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

29 January 2024

Anna Maria Rubi B. Diaz and Sheena Dyan C. Suarez

How agile corporate reporting builds confidence

As businesses grow, finance leaders face increasing stakeholder demand for timely and accurate financial and non-financial corporate reporting. Moreover, organizations must consider how they can keep up with current and future demands, and how they can provide accurate stakeholder reports in a timely manner. CORPORATE REPORTING AND STAKEHOLDER DEMANDSCorporate reporting provides a comprehensive picture of an organization’s financial and non-financial information, which can assist stakeholders and other relevant users in their decision-making. Furthermore, finance leaders can use corporate reporting to communicate the value their businesses create for people, society, and the environment. There is also increasing stakeholder demand for non-financial information, such as sustainability reports that highlight a company’s environmental, social, and governance (ESG) commitments. This development continually influences businesses, encouraging more responsible and sustainable practices. Moreover, evolving accounting principles and other regulatory requirements are continually obliging organizations to report more reliable and relevant information about their performances, positions and their level of compliance. The increasing stakeholder demands trigger the need for finance leaders to revisit their transformation agenda on their finance functions. According to the 2023 Global EY DNA of the CFO Report, 16% of finance leaders believe their finance function delivers best-in-class performance, with only 14% of respondents planning to pursue a bold transformation agenda over the next three years. The small number may imply that there is a hesitancy to adopt new and inventive ways of working. COMMON PITFALLSThrough the years, finance leaders have faced the challenge of meeting internal and external stakeholder demands to comply with the financial reporting standards and regulatory guidelines. As such, some corporate reporting policies, processes, and controls have not yet been transformed to align with organizational needs and demands, resulting in a lack of confidence among stakeholders. There are some common pitfalls to watch out for in corporate reporting: Substantial reliance on manual processes. Even though some organizations have Enterprise Resource Planning (ERP) systems, there are still some corporate reporting processes being done manually. In the 2021 EY 7th Global Corporate Reporting Survey, 56% of finance leaders said that “there has been resistance to some of the changes we have had to introduce.” In addition, 51% said “finance team members have sometimes failed to adopt new processes, reverting to traditional ways of doing things.” These entities normally have siloed systems that rely on spreadsheets to reconcile corporate reports from different systems. Spreadsheets are prone to human error, making them unsustainable since processes may become more complex as entities evolve. Policies are not aligned with regulatory reporting requirements and business demands. Policies are vital to corporate reporting controls. If they are not aligned with regulatory requirements and business demands, they can reduce efficiency and effectiveness in decision-making. Recently, there have been significant changes with regulatory reporting requirements, such as financial reporting standards. Despite these changes, some organizations have not yet updated their policies, which may lead to the inappropriate and inconsistent application of procedures and processes. Consequently, this misalignment may result in fines, litigations, or other consequences to an organization if this non-compliance has a material effect on its corporate reporting. Outdated employee skillsets. Due to today’s fast-paced technological innovations, regulatory changes, and consumer demands, some employees may need to upskill. Moreover, limited skill development may lead to poor performance and outdated corporate reports. According to the 2023 EY Global DNA of the CFO survey, 19% of the finance leaders surveyed said that talent together with risk are the least priorities for finance transformation over the next three years. BUILDING CONFIDENCEAddressing these pitfalls can help organizations achieve agile corporate reporting. To do so, finance leaders need to integrate their processes, policies, and people. Additionally, they need to focus on the following areas: Invest in technology to digitalize processes. The 2023 EY Global DNA of the CFO survey shares that 44% and 36% of the finance leaders are now prioritizing technology transformation and advanced analytics, respectively. Finance leaders need to leverage investments in technology and digitalization to standardize and simplify the corporate reporting process. They must also explore new ways of working where data is integral to unlocking the value of business portfolios. They need to implement integrated systems to provide accurate and real-time reports, leveraging automation from technology. These solutions will enable faster and better decision-making, shifting the focus of finance from back-office bookkeeping to being a trusted business advisor within the organization. Align policies with regulatory reporting requirements and business demands. In aligning policies, finance leaders need to ask themselves whether their organizations have all the necessary policies in place. They also need to determine how their policies compare to those of their industry peers, and if their internal users and customers are satisfied with the policies. Lastly, after determining if the policies are user-friendly, they need to identify the key policy gaps related to regulatory requirements and business demands. Once policies are aligned and updated, finance leaders must ensure their organizations also have a “policy on policies.” This overarching guidance will help define when to create, update, or decommission policies, including approval requirements for these changes. Equip next generation leaders with the right skills and tools. Finance leaders can assess the skill gaps of their existing employees, encourage professional development, and reconcile both to align with business requirements. Any updated policies and processes should be cascaded to employees, especially those that require continuous training and education. These steps will help organizations ensure that the talent assigned to their tasks are aligned with current business and stakeholder demands. THE FUTURE OF CORPORATE REPORTINGFinance leaders need to transform their corporate reporting agenda beyond the numbers, starting with a cultural change on their mindset and behavior. This journey can serve as a challenge and an opportunity to create long-term value for the whole enterprise, improve current ways of working and develop next-generation leaders. When finance leaders consider these, they can rebuild confidence and drive value for the organization today and tomorrow. 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. Anna Maria Rubi B. Diaz is an assurance partner under Financial Accounting Advisory Services (FAAS) and Sheena Dyan C. Suarez is a FAAS director of SGV & Co.

22 January 2024

Benjamin N. Villacorte

Strategies to achieve a sustainable future

The government and private market sustainability players fulfill crucial roles in their transition to a sustainable future. Their capacity to identify environmental, social and governance (ESG) material issues, along with their means for innovation, enables them to tackle environmental challenges globally and locally. The key challenge is balancing the protection of the planet, people, and profits as market players conduct their business operations.This is the second article in a two-part series that will discuss insights from COP28. In this part, we underscored the urgent need for a real and meaningful transition. Increased investor demand and regulatory pressure echo this sentiment, amplified by governments’ collective commitment at COP28 for science-based actions. This second part explores how to move profoundly from a lofty ambition — that is, halving emissions by 2030 and achieving net zero down the line — to progressive action.Ernst & Young’s (EY) keynote session at COP28, “Building Confidence in a Sustainable Future,” featured three panel discussions that delved into three concrete strategies for entities to employ in their efforts to arrest climate change and achieve a sustainable future.Strategy #1: Building investor confidence through regulation and sustainable financeRegulations act as a catalyst for broader sustainability transformation, helping economies allocate capital more efficiently. The creation of the International Sustainability Standards Board (ISSB) disclosure standards, for instance, empowers investors to make better economic and investment decisions by incorporating comprehensive sustainability information.Organizations are encouraged to identify, disclose, and later address material information or the most significant sustainability-related risks and opportunities that could influence such decisions. Businesses in carbon intensive sectors are pressed to disclose their decarbonization plans and progress. These companies are among the top contributors of greenhouse gas emissions, the primary cause of climate change. They, including their assets and supply chains, are also the most susceptible to climate impact. In light of the COP28 agreement to put an end to oil, gas, and coal use in energy systems, this group will continue to face mounting pressure from regulators and investors, including financial institutions, to ramp up their adoption of decarbonization strategies.A few other industries identified with the most exposure to transition risk are real estate, mining, agriculture, and telecommunications.Meanwhile, financial institutions (FIs) also play an integral role in advancing ESG outcomes through sustainable financing. However, it must go beyond supporting customers and communities in achieving their goals. Banks and institutional investors are urged to lead by example, engaging with their suppliers and corporate clients at scale to facilitate effective transition plans. Additionally, banks are perceived as pivotal partners for small- and medium-sized businesses, offering not just financial resources but also essential guidance in the latter’s transition towards more sustainable practices.In the Philippines, there is a pressing need for local businesses to further enhance their reporting practices despite noticeable improvements on two metrics: (1) the number of disclosures made per the recommendations by the Task Force on Climate-Related Financial Disclosures or TCFD (coverage); and (2) the extent and detail of each disclosure (quality).Publicly-listed companies (PLCs) in particular should brace themselves for an upgrade. After deferring implementation late last year, the Securities and Exchange Commission (SEC) notified PLCs that the Revised Sustainability Reporting Guidelines and the SEC Sustainability Reporting Form (SuRe Form) are slated for release in 2024.In keeping with developments on international reporting standards, the SEC is looking at mandating compliance for data covering the year 2024, with reporting due the following year (2025). Regarding sustainability reports for 2023 or those due in 2024, PLCs are advised to continue adhering to the provisions set out in SEC Memorandum Circular No. 4, series of 2019, also known as the “Sustainability Reporting Guidelines for Publicly-Listed Companies.”Since the government is aligning to global sustainability standards and frameworks, companies may gradually start transitioning themselves to the expectations and requirements of investors. They can partner with FIs who support sustainable finance and invest in companies who are advancing sustainability in the market.Strategy #2: Building business confidence through data and talentYou can only improve what you can measure. Harnessing in-depth, reliable sustainability data is fundamental for businesses to make informed decisions. This process involves consistently gathering data into a cohesive system and rigorously evaluating sources, quality, and completeness. Accurate and ample data enable companies to analyze and generate insights, and be clear about their sustainability objectives. At the same time, it allows them to acknowledge areas of unfulfilled goals openly. Ultimately, clarity and transparency in managing sustainability data are critical to boosting their credibility.On a related note, the increase in sustainability reporting, highlighted by the fifth EY Climate Risk Barometer, further emphasizes the need for skilled professionals. These experts are instrumental in weaving standardized reporting frameworks into the fabric of business processes, ensuring that sustainability is not just a compliance metric but a core component of corporate strategy. Accountants, for example, provide expertise in managing and interpreting data that directly influences strategic decisions, aligning financial practices with sustainability objectives.Moreover, just as financial statements are audited, enlisting independent assurance over sustainability reporting shouldn’t be an afterthought. Obtaining assurance empowers businesses to achieve external accreditation or support management’s confidence that the necessary processes and controls are in place. This, in turn, improves stakeholder trust and confidence in an organization’s financial and non-financial reporting.Strategy #3: Collaborative action from the public and private sectorsBusinesses are key drivers in climate action and are central to the success of the COP28 agreement. Their role comes with the recognition that real impact requires integrating climate data and its ramifications into the core business strategy at the Board level. This transcends mere compliance; it’s about taking responsibility by embedding climate awareness across operations, human resources, supply chains, and technology.However, holding governments and country leaders accountable is just as important. Business and industry leaders must challenge the government, demand concrete regulation, and steer the policy compass. Collaboration between the public and private sectors is key to supporting a faster and safer transition to more sustainable operations. It can also drive nationwide discussions or negotiations, ensuring inclusive actions from stakeholders involved.Time is running out. Proactive strategies, razor-sharp policies, and targeted investments aimed at slashing emissions by 2030 are non-negotiable. This journey demands relentless scrutiny, unwavering collaboration, and enduring actions that deliver a triple win for society, policy, and business.CHARTING A SUSTAINABLE COURSE FOR ALL BUSINESSESNow is a critical moment for public and private market players to lead the charge toward sustainability. This era calls for a shift from mere regulatory compliance to completely reimagining business strategies and operations.Specifically, Philippine PLCs are tasked with adapting to evolving reporting standards, which involves harnessing precise sustainability data and engaging adept professionals to provide additional confidence. The actions they take today will shape the corporate landscape of tomorrow.Embracing sustainability positions these companies as leaders and innovators in a global economy increasingly focused on responsible business practices. This is a strategic imperative for enduring success, blending economic growth with a commitment to the planet and its people. 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 Climate Change and Sustainability Services partner of SGV & Co. and the current chair of the Philippine Sustainability Reporting Committee (PSRC).

15 January 2024

Benjamin N. Villacorte

How climate risk reporting can turn ambition into action

At the 2023 United Nations Climate Change Conference (COP28), countries agreed to take collective action to move away from fossil fuels. This first-ever consensus aims to put an end to oil, gas, and coal use in energy systems and sets ambitious targets to triple renewable energy and double energy efficiency by 2030 — keeping the 1.5°C Paris Agreement goal within reach.COP28’s bold aspirations toward decarbonization highlight the urgent need for the climate disclosure landscape to evolve rapidly. Climate reporting plays a crucial role in helping us understand whether the whole economy and the sectors and companies within it are moving towards true transition.This is the first article in a two-part series that will discuss insights from COP28. In this first part, we will discuss insights from the fifth EY Climate Risk Barometer covering current trends in global climate risk reporting, uneven progress within markets and sectors, the adoption of mandatory climate disclosure requirements, and core elements that will shape the reporting landscape.TRENDS IN CLIMATE RISK REPORTINGThe fifth EY Climate Risk Barometer reveals that companies are making progress in climate-related disclosures but fall short of carbon ambitions. This study analyzed 1,500 companies in 51 countries based on two metrics: the number of disclosures made per the recommendations by the Task Force on Climate-Related Financial Disclosures or TCFD (coverage) and the extent and detail of each disclosure (quality).Climate transparency is clearly on the rise, with the quality score jumping from 44% in 2022 to 50% in 2023. This trend suggests that companies are putting in the time and effort to enhance the information shared with stakeholders. However, the 50% score reflects minimal advances, considering the TCFD has been around for eight years, which some may say has already been ample time for companies to fine-tune their reporting.Alongside the increase in quality, disclosure coverage saw a steep year-on-year increase. Company scores soared from 84% to 90%. Yet, pressing concerns remain, particularly about the granularity and quality of disclosures and the effectiveness of the regulatory environment in driving genuine action beyond reporting.Meanwhile, the average score for governance disclosure quality climbed from 46% to 52%, partly due to regulatory pressure — but this is still low. Transition planning remains patchy, with only half of the companies (53%) presenting clear roadmaps. Furthermore, companies continue to focus more on risk than opportunity analysis (77% vs. 68%) despite a slight improvement in the latter.UNEVEN PROGRESS WITHIN MARKETS AND SECTORSFrom a market perspective, Japan, South Korea, the Americas, and most of Europe are leading in disclosure quality. This is unsurprising as these countries and regions can draw on several years of mandatory TCFD disclosures.On the other hand, while the Middle East and Southeast Asia have made strides in disclosure performance compared to last year, these regions are still lagging. To accelerate progress, governments can adopt mandatory climate disclosure requirements. This can potentially change the currently low scores to a significant extent.Sector-wise, companies with the most exposure to transition risk dominated disclosure scores again. Energy leads in both quality and coverage, but its quality performance is greatly matched by financial institutions (e.g., credit bureaus, exchanges, and financial services providers) with a 46% to 54% year-on-year leap. In fact, this year saw changes in quality across the board, with the biggest ones in information technology (IT), real estate, mining, and agriculture.Companies across all sectors face heightened demand for detailed disclosures of their climate-related risks alongside financial implications. This pressure comes from government regulators, investors, and the public. As such, the shift in scores is linked to stakeholders, putting pressure on businesses heavily reliant on fossil fuels to lay down their decarbonization plans and start making progress. In the case of financial institutions, investors are urging them to reduce their brown lending.This is good pressure, however, as climate risk management strategies must not be separate from corporate reporting. Businesses must view climate disclosures as a comprehensive, forward-looking effort to understand the anticipated financial impact. Therefore, it should be assessed in the context of the company’s value chain and wider market dynamics.IFRS S1 AND S2It is worth noting that many companies are embracing comprehensive sustainability reporting frameworks like the Global Reporting Initiative (GRI) Standards alongside the International Sustainability Standards Board (ISSB) disclosure requirements — the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. These standards unveil material climate risks and opportunities, allowing investors, lenders, and creditors to assess companies’ governance, strategy, environmental, and societal impacts.The ISSB offers “transition reliefs” to help companies ease into new sustainability reporting standards. In the first year, companies can prioritize and report only climate-related information and publish disclosures together with their half-year report. They can also hold off disclosing their Scope 3 greenhouse gas emissions, a report that uncovers climate exposure within their value chains.In this country, the Board of Accountancy (BoA) is laying the groundwork for the adoption of the ISSB disclosure standards with Resolution No. 44. The date of adoption is being determined by the BoA, the Securities and Exchange Commission (SEC), and Financial and Sustainability Reporting Standards Council (FSRSC) — previously known as the Financial Reporting Standards Council. To ensure smooth implementation and evaluation, the FSRSC established the Philippine Sustainability Reporting Committee (PSRC), which is set to issue local interpretation and guidance for IFRS S1 and S2.3 ELEMENTS AFFECTING FUTURE CLIMATE DISCLOSURESIn addition to companies’ disclosure performance against TCFD recommendations, this year’s research also included three core elements that will shape the reporting landscape for the next few years. These are:ISSB preparedness. This refers to the readiness to meet IFRS S2 requirements, marked by changes in 1) Governance: adopting the increased ISSB disclosure requirement and disclosing whether organizations have the necessary skills at the board level to oversee climate-related strategies; 2) Strategy: deepening climate disclosures, both by analyzing detailed scenarios for future impacts and setting value chain emission targets alongside overall emission reduction goals; and 3) Metrics and targets: moving towards disclosing businesses’ most significant Scope 3 emissions.Transition planning. This refers to the move to include concrete transition plans — how companies will adapt and grow as the global economy transitions to net zero — in their business strategy and disclose the details to stakeholders.Climate risk reflection in financial statements. This refers to the integration of climate risks into financial statements, quantifying potential losses from stranded assets and valuing assets based on their resilience to climate change.FROM A COMPLIANCE BURDEN TO A STRATEGIC ASSETIt’s time to view climate risk reporting as a strategic resource instead of a compliance burden. Instead of using frameworks solely for disclosure, forward-thinking organizations analyze how climate impacts their business strategy. High-risk businesses, such as those in energy and IT, can evaluate risk management and financial impact using these insights to chart resilient growth strategies and identify key vulnerabilities.By establishing robust data governance structures, they turn climate data into a potent tool that will help them thrive in the face of climate challenges. When companies embrace the spirit of reporting frameworks to drive underlying business changes, they realize financial, customer, employee, societal, and planetary value from the effort.The next article in this series will discuss strategies from the Ernst & Young (EY) keynote session at COP28. Philippine companies should consider these urgently to move from setting ambitious goals to achieving tangible results that will shape the country’s reporting landscape for the next few years. 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 climate change and sustainability services partner of SGV & Co. and the chairman of the Philippine Sustainability Reporting Committee.

08 January 2024

Wilson P. Tan

Risk and resilience in 2024

As we start a new year while still grappling with the challenges left behind by the pandemic, organizations are more cognizant of the increasing number of risks in the global market. The range of risks organizations face is broad, intricate, and interconnected, from unpredictable black swan events to more frequent and predictable gray rhino events.Black swan occurrences, which are highly unpredictable, rare, and uncontrollable, could potentially have a catastrophic impact. Gray rhinos, on the other hand, are common, expected, and often have a large visible impact. It is crucial for boards to concentrate on the latter and integrate them more proactively into their overall risk management strategy.Beyond the typical risks related to finance, cybersecurity, reputation, regulation, and competition, firms are increasingly pressured to handle risks associated with climate change, sustainability, supply chains, and geopolitics. This has led to a greater emphasis on governance and increased pressure on boards.The EY Global Board Risk Survey 2023, which polled 500 board directors worldwide from companies earning over $1 billion, revealed that less than a quarter of the respondents are deemed highly resilient.Highly resilient boards are self-assured and handle unexpected high-impact situations more effectively. They display high effectiveness in aligning risk and business strategy. These boards are neither complacent nor unaware of potential gaps in their preparedness and the evolving risk landscape. By concentrating on certain key areas, boards can support their organizations in prioritizing resilience to more effectively navigate the risk landscape.PRIORITIZING FUTURE AND SUBSTANTIAL RISKSInstead of merely bouncing back in recovery, enterprise resilience is more about adapting to risks. This emphasizes the importance of foreseeing substantial and emerging threats, preparing for them, and adjusting accordingly. The board and management need to effectively perceive beyond immediate and apparent threats while allocating ample time to discuss market changes and trends.Employing technologies such as Artificial Intelligence (AI) and advanced analytics to predict the possibility of black swan and gray rhino events can be beneficial. Implementing quantitative analysis in various situations can improve the board and management’s understanding of the company’s total risk exposure. It can also enhance their comprehension of the viability of the current business strategy and model in the face of emerging risks and whether any adjustments are necessary.PERSONNEL AND CORPORATE CULTURECompanies face ongoing challenges, such as talent scarcity, continuous workforce transformation, and managing the diverse needs of a multigenerational workforce. The demand for flexible work arrangements and the growing challenge of aligning culture are becoming increasingly central to the personnel risks that organizations encounter. With rapid technological changes, there is also a need to enable workforces with skills for the future.The board has the responsibility of supporting management to pinpoint and address the organization’s critical talent needs. They should aim to establish an organization that can adapt to fluctuating expectations regarding culture, skillsets, and diversity, equality, and inclusion. By enhancing their knowledge, adaptability, and supervision, the board can assist management in fostering a people-centric culture. It can also prompt management to cultivate leaders who can embody and sustain that culture.ADDRESSING CLIMATE CHANGEThe undeniable link between environmental sustainability and corporate resilience means that companies face increased expectations from various stakeholders, including investors. These stakeholders are eager to learn about the company’s environmental, social, and governance (ESG) performance, as it compares to short-term profits and long-term investments in sustainability. Simultaneously, authorities are pushing for transparency in sustainability disclosures, while new standards like the IFRS S1 and IFRS S2 from the International Sustainability Standards Board are reducing ambiguity in sustainability reports.However, this presents a golden opportunity for companies to showcase their progress in sustainability performance beyond mere compliance. Highly resilient boards are more conscious of significant sustainability issues and feel more at ease discussing them. This usually occurs when responsibility for ESG risks is assigned, either to a leading committee or the entire board.Boards can also earn the trust of investors by monitoring stringent procedures for gathering, managing, and disclosing reliable data to meet regulatory requirements. If discussions don’t lead to tangible action, the board should question management’s plans and dedication. To effectively fulfill their roles, boards need to enhance their knowledge and expertise in sustainability.RISKS ASSOCIATED WITH EMERGING TECHNOLOGIESWith advancements in generative AI, the emergence of the metaverse, and escalating cyber threats, the landscape of digital technology continues to evolve at an accelerated pace.As enterprises increase their investments in digital technology, it is beneficial for boards and management to possess the knowledge required to identify possible technology opportunities and risks. Their responsibility is not to become tech-savvy — but to ensure their organization is balancing the pace of adopting technology with the willingness to take risks and caution. Innovation is necessary and while emerging technologies may be captivating, they alone do not form a robust business plan and must be supported by well-founded business cases — especially in times of economic uncertainty.To achieve this, the board should collaborate more closely with management, staying informed about significant investments in technology, digital transformation, and cybersecurity. The board needs to encourage management to prioritize the education and skills enhancement of their employees regarding digital matters and acknowledging that the management of digital and technological risks is not solely the responsibility of IT. Boards must gain hands-on experience with new technologies, welcoming innovation with purpose and careful understanding.At the same time, innovative technology will not be able to progress organizational growth without proper governance. Organizations will need to be forward-thinking and proactive towards innovation, treading the fine line of being agile while also being ethical.PRIORITIZING RESILIENCE TO FACE RISKSIn response to a complex and interconnected risk landscape, boards need to better support their organizations in prioritizing resilience by focusing on several key areas. They can do so by building resilience, adapting, pivoting and preparing for gray rhino events.In an increasingly complex world, organizations must be better prepared for long-term challenges. The clarity from top-level management is non-negotiable for boards, as viewing things from a distance can offer a much clearer perspective of the bigger picture. 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.

January 2024

How agile corporate reporting builds confidence

Strategies to achieve a sustainable future

How climate risk reporting can turn ambition into action

Risk and resilience in 2024

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