June 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.
27 June 2022 Benjamin N. Villacorte

A new chapter for Philippine sustainability reporting

In the last few years, a growing number of companies have been publishing sustainability reports and have started integrating environmental, social and governance (ESG) considerations into their strategic frameworks because of regulatory developments and increasing demand from investors and customers.Locally, a key driver for sustainability reporting is Memorandum Circular No. 4, series of 2019, issued by the Securities and Exchange Commission (SEC) in 2019. This requires publicly-listed companies (PLCs) to submit an annual sustainability report under a “comply or explain” approach. The SEC recognized the relevance of ESG disclosures not only to support global and local sustainability goals, but also to encourage transparency and accountability from companies by requiring public disclosure of their sustainability performance.After a year of implementation, we conducted a review on how listed firms responded to the mandate. We then published a report containing a review of listed companies’ 2020 sustainability reports, known as “Beyond the Bottom Line 2nd Edition: Sustainability Landscape in the Philippines.”IMPROVED QUALITY AND COVERAGEThe number of reviewed sustainability reports increased from 73 in 2019 to 118 in 2020. Consistent with the 2019 review results, the 2020 review revealed that 66% still applied the SEC’s template, while 52% released stand-alone, glossy sustainability reports and 53% included sustainability content in their annual reports, which shows that PLCs are gradually adopting more formats than just using the SEC’s template. The most widely adopted (79%) standard remained the Global Reporting Initiative (GRI) Standards.However, there was a notable increase in the use of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations (41%), which suggests that listed companies are recognizing the need to identify potential impacts of climate change to their businesses and mitigate climate risks. Companies in the construction and power & utilities industries covered most of the TCFD disclosures, showing their awareness of their exposure to the adverse impacts of climate change. Meanwhile, holding firms and listed companies in the banking, mining, retail and transportation industries had some climate-related disclosures, whereas the food, beverage and tobacco companies had little to none.Only 10% of the listed firms we reviewed obtained limited assurance, and 56% did not disclose their sustainability vision and strategies or provided only high-level statements of intent relating to sustainability. Sixty-two percent disclosed their materiality assessment process, while biodiversity-related topics like watersheds, marine and International Union for Conservation of Nature Key Biodiversity Areas (IUCN/KBA) remained the least reported. Knowing that the Philippines is one of the most megadiverse countries globally, biodiversity loss is a crucial issue. This makes it imperative for companies to report on biodiversity, especially for industries with direct impact such as mining and power & utilities.Overall, there has been improved quality and coverage in the 2020 sustainability reports compared to the previous year, and ESG disclosures are expected to improve further especially since the “comply or explain” approach ended in 2021. We also anticipate changes in the global and local reporting landscape to address the call to harmonize sustainability reporting standards and frameworks.The IFRS Foundation, through the International Sustainability Standards Board (ISSB), has released the first two exposure drafts of the IFRS Sustainability Standards Disclosures. Comments on the exposure drafts are due on 29 July 2022, and we are expecting the official publication of these standards before 2022 ends.POLICY LANDSCAPE OF SUSTAINABILITY REPORTINGSustainability reporting is just one of the growing regulations that aim to accelerate sustainable development in the country. The growing concern over ESG risks, compounded by the impacts of the COVID-19 pandemic, are driving stronger sustainability efforts from the government and companies.The government has developed and released several policies and frameworks to support decarbonization and the transition to a cleaner energy source through climate funding and action plans. Multiple regulatory and reporting developments are underway to address ESG issues: sustainable finance, extended producer responsibility (EPR), sustainable mining, and biodiversity protection. Investors are also paying more attention to ESG and are saying they are now attaching greater importance to companies’ ESG performance because of the pandemic, as revealed in EY’s 6th Institutional Investor Survey.Despite the current gaps in ESG disclosures as observed in the 2020 review, we see a potential acceleration in the incorporation of ESG considerations into corporate strategies and investment on resources as companies begin to realize that gains from their sustainability efforts outweigh the related costs and are not just an added expense to the business.BEYOND COMPLIANCECurrently, the SEC only requires listed companies to submit sustainability reports, but this will soon be extended to other types of corporations, as they have announced in several webinars. Considering the multiple, fast-paced global and local developments around ESG, businesses should reinforce their sustainability journey as soon as possible and consider the following actions:• Define sustainability governance at the management and board levels• Integrate sustainability into the enterprise risk management system and corporate strategies• Invest in systems and processes that will support reliable and timely ESG reporting• Obtain third-party assurance on ESG disclosures• Keep tabs on the developments around sustainability reporting standards, especially on the IFRS Sustainability Standards Disclosures• Build internal capacity to support the organization’s sustainability thrustSustainability reporting is one of the best ways to boost stakeholder confidence as it demonstrates transparency and accountability. However, it is not enough for companies to produce sustainability reports for compliance purposes alone.Instead, determining material ESG issues for the business is essential to disclosing relevant information to stakeholders and to manage the risks these issues bring. A company’s sustainability journey may also entail business model changes, portfolio rebalancing and investments in new technologies and capabilities. Thus, corporates should start realigning their resources and strategies and understanding what they need to ensure accurate and timely ESG disclosures.Bold sustainability commitments and goals with defined metrics will be necessary to drive impactful actions that help accelerate the country’s sustainable development. 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 from the Climate Change and Sustainability Services team of SGV & Co.

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20 June 2022 Lee Carlo B. Abadia

The Metaverse beckons: Is it time to explore?

The Metaverse is the new industrial frontier. Futurists, entrepreneurs, and professionals have defined it in multiple ways, but its meaning continues to mystify the public. Organizations that decide to embrace it are more likely to discover a turning point, similar to the growth of the internet spurring globalization, or the rise of the smartphone that made on-the-go services available. As technologies cause a cultural shift that influence ways of living, they open a plethora of opportunities which businesses may consider for early adoption for their long-term strategy.DEFINING THE METAVERSEThe word “Meta” in Metaverse is derived from Greek that means “transcending.” Paired with the word “universe,” it implies an area that is beyond the physical. The Metaverse can be defined as a virtual world where a real person can extend themselves and their lives onto digital identities. They can earn, purchase, socialize, learn, and enjoy in this digital space, and the results from these activities can connect and apply to the real world. This is much more immersive than the current ecosystem of social media, online shopping, or gaming communities, because the Metaverse involves key characteristics enabled by key technologies.When derived from various forums, the key characteristics of the Metaverse include (1) Persistence: where your central digital identity is maintained even as you enter and leave the Metaverse; (2) Ownership: where everything you earn or purchase in the world is certified and attributed to be truly yours; (3) Interoperability: where you can carry what you own and use it in other virtual places, and (4) Decentralization: where there is no central organization that dictates the rules of the space, and is instead defined by the users themselves.It is these characteristics that make it an overarching realm, as opposed to current platforms or small metaverses (with a lowercase “m”). These metaverses are managed centrally by the company that created them, and users typically are not able to consume or port digital assets across these.On the other hand, notable technologies that realize the characteristics of the overarching Metaverse are 5G, blockchain, and virtual or augmented reality (VR/AR). Widely rolling out 5G infrastructure provides faster speeds for data consumption of up to potentially 10 GB per second, which is essential for a smooth experience in the virtual world. Blockchain is foundational in what creates the true ownership of certified digital assets or currencies, building a de-centralized autonomous environment enabled by the smart contracting that connects them. Moreover, VR and AR technology, which allows the creation of 3D environments supported by wearables, can make the experience more immersive. There are other layers of technologies involved, such as decentralized applications, but implementing the necessary infrastructure fast tracks the vision.TAPPING INTO DIGITALLY NATIVE CONSUMERSUnderstanding what the Metaverse is helps enable organizations to determine how they can generate new revenue streams or create new business models while positioning themselves early for success in this evolving technology — which can grow exponentially in the future. Leaders must realize that doing so taps into a promising audience: the digital natives. These are the people who grew up in the information age, and who spend a significant amount of their time using laptops, smartphones, and Internet of Things (IoT). Digital natives often prefer to interact online first rather than through traditional face-to-face transactions.In 2019, CNN Philippines said in an online story that the people of the Philippines are some of the heaviest users of the internet, averaging about 10 hours a day. General information from the Philippine Statistics Authority (PSA) indicates that digital natives likely comprise a third or above of the population. These numbers alone provide ample opportunity for new revenue.RECOGNIZING THE POTENTIAL OF NFTsTo cite potential application to business, it is also important to understand the concept of non-fungible tokens or NFTs in the Metaverse. NFTs are digital assets that are unique and authenticated through blockchain. This can be anything from digital art, gaming items, or video clips that are owned by people through their digital personas. Their financial value is created through supply and demand within the digital world. Its appeal can be tied to the human psychology that seeks ownership of things, which is why authenticating through blockchain is important to make it “real” and exclusively “mine.” Aside from the advent of cryptocurrency, NFTs have opened possibilities of other forms of virtual ownership, and it drives demand.In effect, real world brands can use NFTs in various ways, whether for creating brand awareness as people transact through their digital identities to own these NFTs or use the actual ownership itself to unlock a privilege, such as exclusive access or discount to a physical store or location. The applications are almost endless. The experience can be gamified, where online gamers not only play for entertainment, but have their actual efforts translate to acquiring NFTs that have value for trading purposes or even for benefits in the physical world.According to Navigating the Metaverse, A Guide to Limitless Possibilities in a Web 3.0 World, by Cathy Hackl, Dirk Lueth, and Tommaso Di Bartolo, there are also potential recurring revenue streams from a secondary market for royalties for branded NFTs. This means that aside from earning from the primary purchase, royalties can still be applied as NFTs get traded down the line so that businesses can continue to receive earnings from subsequent trading.Aside from products with NFTs, services for the Metaverse can also be provided by businesses, according to the EY white paper on the “Metaverse” by Bikram Dasgupta and Aarathi Panikkar. These can range from curating and developing virtual environments, pursuing business integration, running advertising campaigns, implementing smart contracting, and so on. There is a whole ecosystem that needs to support running and maintaining the world itself, which is also an area that can be engaged in for revenue.THE METAVERSE AS AN INEVITABLE CULTURAL SHIFTBack in October 2021, the most popular social media platform renamed itself to “Meta.” This clearly demonstrates the explicit commitment of the organization to support the direction of the online environment. Moreover, one of the largest software companies has been acquiring well-known gaming companies, also alluding to how these platforms with their own communities and exchanges will play into the future of the Metaverse. The big players are preparing as early as now to help curate the future experience the Metaverse will be able to offer.Given the current interest and increasing entry into the Metaverse globally, business leaders should recognize and understand the phenomenon — even if it sounds far-fetched or unreal — and consciously consider this in their periphery or as a direct future strategy for their organization. The Metaverse is looking to inevitably shift the culture, driven by technology, and should be given the requisite attention so that companies are prepared if it becomes a truly global-level disruption.Similar to how digitization accelerated due to the obvious market of digital natives and even more so with the pandemic requiring seamless virtual work, consumerism, and lifestyles, the time to explore the potential of the Metaverse is now. 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.Lee Carlo B. Abadia is a technology consulting principal of SGV & Co.

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13 June 2022 Anurag Mishra

Fintech: Powering digital transformation in financial services (Third Part)

Last of three partsAnyone who has transferred money to another person’s account without having to deal with a bank employee — by e-mail, text, call or physical visit to a bank branch — is no longer a total stranger to financial technology. But keeping up with developments in the market can be dizzying, as fintech has grown exponentially of late, helped in part by the global health crisis that provided the impetus to reexamine processes and put the customer at the core of solutions.Fintech trends have been disruptive and will continue to be so especially now that the mobility restrictions since 2020 forced financial institutions to take a good look at what a digital economy is going to look like. Looking at the practical responses of banks to stay agile during the pandemic by examining processes that can be automated and making them more customer-centric, we can see that financial institutions have already set into motion what could be the beginnings of digital transformation.In some countries, financial firms are proactively taking steps to understand how their organizations can benefit from the wide array of available and emerging technologies. The experience over the past two years points to an acceleration of technological innovation in the years to come. Making sense of all the buzzwords can be a task for the uninitiated in the fintech world. It would be wise to identify which tech trends to focus on in relation to how they can impact the industry and diverse organizations.In the first part of this three-part series, we discussed the key themes anticipated within the next two years in the fintech market in Asia. In the second, we looked at tax considerations in the Philippines. In this last part of the series, we take a look at a few of the tech trends that are worth keeping an eye on as the industry continues to experience dramatic change.WHITE LABEL FINTECHWhite labeling allows firms to sell products without incurring significant development expense, time or navigating regulatory compliance. Also referred to as “Banking as a Service,” it is an authorization to brand and sell products or services developed by another company. This allows fintech firms to create a branded front-end offering layer over white label application programming interface or API-enabled platforms.This solution leverages the innovation ecosystem without the need to reinvent, reinvest in and go through the entire technology development life cycle. It significantly reduces go-to market offerings to customers and seamlessly integrates technology innovation, creative product offerings and compliance requirements in a highly regulated industry to better serve customers.White labeling is a great and attractive option for businesses to leapfrog into the modern digital world. It is a strategy for emerging companies to reduce risks and free up resources to focus on what they’re good at — develop products, build the brand, and grow their client base. For fintech startups, white label solutions allow them to meet the demands of customers, minus the learning curve. Companies availing of these solutions, however, will have limited control over product development, and the drawbacks can range from bugs and security weaknesses to failure to observe the law.DATA AGGREGATORSA customer’s financial footprint is distributed across various institutions, instruments, and platforms, making it difficult to have a full view of their transaction history. Data aggregators collate customers’ bank accounts, mortgages, brokerage accounts, and credit card data, among others, so they could provide one financial view of customers, irrespective of channel and the businesses the customers transact with. They accomplish this through APIs used by fintech firms through which customers log in to their platforms.This aggregation of data at scale is also the backbone of open banking and a free-flowing financial ecosystem. Data aggregation powers a wide gamut of fintech applications to provide financial services on demand like advising, lending, quicker money transfers etc. The portability enabled by data aggregators cuts down paperwork and allows customers to improve eligibility and access to better products/services. With a free flow of data in the financial ecosystem, firms can have a better view to offer personalized products in real time.Data aggregators’ connection with many institutions, however, can equate with multiple points for possible breaches and leaks. Security risks can also arise from web data scraping, a process that involves a computer program logging into a bank’s website using a client’s credentials and reading code to extract financial data. The industry though continues to look into superior ways of aggregating data without compromising the protection of customers. This, nevertheless, brings to the fore the question of greater regulations that establish guidelines on how financial data is accessed and stored safely. ROBOTIC PROCESS AUTOMATION OR RPACustomer experience drives loyalty to brands. Financial institutions, in turn, grow revenue and margins based on customer loyalty. Hence businesses are increasingly automating core operations to focus on enhancing customer experience and loyalty.Robotic process automation or RPA accomplishes mundane and repeatable backend processes better, faster, and more accurately. RPAs are easy, flexible, budget friendly, and quick to deploy, improving productivity while enhancing serviceability and incremental revenue. RPAs ensure mistake proofing, compliance, real-time reporting and insights in a highly regulated fintech sector.Automation is a great boost to operational efficiency. RPA’s future popularity in the world of fintech will likely be borne out of its utility to compliance and regulatory needs. With automation, businesses are able to efficiently keep audit trails for every process, supporting high compliance.VOICE-ENABLED PAYMENTS (VEP)More and more people get recommendations, shop for the best deals, and perform tasks using rapidly evolving voice assistants (e.g., Alexa, Siri, Google) backed by sophisticated natural language processing and artificial intelligence. Digital voice assistant-enabled devices are estimated to double to 8.4 billion by 2024 providing a smarter and more connected ecosystem than ever before.Many banking services are rapidly being integrated and are accessible through voice assistants. As voice encryption, voice-biometrics, multifactor authentication and voice tokenization advances, a secure voice assistant has the potential to disrupt how customers will pay in the future. The pandemic and millennials comfortable with voice over typing will accelerate adoption. VEP is projected to be used by 31% of the US adult population in 2022.This technology allows seamless, end-to-end, integrated concierge-like experience, allowing customers to multi-task better. As digital payment is the largest segment within the global fintech sector, voice integration with digital touch points will separate fintech leaders from laggards. To drive new opportunities, growth and leadership, fintech players will need to continue to rapidly adopt disruptive VEP technology.As we keep an eye on these and many other tech trends, we will continue to witness the evolving behavior of consumers, which in turn will feed into the appetite of organizations to embrace and capitalize on this wave of technological innovation. There is, however, an element of uncertainty in technologies that, although disruptive, have yet to pass regulatory scrutiny. Financial firms will have to look at how best to jump onto the bandwagon, so to speak — to work on their own projects or fire up their collaborative spirit and forge alliances with industry peers to push new technologies to wider adoption.The potential of these tech trends to help make a world of difference in how processes are improved and productivity raised can be astounding. At the end of the day though, leaders will have to go back to what matters most when embracing innovation — enhanced customer experience, services transformation, and a proven track to successful business models. 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. Anurag Mishra is a technology consulting principal of SGV & Co.

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06 June 2022 Allenierey Allan V. Exclamador

Fintech: Powering digital transformation in financial services (Second Part)

Second of three partsOver the past five years, the Philippines has gained traction in financial technology (fintech), growing from strength to strength and quickly earning the attention of the global fintech community. The Global Fintech Index 2020, the fintech ecosystems ranking created by Findexable, grouped the Philippines along with a few others as countries to watch because it is one of the fastest growing fintech destinations.In the first part of this article, we discussed the key themes expected to dominate headlines in the fintech market in Asia and the Philippines. In the second part of this series, we look at the taxation issues in a market that is experiencing phenomenal growth.The dramatic change in the financial services industry landscape reflects the Philippines’ astounding growth as a fintech destination. In 2017, the Philippines had only 115 fintechs, which is tiny when compared with Singapore, which had the highest concentration (490) out of the 1,268 fintechs in ASEAN, and Indonesia (262). However, the Philippine total nearly doubled to 212 by the end of 2020. Growth in the Philippine fintech industry has since slowed, but a study by the Philippine Institute for Development Studies notes that investment surged 762.5% from 2016 to 2018.In its rankings, Findexable also found that the Philippines excelled in fintech categories like payments, enabling processes and technology, and banking and lending. Stunning growth in numbers posted by the largest mobile e-wallet service supports this observation as it breached its initial full-year target of P3 trillion in gross transaction value for 2021, or three times the record set in 2020.Much of the growth of in the fintech market stems in part from a supportive regulatory environment. Financial regulators in the Philippines have been equally aggressive as their peers in the region in pushing for fintech innovation even as they strive not to lose sight of their responsibility to foster financial stability. The Philippines is among a few economies in Southeast Asia where regulators have issued licenses for digital banking, an area that is anticipated to post significant development that will alter the financial landscape in the next few years.There can only be progress by leaps and bounds for the fintech industry in the years to come as the market nears a point where very few in the workforce will have known of life before the internet. Banks have had a good look into the digital space due to the limitations that the pandemic imposed, and this can only lead to more confident steps in incorporating fintech products with their offerings.TEAMING UP ON REGULATION AND TAXIn anticipation of a further surge in fintech activity, regulators have begun to set standards for the industry. All eyes have been on the tax agency for an issuance that will provide guidance in connection with the tax regime for the industry.At the end of 2021, the Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC) said they were working together to ensure that fintech companies are properly regulated and taxed even as the government encourages their growth and continued innovation. The Department of Finance instructed the two agencies to closely monitor fintech firms and find out what new digital business models they have been adopting to determine how they should be regulated and taxed.Given the dramatic changes that fintech has brought into the financial services landscape, market participants have been on the lookout for clear guidelines or revenue regulations that explicitly apply to them. In the absence of such rules, fintech companies may have been advised to assess and analyze their transactions and apply the basic taxation principles and procedures to comply with tax obligations.The tax agency said it will continue to impose the current Tax Code rules on compliance and taxation based on actual activities of fintech companies, which are similar to those of ordinary corporations or financial institutions. In the same vein, a previous article by this column titled “Taxation of fintech companies in the Philippines” noted that fintech companies are subject to regular income tax based on net taxable income at the rate of 25% effective July 1, 2020. The tax rate will be lowered to 20% for fintech companies with net taxable income not exceeding P5 million and with total assets not exceeding P100 million, excluding land on which the particular business entity’s office, plant, and equipment are situated during the taxable year for which the tax is imposed. But given the infancy of the industry, in lieu of this regular tax rate, a minimum corporate income tax (MCIT) of 2% may be imposed on a new fintech company beginning on the fourth taxable year immediately following the year in which it began business operations. This MCIT rate shall be 1% from July 1, 2020 until June 30, 2023. Withholding taxes on such income may also apply.The ongoing joint initiative of the BIR and SEC aims to broaden the tax base of fintech-related enterprises by ensuring the two agencies have enough regulatory and collection capability to deal with these digital companies. The Finance department said the BIR will continue to gather information from other regulatory agencies on identifying, addressing and closing the gaps resulting from the development and proliferation of fintech entities not clearly or explicitly covered by existing regulations. In 2021, BIR planned to have a team that will evaluate the tax obligations of fintechs based on categories identified by the SEC and those regulated by the Bangko Sentral ng Pilipinas (BSP).VAT ON DIGITAL TRANSACTIONSLawmakers are also considering a house bill that, once enacted, would subject the value created in the digital economy to withholding/income tax and value-added tax (VAT). House Bill 7425 (previously HB 6765) would impose a 12% VAT on the digital sale of services such as online advertising, subscription services, and the supply of other electronic and online services that can be delivered through the internet such as mobile applications, online marketplaces, online licensing of software, and webcasts, among others.A key provision of the bill also seeks to add a new section in the National Internal Revenue Code of 1997 that would require foreign digital service providers to collect and remit VAT for all transactions made through their platforms.In addressing concerns, the measure could unduly burden small enterprises and freelance workers who are dependent on digital channels to make a living, the BSP recently proposed VAT exemptions for low-value digital transactions and for service fees charged by payment service providers.DIGITAL SERVICE TAXIn light of the infancy of the fintech services industry, it has become imperative for Philippine regulators to also find out what their peers in other countries have done for income tax purposes. The Finance department is monitoring developments in countries where digital services taxes have been imposed on online platforms.In mid-2020, the department focused its efforts on collecting VAT on both local and cross-border digital transactions, similar to initiatives by neighbors in ASEAN. It said, however, that it was looking to review and propose tax reforms to levy income tax on cross-border digital transactions after international consensus has been reached on the taxation of the digital economy. Once passed into law, this digital service tax will come on top of the 12% VAT on online transactions.As we look forward to guidance from the government on the taxation and regulation of fintech companies, the fintech market continues to become more complex, as adoption deepens and its benefits broaden to further impact the lives of consumers.It is imperative for fintech providers, particularly those that handle transactions, to keep abreast of tax regulations and staying compliant, as doing otherwise and relegating tax considerations as an afterthought can be detrimental to their customers, partners and even their own bottom line.Government regulators want regulation that does not to impede growth in this young market that has the potential to power the digital transformation of financial services. However, they are also wary of appearing to provide support that can be interpreted as giving fintechs an unfair competitive advantage. Active engagement with the government on the part of market participants will be key as the policy regime for the fintech market takes shape. 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.

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