April 2022

SGV thought leadership on pressing issues faced by chief executives in today’s economic landscape. Articles are published every Monday in the Economy section of the BusinessWorld newspaper.
25 April 2022 Czarina R. Miranda

Managing the hybrid workforce (First Part)

First of two partsFor many organizations trying to regain their footing post-pandemic, it can be quite a paradigm shift to make decisions on adopting hybrid work models, especially since health alert levels continue to be lowered as a means of stimulating economic activity. Hence, under the new normal, corporate leaders will have to address new challenges and questions in managing hybrid teams.There can be great reluctance on the part of organizations to come to terms with the need for a flexible workforce post-pandemic. While opinions vary on the actual productivity that remote work has delivered in the past two years vis a vis pre-pandemic operations, flexible work arrangements offered an avenue for many organizations to remain operational despite the lockdown. There is also anecdotal evidence in support of how various organizations remained productive with telecommuting. However, each organization will need to gauge productivity for themselves given the scale and nature of their operations.A look into worker sentiment points to a general preference for an arrangement that involves flexibility in when and where employees perform their duties. The recent EY Future Consumer Index shows employees “losing interest in pre-pandemic work patterns,” a finding that reinforces those made in the EY 2021 Work Reimagined Employee Survey that showed the majority of surveyed employees in Southeast Asia preferred not to return to pre-COVID ways of working.In the case of the business process outsourcing industry, which employs an estimated 1.4 million workers, there has been overwhelming preference on the part of the talent for a balanced, hybrid work arrangement. This has prompted industry leaders to propose that the government reconsider its order for the outsourcing companies to prepare for a return to full office operations lest they lose their tax perks that are contingent on full on-site operations.Over the past two years, hybrid teams have attracted an abundance of attention. Employees generally favor the opportunity to distance themselves from the workplace — both geographically and emotionally. Filipinos working in the National Capital Region and key cities notorious for traffic congestion found great relief from the hassles of the daily commute. In the human resources domain, the conversations these days among experts often gravitate to the paths that organizations plan to take post-pandemic.The idea of hybrid work models being in the forefront of conversations in human resources did not happen by chance though, even with the lockdowns providing the impetus for organizations to stay agile and quickly find ways to keep operations going amid the restrictions on mobility especially in the first few months of the community quarantine. If you look at legislation related to hybrid work models, telecommuting was a concept already found in our legislative bills before health authorities detected the first COVID-19 case in the Philippines.REMOTE WORK POLICYRepublic Act 11165 or the Telecommuting Act was signed in Dec. 2018 or more than a year before the pandemic. The law formalizes the option for employees to work from home and declares telecommuting as an alternative work arrangement that both employers and employees may implement upon mutual consent. The law also sets out the rights and duties of both employers and employees and promotes employee welfare.Telecommuting and other alternative work models have since become an important subject for legislation and policymaking.A look into our evolving policy regime on flexible work models brings to mind the Department of Labor and Employment’s Labor Advisory No. 09 Series of 2020 which seeks to assist and guide employers and employees in the implementation of “various flexible work arrangements as alternative coping mechanism and remedial measures” during the pandemic. This may not, however, bolster the narrative for hybrid teams because its use of the term “flexible work arrangements” can actually worry employees; “arrangements” referred to in the policy are reduced work hours or workdays, rotation of workers, and forced leave — so-called “better alternatives than outright termination of the services of the employees or the total closure of the establishments.”Responsibilities of employers to their employees are likely to evolve as well if hybrid work models were indeed to become the norm.The experience with telecommuting during the pandemic has, in fact, called the attention of lawmakers to the issue of rest hours as employers’ control over employees now extends beyond work hours through the use of phone, email, and messaging apps. With technology and the ease of communication that it brings, it is easy for lines to blur between work and home. Employees can easily fall into the trap of voluntarily keeping lines of communication open and their devices switched on beyond work hours even if not required by their superiors.Senate Bill 2475 or the Workers Rest Law proposes penalties on employers who intrude on workers’ rest hours to prevent work from depriving employees of their personal time.COMPRESSED WORKWEEKThe government’s economic managers have also considered a proposal for a four-day workweek to help businesses cut costs. There are still no clear signs on whether this proposal will lead to a new law or a department order since the government is likely to present this as management prerogative rather than a mandate for companies to follow.Two years of telecommuting has also given rise to a host of concerns on the part of employees who are responsible for staying available for tasks and meetings during work hours. While remote work saves them the costs and hassles of the daily commute, in return they carry the burden of logistics, internet and utility expenses. Senate Bill 1706 seeks to ease this burden by providing a tax break equivalent to a P25 reduction from the taxable income for every hour worked from home.There have been companies that have opted to extend financial assistance to specific teams within the organization, whose continued productivity weigh more than the cost of any internet connectivity subsidy.OFFICE SPACEOther practical considerations that many companies choosing the hybrid team path will have to tackle include the use of leased office space. Some have had to contend with being unable to negotiate significant discounts on office lease contracts despite the extended lockdowns in the Philippines that kept most workstations unoccupied. A decision to pursue a hybrid work model post-pandemic will mean reconsidering an organization’s pre-pandemic need for space.As organizations explore options to adjust their use of space and optimizing every square meter, some have looked into the hoteling concept (telecommuters reserve a workstation or desk for their in-office days) or hot desking (an employee finds and works at any open seat when in the office). Hoteling is seen as a way of cutting an organization’s office space requirements and costs while also ensuring that social distancing can be managed should employees physically enter the workplace. This can offset investments in equipment and technology that may be needed to support a hybrid team and keep members collaborating as well as responsive to client needs.There can be many more challenges to learn along the way as most organizations take this route, and leaders’ responses can vary from one company to another. As organizations devise their own mix of work arrangements that are suitable to their business models, this direction cannot be seen as a partial return to the old “normal.” Instead, this charts a new path forward that acknowledges the changes in workforce needs and the opportunity for leadership to reimagine the future of work.In the second part of this article, we will talk about the challenges of keeping employee well-being at the forefront in the hybrid work environment. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Czarina R. Miranda is the People Advisory Services Leader of SGV & Co.

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18 April 2022 Aris C. Malantic

Why analytics are essential to quality non-financial corporate reporting

EY’s recent Global Corporate Reporting Survey tells us that change in corporate reporting is accelerating. In particular, the need to better communicate an organization’s ESG performance is putting significant pressure on the finance leaders responsible for its preparation — requiring finance teams to beef up their analytics capabilities.Late last year, more than 1,000 CFOs, financial controllers and senior finance leaders of large organizations across 26 countries — including 250 in Asia-Pacific — were surveyed to understand the challenges they face in corporate reporting.The biggest theme emerging from this research is that, alongside the traditional financial reporting that finance leaders oversee, investors and other stakeholders want consistent and credible ESG disclosures on material issues to help them understand how a company creates long-term value and sustainable growth.EY survey participants are not alone in noticing this trend. At EY, we’re seeing growing increased pressure on corporates to improve their ESG reporting — from equity investors, insurers, lenders, bondholders and asset managers, as well as customers who all want more details on ESG factors to assess the full impact of their economic decisions.ADVANCED ANALYTICS KEY TO EXTRACTING ESG METRICS AND INSIGHTS Extracting ESG insights from data is complex and time-consuming — an almost impossible manual task. It requires the use of advanced analytics, which are now available to help companies structure, synthesize, interpret and derive insights from voluminous data, and create credible and useful ESG reporting. Advanced analytics is particularly important in ESG reporting because of the need to address and relate significant amounts of unstructured data.Not surprisingly, the EY Global Corporate Reporting Survey found the top technology investment priority for finance leaders over the next three years is in advanced and predictive analytics. This priority is particularly felt in Asia-Pacific where 47% of regional respondents (68% in China) vs. 38% of global respondents have analytics as their top tech investment priority.DATA VOLUME AND QUALITY ARE STILL STUMBLING BLOCKSYet even as finance teams seek to invest in analytics and build a more agile financial planning and analysis approach, several data challenges stand in the way. According to EY Asia-Pacific survey participants, the biggest hurdles include the sheer volume of external data, followed closely by data quality and comparability issues. Lack of timely data and inefficient data integration are also problematic.Analytics starts with data, but techniques such as predictive modeling, statistics and visualization are also important in turning that data into timely and actionable insights.For example, organizations can enhance the quality of reporting by introducing forward-looking insights, using external data to corroborate and provide analysis on future trends. Thereafter, this downstream reporting outcome can be used to streamline upstream activities, such as capturing data in the right format to allow for efficient collection and analysis.However, this requires proper planning from data collection to reporting, with technology as a key enabler. In other words, this process should be considered as part of an organization’s digital transformation journey.COLLABORATION ESSENTIAL TO BUILD NEW ANALYTICS CAPABILITIESDeploying these sorts of advanced solutions requires more than finance teams buying new technology. It will take a cross-disciplinary effort that combines advanced data science skills, business domain expertise, and finance and ESG experience.Developing an approach that mimics human efforts is a guided process. It’s not simply about developing algorithms — it can require learning and incorporating the human decision-making process. The finance team will need to work together with key stakeholders, such as the analytics centers of excellence, to define the use cases for advanced ESG analytics and then collaborate during the development process.RESOURCES AND SUPPORT REQUIRED TO DRIVE REPORTING EXCELLENCEBetter quality non-financial corporate reporting, underpinned by advanced data analytics, will be essential to meet the changing needs of investors and stakeholders. Finance leaders need to drive innovation by setting out a bold technology road map for transforming financial analytics and providing enhanced and trusted reporting, including advanced tools such as AI (artificial intelligence).To support them, boards should assess whether finance leaders have adequate resources and budgets to address these challenges and increase their use of advanced data analytics to deliver more robust non-financial corporate reporting. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Aris C. Malantic is a Market Group Leader and the Financial Accounting Advisory Services (FAAS) Leader of SGV & Co., as well as the EY Asean FAAS Leader.

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11 April 2022 Arthur M. Maddalora

Accounting considerations for the oil and gas sector as renewable energy adoption drives ESG reporting

Globally, more and more countries continue to increase their focus on developing renewable energy sources, both due to the increasing pressure from various stakeholders, as well as the acknowledgement of the clear and present danger posed by climate change. Because of this, environmental, social, and governance (ESG) reporting has become a top priority for most boards.As the country gains momentum in shifting to renewable energy, we expect that financial reporting will have to reflect the commitments and actions of most organizations, notably those in the oil and gas sector, in tackling climate change. As a signatory to the Paris Agreement, the Philippines, being a country that is particularly vulnerable to climate-related risks, has pledged to reduce its own greenhouse gas emissions by 75% from its 2015 levels by the year 2030.Given the increasing global climate concerns and strong interest in achieving the United Nations Sustainable Development Goal 7 of ensuring access to affordable, reliable, sustainable and modern energy for all, the Department of Energy (DoE) is pursuing a Clean Energy Scenario setting a target of 35% renewable energy share in the power generation mix by 2030 and more than 50% by 2040. As of 2020, renewable energy accounted for 21.2% of the Philippine power generation mix.OIL AND GAS REMAIN VITAL TO ENERGY SECURITYThe DoE reported that in 2020, indigenous sources comprised almost 53% of the energy supply mix, out of which 6.6% was accounted for by the oil and gas sector, mainly from three petroleum service contracts (SCs): SC38 Malampaya, SC14C1 Galoc, and SC49 Alegria. Malampaya and Galoc are projected to be depleted by 2024 and 2025, respectively.However, in October 2020, the President lifted the moratorium on oil and gas exploration in disputed areas in the West Philippine Sea. One of the areas that will significantly benefit from renewed exploration is SC72 Recto Bank, which is operated by a subsidiary of PXP Energy Corp. SC72’s Sampaguita Gas Field is reported to contain prospective resources of 3.1 trillion cubic feet of gas. This project, once developed and made operational, can fill the void that will be left by Malampaya and Galoc.The reality is that until more renewable energy sources are developed, oil and gas will remain a significant component of the Philippine energy mix. This is why, given the global emphasis on climate-related reporting, oil and gas industry players should be seen as being proactive and taking the lead in addressing ESG concerns.FINANCIAL REPORTING FOR CLIMATE CHANGESustainability reporting is an important factor in improving a company’s sustainability commitment and its relationship with investors and customers.With this, the Securities and Exchange Commission, through its Memorandum Circular No. 4-2019, has provided guidance regarding disclosure requirements relating to sustainability reporting as an attachment to Publicly-Listed Companies’ annual reports (SEC Form 17-A).As climate-related matters continue to evolve and entities make further commitments and take additional actions to tackle climate change, it is important that they ensure their financial statements reflect the most updated assessment of climate-related risks. In November 2021, the International Financial Reporting Standards (IFRS) Foundation announced the establishment of the International Sustainability Standards Boards (ISSB), which is tasked to develop global standards linked to sustainability disclosures including climate and other environmental matters. As of 31 March 2022, the ISSB has issued two Exposure Drafts on IFRS Sustainability Disclosure Standards for public comment.While the Philippine Financial Reporting Standards (PFRSs) do not as yet explicitly reference climate change, climate risk and other climate-related matters, there may still be anticipated impacts on oil and gas companies over several areas of accounting as follows.General disclosure requirements. Entities are required, at a minimum, to follow the specific disclosure requirements in each PFRS standard. In determining the extent of disclosure, entities are required to carefully evaluate whether users of financial statements can assess the effects of climate change on their financial statements. If climate-related matters could reasonably expect to influence the decisions of the users of the financial statements, this information must be disclosed.Going concern. In many cases, climate risk may not add significant going concern uncertainty in the short term. However, Philippine Accounting Standards (PAS) 1 requires disclosures of material uncertainties. Climate-related matters could create material uncertainties related to events or conditions that cast significant doubt upon an entity’s ability to continue as a going concern. In such a case, although going concern may be assumed, additional disclosures explaining the uncertainties associated with the assumption would be required.Exploration and evaluation assets. Entities should consider the impact of climate risk and potential future developments, including the sustainability of its current business model and commercial viability, in assessing the recoverability of its exploration and evaluation assets (i.e., deferred exploration costs) and provide appropriate disclosures.Property, plant and equipment (PP&E). Climate-related matters have the potential to significantly impact the useful life, residual value and decommissioning, and restoration of PP&E (e.g., wells, platforms and related assets, refineries, retail service stations, etc.). Climate change and the associated legislation to promote sustainability increase the risk that PP&E items become “stranded assets” whose carrying value can no longer be recovered within the entity’s existing business model. Given the uncertainties around the impact of climate change, disclosures should be enhanced to allow the users of financial statements to understand and evaluate the judgements applied by management in recognizing and measuring items of PP&E.Impairment of assets. The extent to which certain assets, processes or activities will be impacted by climate-related business requirements and how climate-related risks and opportunities will affect an entity’s forward-looking information, such as cash flow projections, may require significant judgement. Entities should consider what information users rely on in assessing the entity’s (lack of) exposure to climate-related risks.Provisions. As entities take actions and initiatives to address the consequences of climate change, these actions may result in the recognition of new liabilities or, where the criteria for recognition are not met, new contingent liabilities have to be disclosed. Entities should ensure that sufficient disclosures are provided to allow users of financial statements to understand those uncertainties, how climate transition has been considered in the measurement of a provision or disclosure of a contingent liability, and the assumptions and judgements made by management in recognizing and measuring provisions.In a world that is increasingly sitting up and taking note of ESG concerns, the pressure on the oil and gas sector to help address climate risks will likewise continue to mount. While the above list of climate-related considerations is by no means all-inclusive and may vary between entities, they offer a starting point for the industry to take a proactive and progressive stance and demonstrate how it is doing its part to make the global climate change ambition a reality. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Arthur M. Maddalora is a senior manager from the Assurance Service Line of SGV & Co.

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04 April 2022 Benjamin N. Villacorte and Erika N. Courteille

What the EPR Act of 2022 can mean for businesses

Significant changes are bound to happen to the way manufacturers of products with plastic packaging do business once legislators give final approval to the bills institutionalizing the country’s policy and practice of Extended Producer Responsibility (EPR). Mandates for cutting plastic waste footprint will be clear and measurable. Producers will have to deal with compliance reports, internal systems to record waste reduction, third-party audits, and hefty fines for violations.Plastic generation has continued to rise to approximately 400 million tons per year worldwide, according to the 5th United Nations Environment Assembly, and is estimated to double by 2040. Filipinos use up about 2.15 million tons of plastics annually, and more than one-third of these reach the environment, said the World Wide Fund for Nature.In response, the government has started responding to global efforts and targets. In 2019, the National Economic and Development Authority (NEDA) published the Philippine Action Plan for Sustainable Consumption and Production. House Bill (HB) 9147, also known as the “Single-use Plastic Products Regulation Act,” seeks to promote plastic circularity through reduce, reuse, and recycle practices, as well as the EPR.Senate Bill (SB) 2425 and HB 10696 focus on institutionalizing EPR schemes to tackle the plastic waste problem. Both seek to prevent plastic waste from leaking into the environment by holding those that generate waste responsible for the whole life cycle of their products. The bills, which are currently pending joint resolution, push for the amendment of the Ecological Solid Waste Management Act of 2000 (RA 9003).UNDERSTANDING EPREPR is the environmental policy and practice that gives obliged companies (or producers) responsibility over the entire life cycle of their products. With the EPR, producers should ensure proper and effective recovery, treatment, recycling, and disposal of residual plastics from their products, and should adopt ways to improve plastic recyclability or reusability.EPR schemes are designed for participation by relevant stakeholders — the producers themselves, government, producer responsibility organizations (PRO), waste management operators, and other relevant parties such as the informal sector and third-party auditors.The latest iterations of the bills have two major differences that must be reconciled. SB 2425 obliges large companies only while HB 10696 encompasses medium and large companies. SB 2425 requires companies to target 10% recovery in the first year of implementation and 80% by the eighth year. Meanwhile, HB 10696 starts with 20% in the first year, and targets 80% by the fifth year.To encourage compliance, rewards and recognition will be given to outstanding and innovative initiatives. Tax and duty exemptions on imported capital equipment and vehicles used for the EPR scheme may also be awarded to qualified organizations. On the other hand, organizations who submit false documents, misrepresent themselves or fail to meet targets are liable for hefty fines ranging from one to twenty million pesos depending on the size of the organization. Business permits will also be automatically withdrawn for third offenses.  BUSINESSES MUST CONSIDER ZERO-WASTE STRATEGIESThese bills, if passed into law, will surely affect how obliged companies conduct business. Within nine months upon the effectivity of the law, producers or their authorized PRO, shall register their EPR programs with the National Solid Waste Management Council and align their strategies and programs with the mandated recovery targets. Moreover, they will have to submit annual reports to monitor compliance with their respective EPR schemes and targets. Businesses must establish an internal system to record and report their plastic waste footprint, which must be audited by an independent third-party. Recovery or offsetting reports by waste management operators or diverters must also be audited.Waste management operators must ensure that national targets are met. They must coordinate closely with PROs and obliged companies, possibly set up more materials recovery facilities (MRFs) and prepare the necessary resources. Based on the experience of other countries, integration of the informal sector is crucial to the success of EPR schemes since the current bulk of plastic collection, sorting and recycling relies on them. This raises the possibility of developing a plastic management ecosystem where the informal sector provides their knowledge and expertise to the process, and in return, operators can develop formal programs aimed at providing informal workers with secure livelihoods and social protection.EPR also requires buy-in from the consumers. PROs must conduct extensive awareness campaigns on the importance of segregation and sustainability. It is worth noting though that worldwide, it is consumers themselves who are showing preference for brands that are true to their sustainability claims.The EY Future Consumer Index shows that younger generations are critical, skeptical, and willing to switch brand loyalty if expectations are not met. Twenty-four percent of Gen Z and Millennials check the sustainability claims brands make, compared to 4% of Boomers, and they take action, too. Twenty-one percent of Gen Z and Millennials have stopped buying a product because the brand isn’t doing enough for the environment.The point is that while it may be difficult to strike a balance between sustainability and preserving product quality with attractive packaging that ends up in the environment and landfills, consumer attitudes point to a reputational risk for brands that insist on the status quo. It won’t be a surprise if future consumers switch to alternatives and dump brands that are reluctant to change their packaging to more sustainable forms.While waiting for the final passing of the bills, businesses should start monitoring their plastic waste flow and build partnerships for the smoother implementation of their EPR program. They can also start redesigning their products or packaging to reduce their plastic footprint. Ultimately, EPR presents an opportunity for businesses to improve their products, show commitment to the achievement of global climate change targets, and transition towards a circular economy. 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 authors and do not necessarily represent the views of SGV & Co.Benjamin N. Villacorte is a partner and Erika N. Courteille is a manager from the Climate Change and Sustainability Services team of SGV & Co.

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