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

21 October 2024

Henry M. Tan

Why entrepreneurs are critical to the Philippine economy

IN BRIEF:While entrepreneurs represent 10% of the adult population, their ventures account for 70% of employment, making them the most important drivers of job creationEntrepreneurs solve the most complex challenges in today's world and boost the overall economyPhilippines ranks as the world’s 18th most entrepreneurial country, besting developed nations like Denmark, Switzerland, Taiwan, Japan, Singapore, Italy, and New ZealandPULL QUOTE: “When you solve problems, you also attract capital and investments. The Philippines has already produced three unicorns—privately-held startups valued at USD 1 billion or more—with each finding its niche.” There are 594 million entrepreneurs worldwide, according to the Global Entrepreneurship Monitor, representing 7.5% of the global population, or about 10% of the adult population. This makes entrepreneurs a minority, but their impact on the world is unmistakably massive, as ventures by entrepreneurs account for 70% of total employment—making them significant drivers of job creation and critical for economic development.In this article, we run down the reasons why we should celebrate the successes of entrepreneurs and why we should enable more of them to succeed and flourish.Solving the most complex challengesWe recognize the importance of entrepreneurs because they solve the most complex challenges in today's world by bringing new ideas, products, and services to the market. The essence of entrepreneurship is finding innovative ways to solve seemingly impossible problems—from driving healthcare revolutions to enabling financial inclusion and advancing education technology. The pandemic showcased how entrepreneurial agility in startups can respond to global health crises, giving rise to telemedicine, AI-driven diagnostics, personalized medicine, and vaccine development at unprecedented speeds.Entrepreneurs have created platforms that provide financial services to underserved populations, making it easier for people to access banking services, thus enabling economic growth and helping reduce poverty. Through EdTech, free or affordable education has bridged the gap between formal education and those who need it most, at a time and place they prefer.Entrepreneurs are also bringing the world closer to solving the toughest challenges, such as climate change and the destruction of natural ecosystems. The World Economic Forum points out certain grim realities—10% of the global population still live in extreme poverty, 8 million tons of plastic are deposited into the ocean each year, and an area the size of a football pitch is deforested every second. However, the new generation of entrepreneurs is using technology such as drones and satellites to monitor and heal our planet.Being able to solve problems can also potentially attract capital and investments. The Philippines has already produced three “unicorns”—privately-held startups valued at USD 1 billion or more—with each finding its niche. Two of these unicorns notably emerged during the pandemic. Specifically, a developer of prefabricated properties became the nation's first unicorn in October 2017. A digital wallet and lending platform followed in November 2021, and a payment gateway solutions provider joined the ranks in April 2022.Creating jobs and boosting the overall economyWe celebrate entrepreneurs because they excel at creating jobs and boosting economic growth by introducing innovative technologies, products, and services. In the Philippines, MSMEs make up 99.59% of businesses, providing 65.1% of national employment.Filipinos are very entrepreneurial. Data compiled by the business publication and news site CEOWORLD Magazine ranks the Philippines as the world’s 18th most entrepreneurial country, besting developed nations like Denmark, Switzerland, Taiwan, Japan, Singapore, Italy, and New Zealand.This buoyant entrepreneurial environment is likely to inspire more entrepreneurs to join the ranks. A recent research survey by polling firm OCTA found that four out of five Filipinos would prefer to own their own business. Conducted among 1,200 Filipinos aged 18 and above, the survey revealed that 31% of respondents were motivated by the desire to manage their own time and explore horizons that offer limitless opportunities.By offering something better or new, entrepreneurs create competition within the ecosystem, challenging existing firms to become more competitive. This, in turn, creates more jobs and investments in a wide range of industries.All of this results in increased productivity–which Ray Dalio, founder of the world's largest hedge fund firm, Bridgewater Associates, and author of Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail—argues is the most important force in causing the world's total wealth, power, and living standards to rise over time.“Without innovation, productivity growth would grind to a halt,” he said. “In a market-based system, the most powerful way to drive innovation is to bring new ideas to market and to commercialize and profit from them. The marketplace is incredibly efficient at weeding out bad ideas and pricing good ones. In this way, the concepts of innovation and commercialism go hand in hand.”By encouraging a culture of innovation, entrepreneurs enable countries to produce more relative to the rest of the world, making them more attractive places to do business. By doing what they do best, entrepreneurs also create a platform with the potential to lift people out of poverty and improve the overall quality of life. Many international and local studies have shown that entrepreneurship has a positive and significant impact on poverty reduction. There is evidence proving that entrepreneurship increases the probability of individuals moving out of poverty and remaining above the poverty threshold in the Philippines.Empowering entrepreneurs to shape opportunitiesTo empower more entrepreneurs to shape the future of their businesses with confidence, we are pleased to have once again launched a search for entrepreneurs who are shaping opportunities through the EY Entrepreneur Of The Year Philippines 2024.Formed in 1986, the EY Entrepreneur Of The Year program seeks to honor entrepreneurs whose ingenuity and perseverance have created and sustained successful ventures. In 2003, the SGV Foundation first launched the program in the Philippines and has since been recognizing impactful business who can mold and reshape the country’s economic landscape to build a better Philippines and a better working world.This year’s theme, “Shaping Opportunities,” honors individuals who are turning possibilities into realities and making a profound impact on both the country and the world. The current theme recognizes the transformative ability of Filipino entrepreneurs in reimagining and advancing economic and national development with vision, passion, and innovation, according to the SGV Foundation.Inspired by their dreams and propelled by their unwavering resolve, these Filipino business leaders have played a pivotal role in elevating the country. Over the recent weeks, their narratives have been featured in BusinessWorld, sharing their stories of challenges and triumphs to hopefully encourage current and aspiring entrepreneurs. Henry M. Tan is a Partner and the Entrepreneur Of The Year Philippines Program Director of SGV & Co.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.

14 October 2024

Carlo Kristle G. Dimarucut

Bridging the cybersecurity and business strategy gap

IN BRIEF: Today’s cyber risks go beyond technical vulnerabilities, where a breach can disrupt supply chains, damage brand reputation, and lead to significant financial losses. To mitigate cyber risks and protect business interests, cybersecurity must be integrated into the highest levels of decision-making, aligning security measures with the business’s overall objectives to enhance both security and performance.By embedding cybersecurity into the organization’s DNA, C-suite leaders can protect their assets, enhance innovation, and strengthen customer trust.PULL QUOTE: “To effectively safeguard intellectual property, business continuity, and customer trust, companies must bridge the gap between cybersecurity and business objectives for maximum protection. In the digital era, cybersecurity is no longer just a technical concern—it is a strategic imperative. As organizations embrace new technologies to drive growth, the urgency for robust cybersecurity has escalated. However, many businesses still see cybersecurity as a separate function rather than a critical component of their overarching strategy. This disconnect can be costly, as cyber incidents have far-reaching consequences that threaten every facet of the enterprise. For C-suite executives, integrating cybersecurity into the core business strategy is essential. Cyber threats are increasingly sophisticated, targeting intellectual property, business continuity, and customer trust. To effectively safeguard these assets, companies must bridge the gap between cybersecurity and business objectives, aligning them for maximum protection.Cybersecurity: more than an IT issueTraditionally, cybersecurity was relegated to IT departments as a defensive measure against data breaches, malware, and other threats. However, today’s cyber risks go beyond technical vulnerabilities. A breach can disrupt supply chains, damage brand reputation, and lead to significant financial losses. The average cost of a data breach in 2023 reached $4.45 million, underscoring the financial impact of cyber incidents.High-profile ransomware attacks on global companies demonstrate that cyber threats are not just IT issues—they are business risks that demand executive attention. For businesses to thrive, cybersecurity must be viewed as a strategic priority that permeates all levels of the organization.The cost of misalignment The misalignment between cybersecurity and business strategy stems from how risk is perceived at the executive level. While financial, market, and operational risks are often discussed in boardrooms, cybersecurity remains the domain of technical experts. As a result, cybersecurity measures frequently lag behind business initiatives like mergers, acquisitions, or digital transformation projects, leaving companies vulnerable.This reactive approach can lead to crisis management scenarios rather than proactive risk mitigation. For example, adopting cloud solutions without fully assessing security implications exposes sensitive data to potential attacks. When cybersecurity is treated as an afterthought, companies are forced to respond to breaches rather than preventing them, resulting in increased costs and lost opportunities.To mitigate cyber risks and protect business interests, cybersecurity must be integrated into the highest levels of decision-making. The goal is not just to prevent breaches but to align security measures with the business’s overall objectives, enhancing both security and performance.Embedding cybersecurity in digital transformationDigital transformation initiatives aim to enhance customer experience, optimize operations, and streamline processes. However, these efforts can introduce new vulnerabilities if security is not embedded from the outset. For example, integrating internet of things (IoT) technologies or migrating data to the cloud can open up new attack vectors.Cybersecurity should not be seen as a barrier to innovation but as an enabler. By incorporating security considerations into digital transformation, businesses can mitigate risks while maximizing the benefits of new technologies.Cybersecurity as a value propositionIn industries such as financial services, healthcare, and e-commerce, where data breaches can have severe consequences, demonstrating robust cybersecurity practices can differentiate a business in the market. Customers are increasingly aware of how their data is handled, and a strong cybersecurity framework can foster trust and loyalty and create a competitive advantage.By communicating the company’s commitment to data security, executives can build trust and position their brand as a leader in privacy protection.Integrating cybersecurity into risk managementCybersecurity is not just a technical challenge; it is a critical component of enterprise risk management. A cyber incident can affect a company’s finances, operations, and reputation, making it essential to integrate security into the broader risk framework.C-suite leaders and board members should regularly review cybersecurity performance metrics, monitor emerging threats, and ensure that security investments align with the company’s risk profile. This proactive approach enables companies to anticipate and address cyber risks before they escalate, protecting both the business and its stakeholders.Effective cybersecurity requires collaboration across all business functions. From HR to finance and operations, each department plays a role in maintaining security. For example, HR can drive a security-first culture through regular training, while finance can ensure that security investments align with business goals.The C-suite must foster cross-functional collaboration to create a unified approach to cybersecurity. Breaking down silos ensures that security considerations are embedded into every aspect of the business, enhancing resilience and maximizing ROI.The role of leadership in cybersecurity integrationSuccessful integration of cybersecurity into business strategy requires strong leadership from the top. Executives must champion cybersecurity as a core business priority, actively participating in shaping security strategies and ensuring alignment with business objectives.This begins with a shift in mindset: understanding that cybersecurity is not just about preventing breaches but enabling secure, long-term business growth. Regular communication between cybersecurity teams and the board ensures that the organization remains agile and prepared for emerging threats.In an era of escalating cyber risks, companies that fail to align cybersecurity with their business strategy do so at their own peril. By embedding cybersecurity into the organization’s DNA, C-suite leaders can protect their assets, enhance innovation, and strengthen customer trust. Those that bridge the gap between cybersecurity and business strategy will be better positioned to navigate the complexities of the digital age, turning security from a defensive measure into a strategic advantage.To thrive in the digital age, executives must integrate cybersecurity into their business strategies, emphasizing the importance of aligning security with organizational goals for a holistic, proactive approach. Carlo Kristle G. Dimarucut is a Technology Consulting Partner of SGV & Co.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.

07 October 2024

Rossana A. Fajardo

Realizing transformation success through the human element

IN BRIEF: Companies are engaging in transformational activities at an accelerated rate, making the ability to transform successfully and continuously in response to disruption essential for an organization’s survival.Human factors were commonly identified as a primary reason for the result of transformations.To take their transformation efforts to a higher level, organizations must focus on placing humans at the heart of their strategies.PULL QUOTE: “The complex factors that determine whether a transformation succeeds or fails are deeply connected to the human element.” Transformation is important for the enduring success of any organization. However, there has recently been a noticeable shift in its frequency and pace. The EY Global Board Risk Survey revealed that 82% of board members and CEOs believe market disruptions are happening more frequently, and with greater impact. As a result, companies are engaging in transformational activities at an accelerated rate – making the ability to transform successfully and continuously in response to disruption, essential for an organization’s survival.EY and the University of Oxford’s Saïd Business School collaborated to look into more modern and effective methods for driving organizational change. The approach placed a greater emphasis on human factors, which was commonly identified as a primary reason for the failure of transformations. It was observed that not only is the rate of transformation failure excessively high, but it also imposes a human toll that organizations can no longer tolerate.The research indicates that 85% of senior leaders have participated in at least two major transformations in the past five years. Furthermore, 67% of those surveyed acknowledged that they have been part of at least one transformation that did not perform well during this period. While not surprising, it was astonishing that companies continue to accept this high rate of failure as the cost of change. By any other measure or in any other scenario, such a level of performance would be unacceptable.This research underscores that the complex factors determining whether a transformation succeeds or fails are deeply connected to the human element, a pattern that holds true across various industries and geographies. Adequate support can transform the increased stress associated with transformation into a catalyst for enhanced performance and drive progress. To optimize their chances of success, organizations must become proficient in these key areas.Cultivate essential leadership skillsIn the study, employees identified leadership as the primary factor influencing transformation outcomes, regardless of whether it was successful or not. Leaders themselves considered leadership to be the most critical element in successful transformations, but deemed it insignificant when the transformation did not meet expectations.It's essential for leaders to confront their own fears, worries, and uncertainties about the path that lies ahead. For instance, 47% of participants from highly successful transformations reported that leaders were open to ideas from junior staff members, compared to 29% from less successful transformations.Inspire through a shared and compelling visionThe vision is the cornerstone of any transformation. Leaders should extend their search for an inspiring vision beyond their personal scope, their organization, and even their industry. They should cast a broad net to employ future-oriented planning to uncover bold new possibilities, shaping a vision that garners widespread support and resonates emotionally with everyone involved. Close to half (47%) of participants from highly successful transformations acknowledged that the vision was clear and persuasive, in contrast to just 26% from transformations that did not perform well.For the vision to take hold, leaders must effectively convey the reasons behind the need for transformation, rather than merely dictating the actions required. Nearly half (48%) of employees from successful transformations reported that leaders successfully communicated the reasons for organizational change, as opposed to 25% from unsuccessful transformations.Foster a culture that encourages inputIn the qualitative analysis of the research, employees involved in unsuccessful transformations expressed feelings of being ignored, unsupported, and stressed both during and after the process. Subsequent discussions found leaders surprised at these findings and their lack of awareness regarding the significant emotional impact an unsuccessful transformation has on employees.Leaders must channel the appropriate emotions to keep employees committed and driven, while also offering sufficient emotional support to stave off worry and exhaustion. According to the predictive model used in the study, increasing emotional support raised the average probability of a successful transformation by 17%. By being attuned to the emotional state of employees throughout the transformation, leaders can detect early signs of trouble and implement changes to steer the transformation back on course.Empower through clear responsibilitiesThere will be unexpected developments, and intermittent pauses in any transformation journey. Leaders must strike a balance between providing structure and discipline while allowing space for creativity and innovation. Over half (52%) of participants from successful transformations reported that employees had well-defined roles and responsibilities, and 49% indicated that decision-making powers were distributed clearly and suitably throughout the organization.Leaders should promote a culture of trial and error by shifting from a mindset of avoiding failure at all costs to one that embraces rapid learning from failures. Minor setbacks can pave the way for significant achievements, while a fear of failure often results in lost opportunities. Forty-six percent of respondents from successful transformations said they established a process that fosters innovative experimentation without the risk of such experimentation adversely affecting careers or compensation.Leverage technology and skills to drive actionTechnology is not the end goal, but it is instrumental in bringing the vision to fruition. Selecting the appropriate technology is essential to achieving the vision and streamlining the transformation process. Leaders identified the effective deployment of technology as the second most important factor for a successful transformation and its ineffective use as the second leading cause of poor performance. Nearly half (48%) of those from successful transformations reported that their organizations had made the right technological investments to support their transformation goals, as opposed to 33% from less successful transformations. It's vital to consider the emotional reactions that come with the introduction of new technology. Employees from underperforming transformations are 25% more likely to associate transformation with concerns about job stability (49% compared to 39%). Others might view technology as a substitute for human interaction, which is crucial for the emotional health of employees and the smooth functioning of the organization.Leaders should focus on demonstrating progress rather than striving for perfection. By combining recruitment, upskilling or reskilling, partnerships, and outsourcing, leaders can foster the appropriate digital mindset and skills to actualize the potential benefits of technology. Forty-nine percent of participants from successful transformations indicated that their organizations possessed the necessary digital skills and mindset for the transformation, compared to 35% from less successful transformations.Collaborate to connect and createIn contrast to traditional corporate cultures that favored a directive, top-down hierarchy with employees carrying out a vision dictated by their leaders, the current continuous state of transformation demands mutual reliance and teamwork. Leaders must cultivate a culture that promotes connectedness and inventiveness, creating an environment where employees feel secure to explore new methodologies — both digital and agile — that foster innovation, engagement, and rewarding work experiences. Forty-four percent of those from successful transformations reported that their organization's culture supported the adoption of new work practices, as opposed to 28% from less successful transformations. For new work practices to thrive, leaders and employees must work together to recalibrate the dynamics of delegation, ownership, and empowerment. Forty-two percent of participants from successful transformations noted that a new organizational culture was intentionally defined and put into practice as part of the transformation initiative.Harness the human element to achieve transformation successLeaders are aware that their organizations must undergo change, yet the challenge of transformation can leave many feeling inundated. In a time characterized by relentless change, complacency is not a viable option. By tapping into the collective strength of their employees and by applying best practices in relation to each of the factors mentioned, leaders can steer their organizations towards a successful transformation. To take their transformation efforts to a higher level, organizations must focus on placing humans at the heart of their strategies. Rossana A. Fajardo is the Consulting Leader of SGV & Co.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.

30 September 2024

Rajiv Kakar

Navigating the software landscape in the GenAI era

IN BRIEF: Traditionally, the choice between custom and packaged software was straightforward – each option presented clear pros and cons aligned with specific business needs. However, the rise of Generative AI (GenAI) has blurred these lines, altering the decision-making process for business leaders.GenAI, with its unprecedented capabilities in generating code, creating unique content and personalized user experiences, has added to the dilemma for enterprises on whether customized solutions continue to create a unique competitive advantage.Businesses must continue to evaluate the need for customization against the benefits of AI-enhanced packaged solutions. PULL QUOTE: “GenAI is redefining software implementation strategy, compelling businesses to choose between the innovations of custom solutions and the broad appeal of AI-powered packaged software.” The rise of GenAI is reshaping the software industry, enabling new ways to create content, automate tasks, and tailor user experiences. Businesses now face a critical decision: should they invest in custom software that is specifically designed for their needs, or should they choose off-the-shelf solutions that are enhanced by GenAI add-ons like customized content and task automation? This choice has significant implications for how software is selected and implemented across enterprises.For example, the insurance and finance sectors, traditionally reliant on custom-built software for their complex operations, are now moving towards standard, packaged solutions driven by GenAI. Given the need for agility, cost-effectiveness, and digital service demands, this shift showcases the challenges and opportunities in modernizing software systems. Their experiences offer valuable lessons for other industries contemplating similar transitions.As leaders navigate this decision, they must consider the long-term impact on their business strategy and operations. This article explores the considerations and implications of choosing between bespoke and off-the-shelf software solutions in the age of GenAI.The evolving decision matrixCustom software is tailored to meet the specific needs of a business, offering a high degree of personalization and flexibility. On the other hand, packaged software provides a ready-made solution that is generally more cost-effective and quicker to deploy but may not cater to every unique requirement.Traditionally, the choice between custom and packaged software was straightforward – each option presented clear pros and cons aligned with specific business needs. However, the rise of GenAI has blurred these lines, altering the decision-making process for business leaders. The integration of GenAI into software development and deployment processes introduces a new complexity, requiring a more strategic approach to software selection. Like the late 1990s shift in production and manufacturing companies, which moved from proprietary systems to standardized ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management) systems, today's businesses must consider the automation and cost advantages that such a transition could bring.Custom software in the GenAI eraCustom software development, once a time-consuming and costly endeavor, is being transformed by GenAI. AI-driven development tools can now assist programmers in generating code snippets, produce functional and test specifications, and reduce the overall development life cycle. Empirical evidence shows that the appropriate use of GenAI in coding tasks can double the gain in developer productivity. This mirrors the automation of important business functions seen in other industries, such as one-touch customer billing or automated supply-chain planning, which have reaped significant cost advantages from shared services.However, the challenges of integrating GenAI into custom software cannot be overlooked. It requires a depth of technical expertise and raises ethical questions about data usage and AI-generated content. Additionally, custom solutions demand a focused approach, often necessitating the hiring of specialized developers and heavy investment in IT infrastructure and licenses. This is akin to the banking and insurance sectors, where upgrades to core systems are lengthy and risky due to complex, heterogeneous products and decades-old IT systems.Packaged software and GenAIOn the other side of the spectrum, packaged software providers are also incorporating generative AI into their products, offering advanced features that were once only possible with custom development. This democratizes access to powerful AI tools, making them available to a wider audience.This change also makes advanced AI tools more accessible to a wider range of businesses. With these enhanced off-the-shelf products, companies can quickly implement sophisticated solutions and tap into the knowledge of a large user base. However, the generic nature of packaged software may not suit all business requirements. Depending on vendors for updates and new AI features could also lead to potential risks and limitations.Navigating the new software landscapeThe age of GenAI is reshaping the software industry, blurring the lines between custom and packaged solutions. Custom software, now more accessible with AI assistance, offers unparalleled customization and competitive advantage. Packaged software, enhanced by AI, provides a cost-effective and quick-to-deploy alternative with a wealth of community support. Businesses must carefully assess their needs, considering factors such as the level of customization required, budget constraints, and the strategic importance of AI in their operations. Whether opting for a custom-built AI-driven platform or an AI-enhanced packaged solution, the goal remains the same: leveraging the transformative power of GenAI to drive innovation and success in the digital age.As the software industry evolves with the integration of GenAI, businesses are faced with choices that mirror those made by banks and insurance companies. The move towards standard software, driven by the need for new digital services and customer demand for online products, suggests a similar path for businesses across all sectors. By examining the success factors identified in the transition from proprietary to standard systems, such as technology selection, transformation leadership, team composition, timing, and transparency, companies can navigate this new era effectively. The lessons learned from other industries serve as a guide for businesses to make informed decisions in adopting new software solutions that harness the power of GenAI. Rajiv Kakar is a Technology Consulting Principal of SGV & Co.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.

23 September 2024

Bonar A. Laureto

Navigating Change: 10 Key Shifts Shaping Sustainability in the Philippines (Second Part)

IN BRIEF: The SEC's new sustainability reporting form aligns Philippine companies with global standards, enhancing climate risk transparency.Adoption of IFRS S1 and S2 by 2027 will improve the Philippines' attractiveness to investors seeking reliable ESG data.Innovations in insurance, electric vehicles, green steel, renewable energy and battery storage, and aviation fuel are creating new sustainable investment opportunities. PULL QUOTE: “Strategic sustainability shifts are creating new investment frontiers in the Philippines, bolstering the nation's economic and environmental resilience.”The Philippines is rapidly embracing a future where sustainability is not just a buzzword but a core aspect of business and economic strategy. Building on the regulatory reforms and market dynamics discussed in the first part of this series, the country is laying the groundwork for a transformative shift towards a more sustainable and resilient economy. The first part of this article discussed the first five key shifts that are shaping the sustainability landscape in the Philippines, focusing on the implications for businesses and the opportunities for investors in this emerging low-carbon economy. This second article examines the key shifts that are influencing this green transition. It will discuss the roadmap for IFRS S1 and S2 adoption, the severity of rising climate-related loss and damage, rising growth in electric vehicle (EV) adoption, emergence of green steel in construction, decarbonization of the aviation industry, and the innovative approaches and opportunities that are emerging for businesses ready to adapt and thrive in this new landscape.The Philippine Sustainability Reporting Committee’s roadmap for IFRS S1 and S2 adoptionThe Philippine Sustainability Reporting Committee has proposed a roadmap for the full adoption of IFRS S1 and S2 by 2027, which was approved by the Philippine Financial and Sustainability Reporting Standards Council (FSRSC) and for approval by the Board of Accountancy. This phased approach allows companies to gradually align their reporting processes with international standards, improving transparency and comparability across the market. As more companies adopt these standards, the Philippines is set to become increasingly attractive to global investors seeking consistent and reliable ESG data, which is crucial for sustainable investment portfolios.Rising climate-related loss and damageThe increasing severity of climate-related loss and damage in the Philippines has led the insurance sector to re-evaluate its risk models. Consequently, premiums for natural catastrophe insurance products are expected to rise, potentially widening the insurance coverage gap. However, businesses that proactively assess facility-level climate risks can better manage these costs. Additionally, this scenario presents an opportunity for insurance companies to develop innovative products that address the unique risks posed by climate change in the Philippines, thereby safeguarding businesses and communities.Growth in electric vehicle (EV) adoptionEV adoption in the Philippines is gaining significant momentum, driven by investments in charging infrastructure and partnerships with global EV manufacturers. This trend creates investment opportunities in EV technology, infrastructure, and related services, catering to the growing demand for green mobility solutions in the region.Emergence of green steel in constructionThe construction sector in the Philippines is increasingly turning to green steel to reduce scope 3 emissions. This shift is driven by the need to meet sustainability-linked bond requirements and access capital tied to ESG performance. Green steel, which is produced with significantly lower carbon emissions, is becoming a preferred material in real estate and infrastructure projects. This trend opens new avenues for steel manufacturers and suppliers who can meet the rising demand for sustainable construction materials, aligning with global efforts to reduce the carbon footprint of the construction industry.The expansion of the electric vehicle (EV) and green steel industries is set to drive increased demand for renewable energy and battery storage. This surge presents significant opportunities for the renewable energy sector, supporting the Philippines' goal of 50% renewable energy generation by 2040. Decarbonization of the aviation industryThe Philippine aviation industry is actively pursuing decarbonization strategies, including the production of Sustainable Aviation Fuel (SAF) from biomass feedstocks and the implementation of carbon offset initiatives. Government is considering policies that would set clear directions for the use of SAF by local airlines, creating a significant investment opportunity in SAF production. Moreover, private sector companies that rely on aviation services can contribute to this decarbonization effort by purchasing SAF certificates. This approach not only supports the aviation industry's sustainability goals but also enables these companies to reduce their scope 3 emissions related to air travel and freight, thereby enhancing their overall sustainability profiles.How businesses can adapt and thriveAs the sustainability landscape in the Philippines rapidly evolves, businesses must adapt to remain competitive and resilient. The following strategic priorities are essential for navigating this transition:Transforming management systems and analytical approachesTraditional impact reporting, which often focuses on broad, enterprise-wide metrics, is no longer sufficient. The adoption of IFRS S1 and S2 entails a more detailed, data-driven analysis. Companies need to move beyond basic environmental metrics, employing advanced financial modeling to understand how climate and sustainability risks impact specific business segments. This granular analysis—tailored to the organization’s different business models—enables targeted risk mitigation and strategic planning, ensuring resilience against unique challenges.For instance, a retail mall and an office building within the same company might face vastly different climate risks, requiring tailored risk management strategies. By embracing this level of detail, businesses can better identify vulnerabilities, develop targeted mitigation plans, and ultimately enhance their resilience to climate-related disruptions.Integrating climate considerations into strategic planning and innovationIncorporating climate-adjusted financials into strategic planning not only helps businesses anticipate disruptions but also allows them to understand the broader shifts in their business ecosystem, driven by sustainability and climate imperatives. For example, as the finance community increasingly values sustainable investments, real estate companies are under pressure to adopt green building practices. This shift creates opportunities for manufacturers of construction materials to innovate and supply eco-friendly products, such as green steel or recycled materials. By aligning their strategies with these market dynamics, companies can meet the evolving needs of key customers and capitalize on the growing demand for low-carbon solutions across various sectors. This ecosystem viewpoint ensures that businesses remain competitive and relevant in a market increasingly shaped by sustainability considerations.Elevating corporate governance and oversightThe transition to IFRS S1 and S2 significantly broadens the responsibilities of corporate boards, requiring a deep integration of climate and sustainability considerations into governance practices. Boards must ensure that climate-related risks are systematically managed, utilizing advanced tools like scenario analysis and stress testing to evaluate the resilience of the company’s strategies under various environmental scenarios.Effective governance is also about recognizing and seizing new opportunities. Boards should actively engage in pursuing opportunities identified through strategic planning, such as expanding into emerging markets for sustainable products and technologies. By focusing on both risk management and opportunity capitalization, boards can ensure that the company is not only protected from potential disruptions but also well-positioned to thrive in a changing market.To reinforce this strategic focus, it’s crucial that executive incentives are aligned with sustainability goals. Linking leadership compensation to the achievement of these objectives ensures that sustainability is embedded in the company’s core strategies and decision-making processes. This governance approach ensures compliance, strengthens the company's reputation among stakeholders, and positions the business to capitalize on opportunities in the evolving sustainability landscape.By focusing on these areas, businesses in the Philippines can navigate the evolving sustainability landscape and lead in building a resilient, sustainable future. Bonar A. Laureto is an Assurance Principal and leads Climate Solutions under the Sustainability Services team of SGV & Co.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.

16 September 2024

Bonar A. Laureto

Navigating Change: 10 Key Shifts Shaping Sustainability in the Philippines (First Part)

IN BRIEF: As a signatory to the Paris Agreement, the Philippines is advancing towards a low-carbon economy with the proposed Low Carbon Economy Investment Act, incentivizing decarbonization plans and carbon pricing.New legislation, including the Carbon Rights Act and BSP Circulars on Environmental and Social Risk Management Systems, is set to redefine sustainable investment and risk management in the financial sector.The SEC's upcoming sustainability reporting form aligns with global standards, enhancing transparency and aiding investors in assessing climate-related risks and opportunities. PULL QUOTE: “Philippine regulatory reforms are catalyzing a sustainable transformation, positioning businesses for resilience and investors for informed decision-making.” The Philippines is at a pivotal moment in its sustainability journey, driven by a blend of regulatory reforms, market dynamics, and heightened climate awareness. These developments create both risks and opportunities for businesses operating in the country and global investors interested in sustainable investments. As the nation confronts the realities of climate change and its potential impacts, there is a growing consensus among policymakers, business leaders, and civil society on the need for a strategic and coordinated approach to sustainability. This collective push towards environmental stewardship is shaping new business models and investment strategies that prioritize long-term resilience and ethical practices. The Philippines' commitment to this transition is reflected in a series of progressive policies and initiatives that aim to align economic development with sustainable outcomes.This first part of the article explores the first five key shifts that are shaping the sustainability landscape in the Philippines, focusing on the implications for businesses and the opportunities for investors in this emerging low-carbon economy. It explores the upcoming Low Carbon Economy Investment Act, the proposed carbon rights legislation, BSP Circulars 1128 and 2022-042, BSP Circular 1187, and the upcoming Philippine SEC sustainability reporting form. Upcoming carbon pricing policy – Low Carbon Economy Investment Act (HB 7705)The proposed Low Carbon Economy Investment Act, or House Bill 7705, is poised to be a transformative force in the Philippines' shift towards a low-carbon economy. This bill mandates that covered enterprises with substantial contributions to the country’s greenhouse gas (GHG) emissions develop decarbonization plans aligned with a pathway to limit global temperature rise to below 2°C. Additionally, it introduces a carbon pricing mechanism for emissions that exceed established milestones, creating a decarbonization fund. This fund will be reinvested into viable low-carbon projects, presenting significant opportunities for enterprises and investors committed to sustainable development.Proposed carbon rights legislationThe Philippine Congress has introduced the Carbon Rights Act (HB 10635), which aims to address the barriers to investing in carbon forestry and other carbon projects. This legislation seeks to define ownership of carbon rights and establishes mechanisms for their transfer. By clarifying these ownership rights and enabling corresponding adjustments, the bill facilitates the Philippines’ participation in global carbon markets under Article 6 of the Paris Agreement. For investors, particularly those focused on nature-based solutions, this bill presents new opportunities to invest in carbon projects that are critical to achieving global emission reduction targets.BSP Circulars 1128 and 2022-042 on Environmental and Social Risk ManagementThe Bangko Sentral ng Pilipinas (BSP) has implemented Circulars 1128 and 2022-042, which mandate financial institutions to integrate Environmental and Social Risk Management Systems (ESRMS) into their credit risk assessments. These regulations compel banks to conduct climate risk assessments, including stress testing, as part of their underwriting processes. Companies with strong sustainability and climate risk management practices are likely to benefit from easier access to finance, while those slower to adapt may face higher borrowing costs. These circulars also ensure that climate risks are systematically integrated into the financial sector, promoting long-term resilience and stability.BSP Circular 1187 – Sustainable Finance TaxonomyBSP Circular 1187 introduces the Philippine Sustainable Finance Taxonomy Guidelines (SFTG), a framework that classifies economic activities based on their environmental and social sustainability. The taxonomy uses a "traffic light" system—green for aligned activities, amber for transitional activities, and red for non-aligned activities. This classification is crucial for guiding banks and investors in directing capital toward projects that support climate change mitigation and adaptation. By preventing greenwashing, the SFTG ensures that sustainable finance practices in the Philippines are both transparent and credible.Upcoming Philippine SEC sustainability reporting formThe Philippine Securities and Exchange Commission (SEC) is set to introduce a mandatory sustainability reporting form for publicly listed companies, requiring disclosures aligned with International Financial Reporting Standards (IFRS) S1 and S2. These standards emphasize the identification and management of climate-related risks and opportunities, encouraging companies to integrate sustainability into their core business strategies. For investors, these reporting requirements will provide critical insights into the sustainability practices of Philippine companies, facilitating more informed and responsible investment decisions.Charting a sustainable pathThe Philippines stands at a crossroads in its sustainability journey, with recent regulatory reforms and evolving market dynamics steering the nation towards a greener future. As climate change becomes an increasingly pressing global issue, the country is responding with innovative and comprehensive legislative measures and initiatives that aim to reduce carbon emissions and promote sustainable practices, while fostering economic growth, enhancing community resilience, and ensuring environmental justice.The impending introduction of the Philippine SEC's mandatory sustainability reporting form marks a significant step towards greater transparency and accountability in corporate environmental practices. By aligning with international standards, this move propels Philippine companies toward more sustainable operations and equips investors with the requisite information to make responsible decisions. As the nation forges ahead with these regulatory changes, businesses can play a pivotal role in the transition to a sustainable economy, with the potential to set a precedent for other emerging markets in the region.The second part of this article will discuss the roadmap for IFRS S1 and S2 adoption, the severity of rising climate-related loss and damage, rising growth in electric vehicle (EV) adoption, emergence of green steel in construction, decarbonization of the aviation industry, and the innovative approaches and opportunities that are emerging for businesses ready to adapt and thrive in this new landscape. Bonar A. Laureto is an Assurance Principal and leads Climate Solutions under the Sustainability Services team of SGV & Co.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.

09 September 2024

Marie Stephanie C. Tan-Hamed

What matters to APAC boards in 2024

IN BRIEF: 60% of Asia-Pacific board directors identify economic conditions as their top concern for 2024Despite the increasing severity of climate-related risks, only 21% of Asia-Pacific board directors consider climate change a priorityDemand for data analysts in the Philippines outpaces graduate supply, creating a skills gap due to misalignment between education and industry needs PULL QUOTE: “Boards must keep their finger on the pulse of economic indicators to be able to pivot strategies effectively—and quickly—across multiple fields of play when required.”The Asia-Pacific region is proving its mettle amidst increasing economic and geopolitical complexities. However, for boardrooms across the region, maintaining a competitive edge will require more than just resilience. It calls for an agile, globally interconnected approach that can quickly adapt to the shifting landscape.While much of the world braces against economic headwinds, the Asia-Pacific region is positioned to lead the charge and expected to contribute nearly 60% of global GDP growth in 2024, surpassing pre-pandemic benchmarks. Underpinned by robust performance across national economies, this optimistic outlook has nearly three-quarters of Asia-Pacific CEOs forecasting higher revenue growth and profitability for the year ahead.However, this promising forecast comes with its own set of challenges. Boardrooms are under pressure to navigate a mix of pressures — with inflation, rising labor costs, and geopolitical tensions topping the list of concerns. The latest 2024 EY Asia-Pacific Board Priorities survey shows that economic conditions are the primary agenda of 60% of board directors this year. Beyond these economic pressures, capital allocation and talent shortages are also emerging as key pain points that boards need to tackle head-on. Given these dynamics, boards must keep their finger on the pulse of economic indicators to be able to pivot strategies effectively—and quickly—across multiple fields of play when required. This article will discuss the critical challenges Asia-Pacific boards face in 2024 and strategies to turn them into competitive advantages in the evolving global marketplace. Capital allocation pressureAs inflation, rising operational costs, and diminishing pricing power bite the bottom line, Asia-Pacific boards are moving their focus from growth-at-all-costs strategies to a more nuanced focus on financial discipline. The survey reveals that two-thirds of directors are increasingly concerned about capital availability, with 56% grappling with the complexities of mergers and acquisitions, restructuring initiatives, and divestiture decisions.Despite the unique challenges of the current economic landscape, boards can still rely on fundamental oversight practices in capital strategy. These practices include regular reviews of capital budgeting and strategic plans to ensure agility and alignment with corporate objectives, maintaining a competitive edge in the global marketplace. Boards should also prioritize the right metrics, balancing short-term key performance indicators with long-term value creation goals and using a balanced scorecard that integrates financial, non-financial, and qualitative indicators.The rise of Gen Z workforceTalent management is one of the most crucial priorities for Asia-Pacific boards as they prepare for an AI-driven future. By 2025, Generation Z—those born between the mid-1990s and 2010—is expected to make up 27% of the region’s workforce. This generation is characterized by being digital savvy, having a purpose-driven mindset, and a preference for flexibility.Given these traits, boards are challenged to reimagine their approach to talent development. Those that successfully integrate the unique perspectives and skills of this generation can gain fresh insights, enhancing their capacity to innovate and stay competitive. However, achieving this requires more than merely recognizing the value of younger talent. Boards must foster an organizational culture that prioritizes innovation and embraces diversity, equity, and inclusion. AI-fueled people-centric futureAsia-Pacific boards are rapidly embracing Generative AI, with 40% of directors prioritizing digital transformation and business model changes in 2024. As AI-generated data becomes more prevalent, boards must ensure executives exercise proper oversight, making data governance a key priority. Companies must establish guardrails and ensure compliance with evolving regulations.Meanwhile, the growing reliance on data-driven decision-making and AI is sharply increasing demand for specialized skills in data science and AI. A report by the Philippine Institute for Development Studies (PIDS) highlights a rising demand for data analysts in the country, but higher education institutions are currently falling short in producing enough graduates to meet this need. The report highlights that data science and analytics skills remain underdeveloped within the Philippine workforce due to a disconnect between educational institutions and industry requirements. Although several undergraduate degrees, such as computer science, business administration, statistics, and others, serve as pathways for data science and analytics (DSA) careers, they currently lack specific training tailored to industry demands. This highlights the need for boards to recognize the strategic value of these skills and take proactive steps to develop the talent essential for long-term growth and innovation.Thriving in Asia's green economyAs Asia continues to position itself as a key player in the global green economy, businesses across the region have a unique opportunity to capitalize on this shift. The Philippines, for instance, has made significant strides in climate action, ranking sixth out of 67 countries in the 2024 Climate Change Performance Index (CCPI) and fifth out of 10 countries in the Southeast Asia Green Economy Index. These feats underscore the country's progress in reducing greenhouse gas emissions and developing renewable energy. However, both highlight the country's ongoing challenges in climate policy and ambition, revealing a significant gap in government and corporate decarbonization strategies.For businesses to thrive in Asia’s burgeoning green economy, boards must adopt a long-term, strategic approach. While current returns on clean energy investments may lag behind traditional sectors, the potential for future growth is immense. As highlighted in the 2023 EY Global Board Risk Survey, the most resilient boards are those willing to sacrifice short-term financial gains for the long-term benefits of environmental, social, and governance (ESG) commitments.To truly capitalize on Asia’s green economy, businesses must align their capital allocation with ESG objectives, ensuring that their strategies are not just reactive but proactive in driving sustainability. This requires a commitment to meticulous planning, sustainable investments, and the integration of ESG into the core business model.The climate urgencyDespite the urgency of the climate crisis, it remains a secondary concern for many Asia-Pacific boards, with only 21% of respondents identifying it as a critical issue. Nearly half of these directors cite insufficient information as a barrier.The recent EY Sustainable Value Study reveals that some organizations are scaling back their commitments to net zero and modestly reducing investments in sustainability. Larger organizations, particularly those with revenues exceeding USD $5 billion, are more likely to prioritize climate action (47%) compared to their smaller counterparts (13%). However, this shortsightedness threatens the long-term sustainability and resilience of these businesses.To thrive in a decarbonizing economy, boards must recognize climate action as essential to long-term value creation rather than a mere compliance issue. By embedding ESG considerations into their strategies, boards can move sustainability from aspiration to committed action.What it means to be future-fit Asia-Pacific boards must embrace a transformative mindset and develop tailored governance models to navigate 2024 and beyond. While the need for change is evident, the path forward will vary by organization, depending on their current state, maturity, and strategic vision. Prioritizing key issues, reassessing long-term purpose, and defining what it means to be future-fit will be essential for boards. Marie Stephanie C. Tan-Hamed is a Strategy and Transactions (SaT) Partner and the PH Government and Public Sector leader of SGV & Co.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.

02 September 2024

Ryan Gilbert K. Chua

How digital transformations can drive organizational success

IN BRIEF:Companies can keep pace with rapid technological advancements by embracing digital transformation, upskilling employees to work with AI, and ensuring cybersecurity to protect digital assets.The success of digital transformation is closely tied to human emotions, necessitating leaders who prioritize empathy and a people-focused approach. Organizational agility, clear governance, and data governance are key to navigating the complexities of digital transformation. PULL-QUOTE: “Successful digital transformations require effective leadership, talent enablement, organizational agility, cybersecurity, and clear governance policies. By prioritizing these pillars, organizations position themselves for success and ensure their sustained growth and competitiveness.” In this fast-paced digital age, businesses are compelled to continuously innovate and adapt to maintain their competitive edge. The advent of groundbreaking technologies is disrupting traditional practices, compelling companies to undergo digital transformation—a complex process that requires substantial investment.This transformation goes beyond merely adopting the latest technologies; it necessitates bridging the skills gap. As artificial intelligence (AI) gains prominence, there's a growing need for a workforce adept at integrating AI into their workflows, mirroring the agility of startups that rapidly modify apps based on user feedback.Cybersecurity is equally critical, with data breaches underscoring the importance of safeguarding digital assets as fervently as one would secure a physical storefront. Furthermore, robust governance policies provide the strategic direction needed to navigate the digital domain, akin to a CEO's decisive investment in blockchain for enhanced supply chain transparency.Digital transformation is a concrete shift in business operations, using technology to transform processes and services. EY exemplifies this with its EY Digital Audit, which integrates three platforms: EY Canvas, EY Helix, and EY Atlas.These platforms have transformed EY's auditing process. EY Canvas facilitates global team and client collaboration, EY Helix employs advanced analytics on financial data, and EY Atlas acts as a digital repository for current accounting standards and insights. The EY Digital Audit helps ensure that EY firms around the world provide a consistent audit across more than 150 countries, linking over 120,000 EY professionals.When executed effectively, digital transformation reshapes the entire business ecosystem, yielding enhanced results for clients and stakeholders.Unpacking the Digital Investment Index (DII)The EY-Parthenon Digital Investment Index reveals a surge in digital investments as companies race to launch tech-driven offerings. A significant 55% of executives report digital upgrades boosting customer experience. From 2020 to 2022, firms reaping benefits from cloud and Internet of Things (IoT) technologies jumped by 54%, reflecting a trend towards AI and machine learning to enhance customer interactions and gather insights. However, those lagging in adapting strategies risk falling behind. These findings highlight certain factors that underpin successful digital transformations: leadership, capacity, agility, data and cybersecurity, and clear governance.Human-Centric Leadership in Digital ChangeEY Teams and Oxford's Saïd Business School research highlights the crucial role of human emotions in digital transformation success across various sectors. It points to the importance of empathetic leadership that prioritizes people to enhance performance and drive growth. Leaders should champion technology while ensuring its smooth incorporation into everyday tasks. They must foster innovation, adopt new technologies, and safeguard employee well-being to stimulate change from the ground up. EY exemplifies this by embracing remote working technologies, with leaders integrating tools like Microsoft Teams to facilitate seamless remote collaboration, mirroring the effectiveness of in-person engagement. EY wavespace™ centers embody EY's commitment to innovation, providing a collaborative space for teams to explore technologies like AI and blockchain, fostering a culture that values tech integration and employee well-being for digital transformation.Empowering the Workforce for the AI RevolutionThe EY 2023 Work Reimagined Survey reveals that a significant 84% of employers expect their employees to engage with generative AI (GenAI). To capitalize on GenAI's capabilities, companies must prioritize extensive training, ensuring their teams not only use new tools but also possess a comprehensive understanding and proficiency in them. In the face of digital evolution, closing the skills gap and providing upskilling avenues is essential for enhancing workforce competencies. This investment in human capital is crucial for maintaining a competitive edge. Customized learning and development (L&D) programs are key, preparing employees to adeptly manage and exploit digital advancements like GenAI. Cultivating a culture of ongoing learning and flexibility enables organizations to become more robust and positions them to navigate the future of work with a workforce that is agile and digitally savvy.Recognizing and unlocking the full potential of their workforce is essential for any organization's digital evolution. This leadership approach ensures that technology serves people and not the other way around, paving the way for a transformation that is both progressive and human-centered.Cultivating Agile EnterprisesIn the face of technological evolution, the agility of an organization is paramount for successful digital transformations. Companies must be adaptable and forward-thinking, swiftly converting emerging trends into chances for growth. Agility is also anchored in data-centric decision-making. By harnessing data analytics, organizations can discover valuable insights that inform strategic choices and propel digital initiatives.A flexible business and tech framework is essential for supporting transformation efforts. However, many companies grapple with legacy systems, inflexible structures, and compartmentalized operations. Leaders must focus on harmonizing their tech infrastructure with their overarching business goals to foster a responsive and integrated environment.EY demonstrates agility through its adaptive approach to business and technology. The firm actively replaces legacy systems with scalable cloud-based solutions, allowing for a more flexible and integrated tech infrastructure. This shift enables EY to respond quickly to market changes and client needs.Maximizing Data Potential with Robust SecurityAs digital strategies advance, organizations face increased risks of cyber threats and data breaches. To counter this, they must deploy comprehensive cybersecurity measures, robust data protection tools, and stringent privacy protocols. Data is the cornerstone of technological progress and must be managed with strategic care and caution.Safeguarding data is only part of the equation—effective data governance is also essential for organizations to unlock the full value of their digital assets. This means not only protecting data from external threats but also ensuring its quality, accessibility, and ethical use within the organization. With the right governance framework, companies can confidently leverage their data to drive innovation and maintain a competitive edge in the digital landscape.Implementing Clear Governance FrameworksThe intricate nature of any transformation demands substantial resources. Amidst this complexity, there's a danger of straying from the initial business goals, potentially slowing progress or even sidetracking the entire transformation effort. To mitigate this risk, it's crucial for organizations to define their desired business outcomes from the outset.Leaders play a pivotal role in crafting and enforcing detailed governance policies and a decision-centric operating model. By doing so, they provide a clear roadmap that aligns the transformation process with the organization's strategic objectives, ensuring that every step contributes to the momentum needed to achieve a successful transformation.Charting the Digital CourseIn today's digital landscape, staying competitive means embracing innovation. Leaders must ensure digital transformations are in sync with their immediate and future objectives, including a commitment to long-term strategies and a focus on people. Awareness of employee well-being, tech progress, and emerging cybersecurity threats is key to adapting digital strategies amid new challenges.Crucial to this journey are effective leadership, talent empowerment, agility, cybersecurity, and definitive governance. By valuing these elements, organizations can navigate the digital terrain, secure ongoing success, and maintain a competitive edge. Ryan Gilbert K. Chua is the Business Consulting Leader and Technology Assurance Leader of SGV & Co.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.

26 August 2024

Roderick M. Vega

Keeping up with advances in employment fraud

As the global economy shifts towards recovery, organizations are ramping up their defenses against the threat of employment fraud. The hiring landscape, ever-evolving and increasingly digital, presents various opportunities for deceitful practices. Impersonation, falsification of qualifications, and sophisticated phishing attacks are just a few of the tactics employed by fraudsters to infiltrate companies.Employers who place their bets on seemingly promising candidates without conducting thorough background checks are especially vulnerable to fraud. Impersonation, hiding information, falsifying facts, placing proxy attendees during work evaluations, multiple affiliations, and phishing attacks on job portals have been increasing given the advent of technology.The Report to the Nations 2022 by the Association of Certified Fraud Examiners (ACFE) reports that nearly half of the organizations that fell victim to employment fraud (43%) had bypassed comprehensive background checks in their hiring processes. This data highlights the need for a more diligent and nuanced approach to candidate verification, one that balances thoroughness with the realities of the modern job market.The shortcomings of traditional background screening methods Currently, the hiring industry relies almost entirely on multiple third-party verification vendors who physically visit addresses to check the claims made by prospective employees. In one of the surveys conducted by EY, as many as 59% of the LinkedIn poll respondents revealed that their organizations employ third-party intermediaries for pre-employment background checks, while 18% conduct manual checks, and 9% onboard employees without any employment verification at all. However, the manual process is not only time consuming but also prone to human error as well as allowing room for misinterpretations. As many as 14% of the LinkedIn poll respondents confided that their current manual verification process is filled with errors while 66% felt that their current method is time consuming. The costs involved and the exposure of employees’ Personal Identifiable Information (PII) data and the challenges it entails additionally weigh heavily on employers. Physical verification methods alone are almost redundant given that fraudsters are devising more technically advanced scams. On the other hand, making the process non-virtual makes the process transparent, reduces the chances of employees submitting doctored documents, and ticks all the boxes of data privacy compliance.Navigating the evolving technological landscapeThe rise of the gig economy and the shift to remote work have compounded the difficulty of tracking a candidate's employment history. Traditional verification methods, which often involve third-party vendors personally verifying claims, are becoming increasingly outdated. These methods are not only slow and prone to human error but also raise privacy concerns as they involve the handling of sensitive personal information.While the fraud menace threatens to arrest the application of technological advancement in the hiring space, the answer to the dilemma lies in tech itself. The development of employee background check tools has led to a complete overhaul of pre-hiring formalities. Technology supported checks have helped simplify the methodologies for companies to identify anomalies in the overall assessment of the candidate’s past employment experiences. Scaled and customized to fit the hiring prerequisites of diverse industries, these models also have a shorter turnaround time as compared to traditional methods, making for a swifter hiring experience.Digital address verification, face-match technology, and geotagging are other methods being employed to identify inconsistencies in photographs and validate the authenticity of the claims made by candidates. These solutions are more efficient and offer a higher degree of accuracy and compliance with data privacy standards.The ethical use of technology in hiringAs we integrate these advanced tools into our hiring processes, it is imperative to consider the ethical implications. It is crucial to ensure that these technologies are used responsibly and that they serve to enhance, rather than replace, human judgment. Technology strengthens our hiring defenses, yet it cannot guarantee absolute protection against fraud.While these technological advancements significantly enhance our ability to detect inconsistencies and fraudulent claims, they are not foolproof. It is important to acknowledge that no system can guarantee a completely fraud-free hiring process. The goal is to reduce the risk of fraud and to build a more trustworthy workforce.Revolutionizing hiring Looking ahead, the potential for further technological advancements in hiring is vast. Machine learning algorithms are becoming increasingly adept at analyzing vast amounts of data to identify patterns that may indicate fraudulent behavior. Blockchain technology holds the promise of creating secure, immutable records of candidates' employment histories, education, and credentials.HR departments play a critical role in navigating this new landscape. They must be adept at using these technological tools while also maintaining a human touch. It is their responsibility to ensure that the hiring process remains fair, equitable, and free from discrimination.In an era where hiring practices are being redefined by digital innovation, it may be crucial to consider engaging the services of an experienced and technologically enabled third-party who can do precise and regulatory-compliant models to expedite and secure pre-employment checks. This way, companies will be able to harness the power of data and technology to hire human resources with verified profiles, enabling a more secure and reliable recruitment process. Roderick M. Vega is the Forensic and Integrity Services Leader of SGV & Co.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.

19 August 2024

Roderick M. Vega

How background checks can help prevent employment fraud

Employment fraud not only takes a financial toll due to the hiring of an ill-suited candidate but also increases risks of occupational fraud. The events that marked the beginning of the 2020s spurred unprecedented transformation by compelling organizations to accelerate their digital journey and enable remote working and business continuity. While it ushered in a new working world of tech-powered solutions, the accelerated pace of growth also left organizations vulnerable to heightened fraud risks.According to the Occupational Fraud 2024: A Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE), out of 183 cases documented in the Asia-Pacific region, 12 (6%) of those were from the Philippines. This report analyzes 1,921 real cases of occupational fraud that were investigated between January 2022 and September 2023. However, it should be noted that the Asia-Pacific region reports the highest loss due to the cost of fraud compared to other regions in the study, with losses amounting to 1.2 million USD, compared to Western Europe who came in second with losses of 1 million USD.According to ACFE’s Report to the Nations 2024, 16% of the organizations that fell victim to fraud had chosen to onboard candidates despite the red flags that were raised during the background screening process, illustrating their dire need to hire.To mitigate such risks, HR departments can set the groundwork for organizational compliance efforts and cultivate an environment committed to following rules and policies. Through the support of HR personnel, compliance approaches can evolve from being reactive to proactive, enabling businesses to effortlessly integrate new regulations.Challenges of remote hiring and inadequate background checksDuring these challenging times, human resource functions find themselves struggling to bridge the talent gap in organizations through remote hiring. However, without the tried-and-tested safety measures such as employee background checks in place, fraudsters exploit the loopholes in the tech-enabled virtual interviews and skill-assessment processes to con organizations into hiring inadequately skilled, unscrupulous, or downright unqualified candidates for important positions through impersonation, proctored interviews, and so forth. The lack of continuous monitoring also results in issues such as multiple employment and compromised employee performance.In the realm of talent acquisition, HR teams play a pivotal role in ensuring compliance. They must ensure that the recruitment process adheres to employment laws, remains impartial, equitable, and free of discrimination. In an era where employment fraud is escalating, the onboarding process is particularly susceptible to modern fraud tactics, including overstated resumes, the use of deepfakes (artificial intelligence or AI-produced media where someone’s likeness or voice is replaced with another’s) during interviews, the submission of counterfeit documents, and undisclosed criminal histories. As such, HR can act as a safeguard by employing risk mitigation strategies to recruit candidates with verified qualifications and employment records.The high cost of occupational fraud and unverified hiresOrganizations share confidential information and valuable data with employees based on the trust established during the onboarding process. If the relationship is built on false pretense or with forged documents submitted by the candidate to improve their chances of being recruited, it can prove detrimental to the organization. All types of fraud are breaches of trust. Occupational fraud is the costliest and most common form of deception that takes place within organizations.The Report to the Nations 2024, which covered 1,921 cases of occupational fraud in 138 countries, reported losses of more than US$3.1 billion incurred by affected companies. Candidates who use fraudulent ways to get hired and submit inauthentic documents during pre-employment background checks are likely to operate with the same mindset during their employment, resulting in increased incidences of occupational fraud. The long-term repercussions of employment fraud A fraudulent candidate presents false information due to the lack of appropriate credentials to secure the position organically. With the advent of technology and remote jobs, fraudsters are creating deepfakes to impersonate qualified professionals and land jobs on their behalf. Such frauds can hamper overall team productivity, compromise business outcomes, and expose the organization to legal and reputational damage. While employees committing employment fraud stand to lose their jobs when their misdemeanors come to light, the organization incurs long-term reputational damage in the ordeal.Leveraging technology for comprehensive background checksWith the introduction of improved background check processes, HR teams can now utilize industry experience to thoroughly scrutinize candidates' resumes, documents, references, academic qualifications, and professional experience—all by one specialist. Automated HR compliance solutions can reduce the inaccuracies associated with manual background checks and offer faster processing times compared to traditional methods. This ensures that the hired candidates meet the company's requirements and adhere to its policies. While the primary objective of background checks is to detect fraud, they can also serve to assess cultural and value alignment, assisting HR in selecting candidates who resonate with the company's values. Employment fraud, like every other scam, is difficult to avoid. However, occurrences can be considerably reduced by implementing innovative solutions offered by employee background verification companies. Organizations can help prevent the hiring of unqualified professionals by investing in tech-forward tools for background verifications, leveraging data and cutting-edge innovations like face-matching and geo-tagging to address the loopholes in the employee verification process in a timely and cost-effective manner. Preemptive measures such as employee background checks can help reduce instances of fraud.Safeguarding the future of workThe importance of comprehensive background checks in the modern workplace cannot be overstated. As organizations navigate the complexities of a digitalized employment landscape, the need for robust verification processes becomes increasingly critical to prevent employment fraud and its associated costs. Advanced tools that harness centralized viewing are not only streamlining the background check process but are also enhancing the accuracy and integrity of hiring decisions. In addition, companies can explore engaging with third-party professionals with an extensive track record in fraud and integrity services. These measures are instrumental in building a trustworthy workforce that upholds the values and standards of the organization. Ultimately, by investing in and prioritizing thorough background checks as well as fostering a culture of compliance and ethical hiring, companies can protect themselves from the financial, operational, and reputational damages caused by employment fraud, ensuring a secure and prosperous future for their business and employees alike. Roderick M. Vega is the Forensic and Integrity Services Leader of SGV & Co.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.

2024

Why entrepreneurs are critical to the Philippine economy

Bridging the cybersecurity and business strategy gap

Realizing transformation success through the human element

Navigating the software landscape in the GenAI era

Navigating Change: 10 Key Shifts Shaping Sustainability in the Philippines (Second Part)

Navigating Change: 10 Key Shifts Shaping Sustainability in the Philippines (First Part)

What matters to APAC boards in 2024

How digital transformations can drive organizational success

Keeping up with advances in employment fraud

How background checks can help prevent employment fraud

Other SGV News and Publications

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