2024 Articles - Suits the C-Suite - Page 5 | SGV & Co. | EY

19 February 2024

Kristopher S. Catalan and Patricia Jazmin D. Patricio

The IPO journey for family businesses

Taking a family business public through an Initial Public Offering (IPO) is a significant milestone that requires strategic planning and careful execution. The transition can unlock new opportunities for growth, but also brings challenges brought by increased scrutiny, regulatory requirements and stakeholder expectations.In an IPO, a private company becomes a publicly traded entity, offering its shares to the public through a stock exchange. This transition from private to public status is marked by the issuance of new equity shares to institutional and retail investors, expanding the company’s ownership base. This may not be appealing for some family businesses, as it may dilute the family’s ownership and even run the risk of losing control.Looking at it from a different perspective, an IPO lets family owners realize previously unmeasured value of their companies with the opportunity to cash in through secondary offer during the IPO or later on subject to lock-up restrictions. On the other hand, the public will now have a chance to invest in what it used to be a private company with hopes of future capital gains or dividend payouts. For the company going public, it is an important step in accessing significant long-term capital that can fund expansion programs or new strategic investments that bank creditors or private investors may not be able to provide.KNOWING WHEN TO DO THE IPOIn the 2023 EY Global IPO Trends Report, the ASEAN IPO market was generally challenging, with high inflation rates and elevated interest rates reducing IPO activities for most countries in ASEAN. In the Philippines, there were only three IPOs, all completed in the first half of 2023. Globally, moderating inflation rates and interest rate cuts could attract investors back to IPOs. Locally, a good number of IPO transactions are expected this year due to strong economic fundamentals, but the government and private sector remain wary of global and local headwinds which may undermine investor confidence.Company or sector specific conditions must be considered when going listed. For example, the Philippine Securities and Exchange Commission (SEC) requires a company to establish three years of profitable operations, i.e., at least P75 million of cumulative net income, excluding non-recurring items, for the latest three full fiscal years and a minimum net income of P50 million for the most recent year. Companies with established profitability and cash flows that are consistent with their equity story will generally generate good valuations.Up and coming sectors and economies with good outlooks, such as those in mining and minerals due to the global demand for raw materials for batteries of electric vehicles, or technology companies in South Korea due to advances in artificial intelligence (AI), have had good valuations recently. Growing interest in critical minerals such as lithium and nickel are heavily influenced by environmental, social and governance (ESG) factors which has lately been a focal point for benchmarking companies’ potential. These conditions are hard to predict and are often “one without the other,” making it key for companies to prepare early to move fast when the right time and conditions come into play.DEFINING CORPORATE IDENTITY WHILE BUILDING A LASTING LEGACYOften characterized by tradition and family values, family businesses may hesitate to go public. The business-as-usual attitude must cease as companies will need to revisit and upgrade certain aspects of their operations, talent, performance measurement, and even redefine strategies.That is not to say that the family legacy and tradition are lost during the transition to being a public company. Family businesses need to tread this line carefully to ensure that what made them thrive in the past can be part of their current business narrative while adopting new ways of working. Family businesses will need to start the IPO readiness assessment as early as possible to know what needs to change and when. From detailed elements such as the operating or accounting manual to complex business processes such as entity-wide risk management or investor relations, they must assess their level of maturity to know what, where and when help is needed.A readiness assessment also enables aspiring family businesses to determine current structures and policies (i.e., operating policies and processes, financial and management reporting, data, systems and technology, risk management, etc.) that need to evolve to be future-fit, while retaining the rich history that defines the identity of the family business.STRENGTHENING PEOPLE AND PREPARING THE NEXT GENERATIONFamily businesses must assess how capable their current management teams are in leading them to their desired future. A compelling equity story and strong financials are futile without captains who can steer the ships. Strengthening the management team can include hiring experienced professional managers who are equipped with expansive business networks to help the company grow and thrive as a listed entity. Companies may need to create new positions to help grow and sustain their businesses or manage risks in navigating regulatory complexities and complying with securities laws.Companies must identify family members who can retain key leadership positions in critical areas of the business and in the board, as well as a succession plan that enables NextGen family members to train early in the ways of the business. Based on the 2023 EY and University of St. Gallen Family Business Index, only 13 out of 179 board seats (7.3%) for 17 family enterprises in ASEAN were occupied by NextGen family members, with practically zero NextGen on the boards of the four Philippine companies included in the study.Family businesses have rich histories and backgrounds which are integral to a compelling equity story. Company history can demonstrate the readiness of the company to navigate the future while defining what the company represents. A compelling equity story should be able to narrate the humble origins of the business and where it wants to go in the future.OPTIMIZING INFORMATION WITH THE RIGHT INFRASTRUCTURE AND TEAMOften, some IPO aspirants inadequately prepare their financial, management and tax reporting, with outdated legacy systems or predominantly manual reporting processes that cannot produce the required reports on a timely basis. Worse, private companies may not have a complete finance team capable of providing these reports and an IT team who can support these organizations.Prior to going public, these companies must be able to produce financial and non-financial reports with material business information within the required reporting timelines. During IPO, the Prospectus must include three years of annual audited financial statements, reviewed by the underwriters and approved by regulators. Post-IPO, annual and quarterly reports must be submitted to the Philippine Stock Exchange and SEC within the deadlines set.Suffice to say, these instances highlight the importance of an efficient and effective financial and management reporting process that can generate timely and reliable reports. Information reliability and relevance depends on whether the companies have the right infrastructure and team that can generate reasonably accurate corporate reports. The right infrastructure means that organizations need IT systems and policies that support how data is accumulated, recorded and reported so that management and the public can optimally use this information in making decisions. The right team does not only refer to competent manpower — it means a continuously trained talent pool, periodically replenished through strategic hiring.PROTECTING THE REPUTATION OF THE FAMILY BUSINESSGoing public raises the company’s profile, making it more visible among customers, partners, and potential business collaborators. This increased visibility exposes the public company to higher reputational risk, thereby increasing scrutiny on the family’s brand. Companies need to institutionalize enterprise-wide risk management and strengthen compliance to protect their reputation.Family businesses may seek guidance from third-party legal and business advisors to help their companies prepare. They must involve underwriters and regulators early to anticipate issues that may hinder the IPO. Family businesses must also be ready with alternative fund-raising activities in case the IPO is deferred or abandoned so that their growth objectives can remain on track.ASSESS, PLAN, EXECUTE — AND FOLLOW THROUGH!An IPO should not only be viewed as a one-time event focused on raising capital. It starts from the decision to do an IPO and transform the company before the listing happens. It is a meaningful journey for the companies and its owners which requires a paradigm shift from the entire organization that cannot be done overnight.The strategic decision of a family business to go public demands meticulous planning and near seamless execution. Post IPO, these family businesses must be able to deliver what they committed to investors. When done right, barring unanticipated unfavorable economic events, this beneficial corporate upgrade called an IPO should enable family businesses to sustain the value promised to both the family and public investors. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Kristopher S. Catalan is an assurance partner and the EY private leader of SGV & Co., and Patricia Jazmin D. Patricio is a Financial Accounting Advisory Services (FAAS) manager of SGV & Co.

12 February 2024

Aris C. Malantic and Julius Ivan L. Bautista

Transforming bold vision into a successful IPO journey (Second Part)

In this period of economic recovery, entrepreneurs are increasingly looking at initial public offerings (IPOs) as an avenue to raise additional funds. But in the face of economic and geopolitical headwinds, how can CEOs turn their bold vision into a successful IPO? In the first part of this article, we discussed how a company can start its IPO journey and the key factors to consider in order to succeed. However, now that we know what characterizes a successful IPO journey, CEOs need to ask if they are ready to deliver. Here, we discuss how the right IPO strategy and preparation can contribute to a successful IPO. IPO STRATEGYAn IPO strategy starts with an equity story that incorporates a well-built corporate strategy and a fine-tuned business plan. A corporate strategy focuses on the company’s long-term goals, an optimal group structure, and growth objectives, while a business plan defines how the company can compete within the market and seize new opportunities. With a well-polished IPO strategy, IPO aspirants can better evaluate their strategic options by deciding on potential multi-track approaches to listing and the potential listing venues, coordinating with external advisors and identifying the right capital market that will resonate with the company’s business sentiments and growth ambitions. A well-defined IPO strategy should be anchored on a holistic end-to-end view of the key milestones in an entity’s IPO journey — from strategic planning to IPO execution and after-market performance. This strategy is typically supported by a health check to identify any potential gaps within the company’s structures, finance function, environmental, social and governance (ESG) agenda, systems and controls, and investor relations. STRUCTURESOrganizational structures bind the teams working together towards a common goal and demarcate functions between them. Given an IPO’s transformational nature, aspirants should consider revisiting and reshaping their current structures where needed to support the efficient functioning of the organization as a public company. This might also entail re-evaluating the group structure, governance, ownership and corporate structure. IPO aspirants should reevaluate the group structure if the potential issuer or listing vehicle is part of a group. The group should define which company will be the potential issuer or listing vehicle, the country of registration, and its legal form. They must also assess which group structure is best positioned for listing through a transfer pricing analysis of current and future related party transactions. Governance structure reevaluation can start by assessing whether there is a defined set of regulations and documented policies and procedures, and whether these align with governance reporting requirements and provide adequate transparency and accountability to current stakeholders. Since company ownership will be opened to the public, current shareholders should assess the ownership structure, the optimal proportion the public will own, what types of investors they are planning to attract, and the corporate image they want to project since these potential investors can influence the strategy and direction of the company post-IPO. Corporate structure should also be reassessed to let potential investors identify each business unit or department’s level of responsibility and accountability. A well-defined corporate structure separates management and ownership roles. Internally, the structure should also allow CEOs to articulate the business plan to the group organization, how the IPO affects employees, and how business operations will be adjusted prior to and upon realization of the IPO transaction. FINANCIALIPO aspirants must look at the finance organization through the lens of public markets even before they go public. Depending on the listing venue, changes to generally accepted accounting and financial reporting principles currently being applied may be required in preparing the financial statements. Companies need to check if the current finance infrastructure and processes can produce timely financial reports, as these are vital in building investor trust and confidence. As regulations on financial reporting vary across jurisdictions, a well-functioning financial statements close process that is supported by a capable mix of resources with the appropriate skills are necessary in responding to expanded reporting requirements. Potential public and institutional investors will also consider the company’s external auditor. Appointing a credible external auditor will help improve investor confidence in the financial reports of the company. External advisers can provide objective viewpoints that can help in addressing any financial reporting gaps that the company may have overlooked in previous periods to optimize the finance function. ESG AGENDAIn the Philippines, the ESG agenda is emerging as an important element for stakeholders in the IPO stage. Investors have started to consider ESG factors when making investment decisions, along with a company’s financial performance, resilience, and ability to sustain operations during adverse situations. Public companies are required to disclose their sustainability efforts as well as include their plans to further improve performance and achieve their ESG targets. Companies can ensure compliance with sustainability principles by engaging advisers with an ESG background. Regulators also continue to develop and standardize climate disclosures required of public companies, such as the Securities and Exchange Commission’s (SEC) Revised Sustainability Reporting Guidelines and the Sustainability Reporting Form, to keep up with global developments around sustainability reporting. SYSTEMS AND CONTROLSIPO aspirants should revisit their enterprise-wide systems and controls to identify potential weaknesses and opportunities for improvement. Continuous process improvement should be implemented to ensure that the systems and controls are effective in capturing and mitigating potential risks, especially in a growing business operations setting. Entity-level controls, information technology (IT) general controls, and business processes controls should be documented properly to ensure they can support the requirements of a public company. An effective internal audit function should be in place, performing as intended in the organization’s overall control framework. Internal audits can focus on areas such as the effectiveness of the company’s internal controls, corporate governance, and accounting processes. Internal audits also help the company in its continuous process improvement efforts. INVESTOR RELATIONS AND COMPLIANCE FUNCTIONSA company’s investor relations function facilitates two-way communication between the company’s corporate management and its investors. It also enables the integration between finance, communication, marketing and legal functions. Critical information provided by the investor relations function includes press releases, earnings reports, and analyst briefings which contribute to a transparent relationship between the company and its stakeholders. They help ensure that shareholder concerns and interests are also communicated to management and the board. Further, the investor relations function cohesively monitors the company’s stock price, performance, competitive position, and public image. An investor relations officer normally reports to the company’s Chief Financial Officer (CFO) or Treasurer who has the primary responsibility over investor relations. Meanwhile, the compliance function becomes even more relevant due to the additional regulatory requirements for a publicly listed company. These include regular reporting and ad hoc disclosures such as information on mergers and acquisitions, changes in leadership, legal issues, and significant sales or purchases of assets. TIMINGAppropriately timing the market can result in a win-win situation by providing optimal valuation and IPO proceeds for the company, and investment returns for IPO investors. IPO aspirants must be able to communicate a realistic timeline to the entire IPO team and set milestones tracked by a Project Steering Committee and a Project Management Office (PMO). The PMO ensures that the IPO project has enough resources throughout the IPO process, monitoring the strength and buoyancy of capital markets, current economic indicators, and company performance. Some companies decided to postpone or withdraw IPO plans due to market volatility, after-market performance of previous IPOs, and geopolitical uncertainties. In such cases, contingency plans are necessary to achieve the right timing — especially when the market reaches its ideal state for IPO listing. The PMO should be able to assess when to execute these contingency plans and consider the multi-track approach designed during the evaluation of the company’s IPO strategy. IPO TRANSFORMATIONStarting the IPO journey does not mean immediately closing any gaps found during preparation. Instead, it presents the organization with an opportunity to identify them, prioritize which gaps require immediate action, and plan how to close gaps which can affect the company’s valuation before and post-IPO. Our accumulated experience in supporting IPO aspirants tells us that IPO journey must be approached as a structured, managed transformation of the people, processes, systems and culture of an organization. Through careful planning and consideration of these factors, companies will be better equipped to transform their bold vision for growth into a successful IPO. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Aris C. Malantic is a partner and the Financial Accounting Advisory Services (FAAS) leader and Julius Ivan L. Bautista is a FAAS associate director of SGV & Co.

05 February 2024

Aris C. Malantic and Jerwin C. Esquibel

Transforming bold vision into a successful IPO journey (First Part)

First of two parts As the economy continues to recover, many entrepreneurs are contemplating how to raise funds through an initial public offering (IPO) and level up their game. Chief executive officers (CEOs) envision growth and set new goals such as investing for innovation, increasing brand awareness, and improving their companies’ credit worthiness. In the face of current economic and geopolitical headwinds, rather than asking whether the markets are ready for IPO aspirants, the key question for CEOs pursuing their bold vision is, “What can we do to achieve a successful IPO journey?” The IPO journey is more than just a financing event — it should be approached as a transformational process. Because this has to be a structured and managed transformation of the people, processes, systems, and culture of an organization, it is crucial for CEOs to perform an IPO readiness assessment and consider the following critical success factors to transform their bold vision into a successful IPO journey. EVALUATING STRATEGIC OPTIONSEven if a company assesses that the current environment is not ideal for fundraising, it can serve as an opportunity to plan and prepare for an IPO or any other strategic transaction. While waiting for significant markets and geopolitical uncertainties to settle, executives can embark upon their IPO journey. Planning for an IPO involves a holistic discussion about the strategic options offered by the capital market. An IPO aspirant needs to design a multi-track approach that covers the options for listing (either direct or dual and secondary listing) as well as other financing methods such as private capital, debt, or a trade sale. Considering an array of exit and funding alternatives in an IPO readiness assessment is critical to achieve flexibility in the timing and pricing of alternatives and to exploit narrow IPO windows. EARLY PREPARATION IS KEYIPO aspirants should begin the IPO readiness process early to allow the pre-listing company to act and operate like a public company at least a year before the IPO. The preparation can start with a comprehensive IPO readiness assessment as a first step, ideally over a 12- to 24-month timeline. The IPO readiness assessment will serve as a diagnostic phase so that CEOs can identify opportunities for the transformation of certain key focus areas. The IPO readiness process also includes building a strong IPO team with members from management, the board, and external advisors, among others. External advisors can be composed of bankers, lawyers, auditors, and investor relations advisors. Assembling a powerful team begins from top management. Institutional investors will look to the CEO, who is mainly responsible for articulating and executing the company’s vision and business strategy, while the chief financial officer (CFO) will likely be focused on investor relations in a public company. A quality management team should also ideally include executives who have experience in IPOs and managing public companies. TAKING ON AN INVESTOR’S PERSPECTIVEA successful IPO can be characterized by a compelling equity story that captures the appetite of institutional investors. Hence, it is vital for CEOs to approach their IPO journey from an institutional investor’s perspective. Institutional investors mainly influence the movement in stock prices and include mutual funds, hedge funds, banks, insurance companies, pension funds, larger corporate issuers and other corporate finance intermediaries. IPO aspirants need to recognize the need for enhanced corporate governance, recruiting qualified non-executive board members, improving internal controls, and forming a qualified audit committee. This also includes the need to fine-tune internal business operations through working capital management, proactively addressing regulatory risks and rationalizing the business structure. Given the increased stakeholder demand for sustainability, IPO candidates must also be able to clearly articulate and demonstrate an embedded environmental, social and governance (ESG) strategy and culture, from climate change mitigation initiatives to promoting board and management diversity. STRONG PERFORMANCE TRACK RECORDInvestors usually base their IPO investment decisions on financial factors, especially debt to equity ratios, revenues, return on equity (RoE), profitability and earnings before interest, taxes, depreciation, and amortization (EBITDA). This also includes the capability of IPO candidates to comply with new financial and sustainability reporting standards and securities regulations. IPO investment decisions may also be based on non-financial factors, including the quality of management, corporate strategy and execution, brand strength and operational efficiency, and corporate governance. IPO candidates should also focus on profitability and cash flows or articulate a clear path to profitability. They must craft a compelling equity story backed by a strong track record of growth that sets their company apart from their peers while maximizing value for their stakeholders. TRANSFORMATIONAL IPO JOURNEYAlthough an IPO is a key turning point in the life of a company, market leaders should not treat an IPO as a one-time financial transaction — they must approach it as one defining step in a complex transformational journey from a private to a public company. While IPO aspirants need to be cautious given the challenging capital market environment, CEOs must focus on preparing an equity story that addresses the concerns of institutional investors. This transformational process begins with IPO readiness and ample internal preparation, aiming towards a successful IPO journey even with the fleeting market window of opportunity. The second part of this article will discuss additional elements that can contribute to the success of an IPO journey. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Aris C. Malantic is a partner and the Financial Accounting Advisory Services (FAAS) leader, and Jerwin C. Esquibel is a senior director under FAAS of SGV & Co.

29 January 2024

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

How agile corporate reporting builds confidence

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

22 January 2024

Benjamin N. Villacorte

Strategies to achieve a sustainable future

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

15 January 2024

Benjamin N. Villacorte

How climate risk reporting can turn ambition into action

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

08 January 2024

Wilson P. Tan

Risk and resilience in 2024

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

2024