2021 Articles - Suits the C-Suite - Page 3

08 February 2021

Not available

Decarbonizing for a better working world (Second part)

(Second of two parts)In the first part of this article, we discussed the costs and impact of climate change, the mounting pressures for carbon reduction, and the increasing demand of investors and regulators for greater transparency on nonfinancial performance through sustainability reporting.Climate change and sustainability were among the highlights at the 2021 meeting of the World Economic Forum (WEF), a week-long program at the end of January dedicated to help leaders select innovative solutions to address the pandemic and drive recovery. While climate change was already a dominant theme in the WEF in 2020, this year sees the private sector ready to prioritize a low-carbon future in their evolving business models and strategies.As part of its commitment to sustainability, Ernst & Young Global (EY), of which SGV is the Philippine member firm, recently announced its ambition to be carbon negative by 2021, and net zero in 2025. Becoming carbon negative will result in the reduction of EY’s carbon emissions in line with the 1.5 degrees Celsius Science Based Target (SBT), as well as investing in technologies and nature-based solutions to remove and offset more carbon than EY emits each year. This new ambition builds on the global organization’s achievement of carbon neutrality in December 2020.KEY ELEMENTS OF THE EY CARBON NEGATIVE AMBITIONThere are several key components in the EY ambition to not only become carbon negative, but to also reduce total emissions by 40% and achieve net zero in 2025.— Reducing business travel emissions. Though many EY services require an element of business travel, air travel provides the most significant negative impact on the environment, accounting for approximately 75% of EY’s global carbon emissions in FY19. These emissions will be reduced by 35% in 2025 using 2019 baseline data by continuing to use remote working technologies that helped EY teams provide uninterrupted client service during the pandemic.— Reducing overall office electricity usage. EY will reduce its office carbon emissions from electricity consumption to zero by FY25 and by switching to 100% renewable energy for remaining EY needs. By FY25, EY aims to be a fully accredited member of the RE100, a group of influential organizations committed to 100% renewable power. From 2020, EY’s global Scope 3 emissions measurements include employees working from home, reflecting the changes resulting from the pandemic, trends in remote working and the organization’s flexible working schedule.— Structuring electricity supply contracts. Along with agreed Virtual Power Purchase Agreements (VPPAs) with several solar and wind farms, EY aims to introduce more electricity than it consumes into national grids. These arrangements will add more than twice the amount of electricity consumed into multiple national electricity grids from 100% renewable energy. This allows EY to reduce its total electricity costs, offset its own office electricity emissions, and play its role in decarbonizing the electricity generation sector.— Providing EY teams with tools to calculate and reduce carbon emitted. EY recognizes that executing client-facing projects results in carbon emissions, and many clients want to work towards reducing them. To this end, EY will provide its teams with tools such as the EY Engagement Carbon Calculator to enable them to assess then reduce the amount of carbon emitted when delivering client work.— Offsetting more carbon than EY emits through nature-based solutions and carbon-reduction technologies. EY launched a collaboration with profit-for-purpose organization South Pole in December 2020, where contributions from EY will contribute to renewable energy projects (including solar, wind and hydro) and help preserve natural environments.— Requiring 75% of EY suppliers to set science-based targets. EY will set a goal for suppliers to have a Science Based Targets initiative (SBTi) approved carbon-reduction target by FY25. This involves collaborating with all suppliers to help them achieve SBTi accreditation and decarbonize their products and services, exponentially increasing the impact of EY’s carbon negative position.— Sustainable solutions for a carbon negative working world. In addition to increasing investments in solutions, EY will continue carrying out activities in various multi-stakeholder sustainability alliances. Such alliances include working on metrics and reporting with the World Economic Forum International Business Council, collaborating with C-suite Sustainability leaders in the S30 group, membership in the Alliance of CEO Climate Leaders, and work with the UN Global Compact and the World Business Council for Sustainable Development.As EY undertakes efforts to become more sustainable, it is also developing a new set of global sustainability solutions for clients to assist them in their own sustainability journey while protecting and creating long-term value for all stakeholders. In addition, EY will continue to transform its business amid the COVID-19 pandemic and invest in its people by equipping them with the knowledge and skills necessary to lead climate action at work and at home.As a member firm of EY Global, SGV & Co. will likewise further strengthen its own carbon reduction efforts and sustainability programs to align with the EY carbon negative ambition. More than merely adopting this initiative, the program falls within SGV’s Purpose to nurture transformative leaders capable of reframing the future and helping create long-term value.The COVID-19 crisis has taught us that providing exceptional client service is still possible despite the challenges it brought. The lessons that we have gained from managing the pandemic will help EY further attain its sustainability ambitions. Many of the practices the EY global firm and SGV have adopted due to COVID-19 will remain relevant to reducing carbon emissions and we will capitalize on these as we define our new normal of doing business.As the world moves towards an increasingly decarbonized future, it is our hope that more organizations will take up the challenge and join hands to help address the daunting risks posed by climate change.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.Clairma T. Mangangey is the Climate Change and Sustainability Services Leader of SGV & Co.

01 February 2021

Not available

Decarbonizing for a better working world (First part)

(First of two parts)Climate change is an urgent issue and taking action is critically necessary to limit and reduce global carbon emissions. Businesses in particular will need to consider their own carbon footprint. With collective technological capabilities, financial resources, innovative capacity and global reach to search for solutions towards a low-carbon future, many businesses worldwide are setting carbon reduction targets, progressing towards net zero. In fact, just last week EY Global Ltd. (of which SGV is a member firm) announced its plans to achieve negative carbon emissions in 2021 and net zero by 2025.Combatting climate change is a unique challenge for each organization, but it is clear that a collective effort is crucial to avert disaster. With the ongoing pandemic reinforcing the drive towards a sustainable future, transitioning to decarbonization is more vital than ever to achieve long-term resilience for organizations as well as to aid economic recovery.THE COSTS AND IMPACT OF CLIMATE CHANGEThe Economist estimates that by 2050, the global economy will be 3% smaller due to a lack of climate resilience, potentially raising the cumulative cost of damages to $8 trillion. Research from the EY Megatrends 2020 report also reveals that many Asian countries face high vulnerability to rapidly rising sea levels, flooding, and heat waves. Without clear action to decarbonize economies, hundreds of millions of people may be victims of coastal flooding by 2050.Domestically, the increasingly worse effects of climate change directly impact the vulnerable agriculture and fishing industries in the Philippines. The Philippine Statistics Authority (PSA) said in a report that the production costs for crops and fish have increased between 2017 and 2019 compared to the period between 2016 and 2018. This alarming trend resulted in much lower income for farmers and fishermen.MOUNTING PRESSURES FOR CARBON REDUCTIONBusinesses are more cognizant of the significance of both decarbonization strategies and climate-related investments in achieving long-term sustainable growth. A rise in new industries to support clean technologies can be expected, while emission caps and carbon pricing could transform taxation and invert cost structures.Certain governments in the Asia-Pacific have recognized the need to mitigate the disruptive risks of climate change. For example, Japan committed to achieve carbon neutrality by 2050, and China, the largest carbon emitter in the world, announced its intent to establish peak emissions by 2030 and reach net zero emissions by 2060.The findings from the 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey indicate that investors need to look into long-term value by critically assessing company performance through environmental, social and governance (ESG) factors, including climate change.In order to meet investor expectations and appear future-proof, companies need to prioritize means of analyzing the opportunities and risks of climate change. They will also need to prioritize how to improve disclosure of their sustainability performance, or else risk the possibility of losing access to capital markets.The decarbonization of businesses is further accelerated by consumers, particularly Generation Z, who are also increasingly aware of how their choices impact climate change. Gen Z is becoming even more influential as stakeholder capitalism continues to rise. They believe in the essential role business plays in addressing climate change and prioritize businesses that protect the environment and utilize sustainable supply chains.SEC REQUIREMENT FOR SUSTAINABILITY REPORTINGIn a 2019 article, Sustainability reports: fad or for good? SGV Partner Benjamin N. Villacorte had articulated that companies are encouraged not to wait for sustainability reporting standards or a regulatory requirement to be mandatory.Recall that in 2019, the Securities and Exchange Commission (SEC) required publicly listed companies (PLCs) to submit their Sustainability Report with their 2019 Annual Report in 2020. The issued memorandum detailed that the guidelines will be adopted on a “comply or explain” approach for the first three years upon implementation. By 2023, PLCs are required to comply with Sustainability Reporting Guidelines specified in the memo, or else be penalized for an Incomplete Annual Report (under SEC Memorandum Circular No. 6, Series of 2005).This pronouncement reiterates the need for structured sustainability reporting and for companies to manage their non-financial performance towards achieving the universal target of improved sustainability. For it to be effective and useful, companies should not only view sustainability as an exercise in compliance, but as their responsibility to earn their social license to operate.BUILDING A DECARBONIZED FUTUREGiven the foreseeable impact of climate change alongside the mounting pressure from investors, employers, leaders, consumers and policymakers to address it, organizations are encouraged to embrace the decarbonization imperative. Adopting a decarbonization strategy will bring about the goodwill of investors, employees and consumers, and also build long-term, sustainable value.In the second part of this article, we will discuss how EY, as part of its commitment to sustainability, will tackle the challenge of becoming carbon negative by 2021.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.Clairma T. Mangangey is the Climate Change and Sustainability Services Leader of SGV & Co.

25 January 2021

Not available

The Tax Reform Package 2: CREATE-ing opportunities for business

The Department of Finance (DoF) originally designed its tax reform package 2 to be revenue-neutral, gradually lowering the corporate income tax (CIT) rate while modernizing incentives and making them “performance-based, targeted, time-bound, and transparent” for companies. However, the COVID-19 pandemic brought about unforeseen hardships and challenges to businesses. The DoF has refocused package 2 (now known as the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE) to make it more “responsive to the needs of businesses negatively affected by the COVID-19 pandemic, and to improve the ability of the Philippines to attract highly desirable investments that will serve the public interest.” SENATE BILL NO. 1357 — CREATE According to the DoF, the changes make the proposed bill the first-ever revenue-eroding tax reform package and the largest fiscal stimulus program for enterprises in the country’s history. In this light, the Senate approved in November Senate Bill (SB) No. 1357, known as CREATE, after which the bill was forwarded to the House of Representatives in December. The provisions in the bill will still be reconciled with the House of Representatives’ version, through a bicameral conference (bicam) and may still be subject to change. The bill aims to improve the equity and efficiency of the corporate tax system by lowering the rate, widening the tax base, and reducing tax distortions and leakages, as well as developing a more responsive and globally competitive tax incentive regime that is performance-based, targeted, time-bound, and transparent. It also aims to provide support to businesses in their recovery from unforeseen events such as an outbreak of communicable diseases or a global pandemic and strengthen the nation’s capability for similar circumstances in the future. In addition, it seeks to create a more equitable tax incentive system that will allow for inclusive growth and generation of jobs and opportunities across the entire country and ensure access and ease in the granting of these incentives, especially for applicants in the least developed areas. CREATE seeks to lower the CIT rate from 30% to 25% effective July 1, 2020. But domestic corporations with net taxable income not exceeding P5,000,000 and with total assets not exceeding P100,000,000, excluding land on which the particular business entity’s office, plant, and equipment are situated, shall be taxed at 20%. While this reduction in the CIT rate will significantly cut into government revenue, the DoF said all firms, especially micro, small and medium enterprises (MSMEs), can use the tax savings to fund their operations and retain employees. The DoF also adds that foregone revenue from the reduction of the CIR rate constitute an unprecedented investment that shows the government’s resolve to vigorously fight the effects of COVID-19 on the economy and get businesses back on their feet as quickly as possible. Currently, when the minimum corporate income tax (MCIT) of 2% on gross income is greater than the regular income tax of 30% on net taxable income, such MCIT of 2% is imposed on the corporation. Under CREATE, effective July 1, 2020 until June 30, 2023, the MCIT rate shall be one percent (1%). FOREIGN-SOURCED DIVIDENDS Another notable change covers foreign-sourced dividends received by a domestic corporation. Dividends received by a domestic corporation from another domestic corporation are not subject to income tax. However, foreign-sourced dividends received by a domestic corporation from investments abroad are subject to income tax. Under CREATE, these foreign-sourced dividends received by a domestic corporation shall not be subject to income tax provided that 1) the funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign-sourced dividends were received; 2) the dividends shall be limited to funding working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure projects; and 3) the domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation and has held the shares for a minimum of two years at the time of the dividend distribution. This will encourage domestic corporations with substantial investments abroad to repatriate profits to the Philippines and use the funds to reinvest locally, helping to drive economic growth. NON-PROFIT ORGANIZATIONS Proprietary educational institutions and hospitals which are non-profit shall be imposed a tax rate of 1% on their taxable income from July 1, 2020 until June 30, 2023, instead of 10%. “Proprietary” is defined as a private hospital or any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd), the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. It is widely known that educational institutions and hospitals are among the entities badly affected by the pandemic. This reduction in tax rate for a limited time aims to help these hospitals and educational institutions cope with the crisis and retain employees. ADDITIONAL CHANGES PROPOSED IN CREATE Other salient changes proposed in the CREATE bill include the removal of exemption of offshore banking units (OBUs) and the repeal of the imposition of improperly accumulated earnings tax (IAET). In addition, the Regional Operating Headquarters (ROHQs) of multinational companies shall pay a tax of 10% of their taxable income, except that effective Dec. 31, 2021, ROHQs will be subject to the prevailing regular corporate income tax. The sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases shall be exempt from value-added tax (VAT) beginning on Jan. 1, 2021 instead of Jan. 1, 2023. The sale or importation of equipment, raw materials and other items necessary for COVID-19 prevention, such as PPE, medication and FDA-approved vaccines, will also be exempt from VAT beginning Jan. 1, 2021 to Dec. 31, 2023. FISCAL TAX INCENTIVES Under CREATE, tax incentives may generally be available to certain enterprises provided their activities qualify under the Strategic Investment Priorities Plan (SIPP) to be issued every three years. The incentives can include, among others, income tax holiday (ITH) and special corporate income tax (SCIT) in lieu of all taxes-both local and national. The duration of the ITH can range from four to 17 years depending on the location and industry of the registered project or activity, and other relevant factors as may be defined in the SIPP. In CREATE, the period for availing of the ITH will be followed by the Special Corporate Income Tax (SCIT) rate, equivalent to 5% effective July 1, 2020, based on the gross income earned, in lieu of all taxes, both national and local. The period for availing of SCIT after the ITH incentive is 10 years across all categories. Furthermore, registered enterprises are exempt from customs duty on imports of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity. Registered enterprises are also exempt from VAT on imports and are entitled to VAT zero-rating on domestic purchases of goods and services directly and exclusively used in their registered project or activity located inside an ecozone or freeport. Investments registered before the effectivity of CREATE will be governed by the following rules: 1) registered enterprises whose projects or activities were granted only an ITH prior to the effectivity of the CREATE will be allowed to continue availing of the ITH for the remaining period of the ITH as specified in the terms and conditions of their registration; 2) those that have been granted the ITH but have not yet availed of the incentive upon the effectivity of CREATE may use the ITH for the period specified in the terms and conditions of their registration; and 3) registered enterprises whose projects or activities were granted an ITH prior to the effectivity of CREATE and are entitled to the 5% tax on gross income earned incentive after the ITH will be allowed to avail of the 5% gross income earned incentive for 10 years. Registered enterprises currently availing of the 5% tax on gross income earned granted prior to the effectivity of the CREATE will be allowed to continue availing of the 5% tax incentive for 10 years. Given the devastating impact of the pandemic, passing the CREATE bill into law now appears even more urgent. It is hoped that its implementation and execution will play a key role towards economic recovery and eventual national economic resurgence. 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. Allenierey Allan V. Exclamador is a Tax Partner of SGV & Co.

18 January 2021

Not available

The dawning potential of digital banking

Owing to the significant role of digital platforms especially during the pandemic, the Bangko Sentral ng Pilipinas (BSP) recently recognized “digital banks” as a separate and distinct bank category with the issuance by the Monetary Board of the Digital Banking Framework on Nov. 26, followed by the issuance of the Guidelines on establishment of digital banks (BSP Circular 1105) on Dec. 2. BSP Governor Benjamin E. Diokno has also acknowledged the role of these banks “as additional partners in further promoting market efficiencies and expanding access of Filipinos to a broad range of financial services” consistent with the BSP’s financial inclusiveness agenda. WHAT IS A DIGITAL BANK? Does merely having an online banking platform, app or website (which most banks currently have) make a bank a digital bank? Not necessarily. An online banking facility merely supplements the operations of traditional banks by allowing alternative ways to transfer money, check account balances or pay bills. A digital bank, on the other hand, is essentially an online-only bank. Under the amended Manual of Regulations for Banks (MORB), a “digital bank” refers to an entity that offers financial products and services that are processed end-to-end through a digital platform and/or electronic channels with no physical branch, sub-branch or branch-lite unit offering financial products and services. This essentially requires the entire banking and service delivery process to be digitized — not just parts of it. While a physical branch is not required, regulations still mandate that digital banks maintain a principal or head office in the Philippines. This houses the offices of management and serves as the main point of contact for stakeholders that include the BSP, other regulators and customers. HOW DOES A DIGITAL BANK OPERATE? Under the BSP Circular 1105, digital banks essentially operate and are regulated the same way as bricks and mortar banks. It has a similar license to grant loans, accept savings, time deposits, and foreign currency deposits, as well as invest in readily marketable bonds and other debt securities, commercial paper and accounts receivable, drafts, and bills of exchange. It can also act as a correspondent for other financial institutions, issue money products and credit cards, buy and sell foreign exchange, and present, market, sell and service microinsurance products. However, digital banks are quite different in many ways from their traditional counterparts and in many cases, offer more convenient banking solutions. A MORE CONVENIENT BANKING EXPERIENCE Without the requirement of going to a physical branch, digital banks will allow clients to save time and effort in all transactions such as account opening, Know Your Customer (KYC) procedures and depositing cash or checks. Digital banks invest significantly in technology to allow facial recognition in conducting KYC and Anti-Money Laundering (AML) procedures or the use of fingerprint or digital signatures (instead of the traditional wet signatures) to transact — all by simply using a mobile phone or laptop. This is especially useful during the pandemic as it practically eliminates the need to physically go to a bank branch for face-to-face contact with bank personnel. This platform also benefits the banks as they are able to save time and resources due, in large part, to the reduction in manpower costs, supplies (no need for deposit slips and other forms) and rent among others. Theoretically, the savings from these expenses would allow them to invest and constantly upgrade their IT infrastructure to ensure a safe and secure banking experience for its clients. Moreover, these savings on overhead costs may allow them to offer higher interest rates and possibly remove minimum maintaining balance requirements or service fees. Digital banks may also offer true 24-hour/7 days a week accessibility on all banking transactions. While the online banking services of current bricks and mortar banks allow round-the-clock access to bank accounts for money transfers and billing payments, access to loan applications or certain financial products will still require clients to visit the bank. WHO MAY APPLY FOR A DIGITAL BANKING LICENSE? Because of the obvious advantage digital banks can offer, numerous banks have been showing interest in applying for a digital license. But what does it take to secure a digital bank license? According to the BSP Circular 1105, the qualifications in terms of stockholdings cite that (1) foreign individuals or foreign non-bank corporations may own or control up to a combined 40% of the voting stock of the digital bank; and (2) Filipino individuals or domestic non-bank corporations may each own up to 40% of the voting stock of a digital bank. Qualified foreign banks may also own or control up to 100% of voting stock. An applicant must submit a detailed review and assessment of the supporting IT systems and infrastructure vis-à-vis the digital banking model, and the applicable requirements in offering Electronic Payments and Financial Services (EPFS) under Section 701 of the BSP Circular. In addition, at least one member of the Board of Directors (BoD) and one senior management office should have a minimum of three years of experience and knowledge in operating a business in the field of technology or e-commerce. Existing bricks-and-mortar banks are also allowed to convert to digital banks under certain conditions. The Circular specifically requires the bank to meet the minimum P1-billion capital requirement and transition plan (including the divestment or closure of branches or branch-lite units) within three years from approval of conversion. Once approved for conversion, however, the bank may no longer engage or renew transactions not associated with those allowed for a digital bank and within six months, shall phase out all inherent powers and activities under special authorities not normally associated with a digital bank. Given these requirements under the BSP Circular 1105, it appears that existing banks that are commonly known or marketed as “digital banks” or meet all the qualifications of a digital bank but have not converted must secure a digital bank license from the BSP before they can officially operate as a digital bank. THE TIMELY RISE OF DIGITAL BANKS What remains to be seen, however, is whether bricks-and-mortar banks will immediately choose to convert to a full digital bank or retain their current license with some digital bank or online platform features to offer the best of both worlds to their clients. While digital banks may make the banking experience more convenient, the absence of a physical branch may not necessarily be ideal for some as it often translates to lack of physical and personal connection. Admittedly, many long-time banking clients still prefer a personal relationship with their banks and in the banking world, an established relationship between a bank and its client clearly goes a long way for both parties. Regardless, it is safe to say that digital banking in the Philippines is finally online and here to stay. While our progress in the digital banking space has not been that swift, it is hoped that the financial inclusiveness agenda of the BSP will accelerate the expansion of digital banks to reach the unbanked and unserved population. At the end of the day, it is always better to have inclusive choices available for everyone to encourage financial literacy and security. For as long as the market is assured of the integrity of the bank’s IT infrastructure and full compliance with the BSP Circular 1105 as well as strict adherence to BSP Corporate Governance Guidelines, digital banks can serve as a true alternative to traditional banks. With the New Normal likely to remain in the foreseeable future, remote and virtual access to banks will not only be convenient to all but also essential for public health and safety. 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. Maria Margarita D. Mallari-Acaban is a Tax Partner of SGV & Co.

11 January 2021

Not available

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

Not available

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.