedly challenging, demanding and somewhat painful. The pandemic was indiscriminate, affecting people, businesses and governments the world over. It taught us to address accelerated change and uncertainty with forethought and equanimity. It compelled us to embrace technology with necessary urgency. And it made us rethink, reframe and reimagine the future in a post-pandemic world. As we begin the New Year, we Now have the opportunity to reflect upon the one that just passed, look to the Next year armed with the lessons the pandemic imparted, and plan for recovery Beyond. The New Normal dictated that we learn to manage our lives safely knowing that the virus will likely be with us for the foreseeable future. Leaders are called upon, more than ever, to lead their organizations with empathy and protect the well-being of their people. This is all while developing proactive measures to resume business operations and to contribute to economic recovery. Before the government imposed the lockdown, SGV leadership had been preparing for potentially bigger disruptions, partly due to the earlier experience we had when Taal Volcano erupted. Our Business Continuity Management program included a Crisis Management Team (CMT) in place, and it was promptly activated in early March. This team comprises members from critical groups within the firm, including risk management, IT, finance, legal, support services, communications and talent. The CMT was able to project potential problems, address unforeseen ones and anticipate others, all with the goal of protecting the overall health and security of our people, their families, our clients, and all our other stakeholders. This was not an easy task, as there were no precedents to provide guidance nor best practices to speak of — the team continued to rely on evolving government directives and scientific pronouncements while confronting an unseen and unknown enemy. NOW: LEADING WITH EMPATHY AND PROTECTING OUR PEOPLE The beginning of the community quarantine saw everyone adjusting to what would become the New Normal, with new risks and challenges arising. This was especially true when several members of the workforce found themselves stranded, mobility severely impeded and some becoming completely unable to work. The situation necessitated that leaders be emphatic in understanding the unique challenges facing their people. Leaders needed to find ways not only to keep people motivated and engaged, but also ways to nurture their strengths and support their continuing development. Sincere empathy also builds trust among an organization’s people, and this trust in turn, builds confidence in leadership. The key is to communicate clearly, constantly and concretely for both internal and external audiences. One needs to be transparent, express understanding, and always speak with confidence. Most importantly, the organization’s Purpose should be the overarching and guiding principle in overcoming challenges. Our own Purpose “to nurture leaders and enable businesses for a better Philippines” was like a mantra for all of us and which, I believe, continues to unify us in thought and action during this pandemic. When our offices closed and the need for remote working became crucial, alternative work arrangements were swiftly carried out. IT and technology security policies were updated to address potential risks as well as ease the adjustment to remote working. Assistance was also provided to employees who were stranded or needed additional arrangements to continue working. At the same time, the firm provided medical support for employees and maintained salaries and benefits. Health policies were reissued to heighten the awareness on how best to address the pandemic. Mental and emotional health programs were implemented as added support, with webinars and activities held virtually on various platforms to raise morale and foster a stronger sense of camaraderie. We had masses and monthly bible studies as well as daily bible verses to address the spiritual well-being of our people. It was very important to keep our people engaged. The key takeaway is that organizations need to imagine and prepare for every eventuality. By anticipating possible issues and risks through scenario-planning and business continuity preparation, we became more agile and better prepared to protect our people. NEXT: PROACTIVE MEASURES TO REOPEN BUSINESS Understanding that life and business will need to go on during, and after, the pandemic, SGV developed proactive measures on how to safely maneuver in this new working world. Best practices from other EY member firms were consulted and adopted, and the strict compliance with SGV and government policies was enforced. The firm mandated the regular sanitation and disinfection of all offices as well as provided masks and sanitizers to all employees. SGV also made use of daily health and work location monitoring reports for its workforce and health screening forms for guests. Reminders on how to stay safe were continuously communicated, such as when needing to leave one’s home to work or when working in other locations as potentially required by clients. As an example of one such communication, these practices were all highlighted in a complete guide called A Day in the Life of an SGVean in the New Normal which provided easy-to-understand and engaging guidance on important day-to-day health protocols. BEYOND: DOING ONE’S PART TO CONTRIBUTE TO ECONOMIC RECOVERY As part of SGV’s Purpose to enable businesses, the firm actively seeks ways to help companies plan for future recovery. We made it a point to help our clients build resiliency plans, and continuously provided thought leadership to both the private and public sectors. We share our knowledge regularly through webinars and virtual speaking engagements. CSR efforts continued in support of the greater community. They were coursed through the SGV Foundation, which oversaw donations to those deeply affected by the crisis, as well as calamities such as the Taal eruption and the powerful typhoons that hit the country. In order to look forward, leaders must identify and address weaknesses in their current business models. Our previous articles encouraged C-Suites to urgently reinvent and streamline business practices in light of the pandemic, as well as to take a hard look at revenues and costs with the goal of identifying ways to make them more efficient. Leaders must also explore how technology and digital transformation can be utilized to strengthen businesses. Furthermore, we encourage leaders to take the time to connect more with the people in their respective organizations. Embody your organization’s Purpose, and let it be the anchor that keeps everyone grounded. Let us welcome the New Year filled with hope, optimism and faith. 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. Wilson P. Tan is the Country Managing Partner of SGV & Co.

2021

Creating long-term value with sustainability and climate-related disclosures

Leading Now, Next and Beyond COVID-19

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