Suits the C-Suite

06 November 2023

Noel P. Rabaja

Strategizing for sustainable development

Public policies attempt to fulfill one or more of the following objectives: efficiency, equity, and stability. Efficiency and stability are necessary conditions for sustainable growth while equity helps make development inclusive.This is the second article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors.In this article, we will discuss the Philippine strategy for sustainable development.GROWTH THROUGH TRADE AND INVESTMENTThe Philippine Development Plan (PDP) 2023-2028 aims for a deep economic and social transformation to reinvigorate job creation and accelerate poverty reduction by steering the economy back to a high-growth path. In this regard, two main performance indicators are identified and will be monitored by the National Government.The first is for the country to graduate into upper middle-income class status within the term of the current administration. For this, the economy must grow its per capita income above the threshold set by the World Bank, which means a gross national income (GNI) per capita of at least $4,466. In 2022, the Philippines achieved a GNI per capita of $3,950.The second is to lower the poverty level from 18.1% in 2021 to single digits by 2028 — the end of the term of the current administration. Both indicators require high growth rates. For the next year through 2028, the government pencils the growth rate between 6.5% and 8%.Growth is expected to be investment-led with the implementation of structural changes such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, which lowered the corporate income tax rate, and the amendments to the Public Service Act (PSA), Foreign Investment Act (FIA), and Retail Trade Liberalization Act (RTLA), which further liberalized the economy. The new legislation is expected to attract more local and foreign investment, especially in the liberalized sectors. For the energy sector in particular, amendments to the PSA are envisioned to help raise the capital needed to speed up the energy transition of the country to renewables.In addition, the Regional Comprehensive Economic Partnership (RCEP), a trading bloc that encompasses the ten members of the Association of Southeast Asian Nations (ASEAN) and the ASEAN Plus One Free Trade Agreement (FTA) partners Japan, China, South Korea, Australia, and New Zealand, is already in force for the Philippines, helping ease market access through trade and investment rules and supporting global and regional supply chains. The Philippines can potentially position itself as a regional manufacturing hub if the right incentives and policy measures are put in place to encourage local and foreign investors to participate. Together, trade and investment are expected to play an important role in attaining economic transformation, the second goal of the PDP.HUMAN CAPITAL AND INFRASTRUCTUREThe ability of people to take advantage of market opportunities arising from investment rests on human capital. To this end, the first goal of the PDP is social transformation which includes, among others, sustained expenditure on social services, mainly education, health, and social protection.The first two goals of the PDP help attain the developmental objectives of efficiency and equity, which rest on the pillars of sustainability and resilience. The third fosters societal resilience: an enabling environment encompassing institutions, macroeconomic stability, and the physical and natural environment.Institutions are vital to economic acceleration, which is why the government’s steps to enhance the ease of doing business are most welcome. Infrastructure development also enables an economy to sustain higher levels of growth, which, in turn, catalyzes yet more investment. The Public-Private Partnership (PPP) Act is up for the signature of President Marcos and, if approved, is expected to further enhance the business atmosphere in mobilizing private resources for infrastructure development.The government aims to sustain its infrastructure program at 5-6% of GDP through 2028 amid a six-year medium-term fiscal framework. This plan gradually narrows the deficit to 3% of GDP by 2028, down from 7.3% in 2022, such that the debt-to-GDP ratio is reduced from nearly 61% in 2022 to a more sustainable level of at most 53% by 2028.DEBT MANAGEMENTThe National Government’s debt was less than 40% before the pandemic struck. It expended much of its fiscal space combatting the pandemic, incurring debt and large budget deficits. While the current 61% debt-to-GDP ratio may be manageable for an emerging economy like the Philippines for some time, the country may not have the fiscal space to respond to another potential domestic or external shock. If the debt continues to rise more than the economy, risks will increase, and the government may “crowd out” private investment as it competes with the private sector for funds to service its debt.The planned fiscal consolidation entails harmonizing the revenue needs with the promotion of investment through the structure and administration of the reformed incentive system. The National Government plans to raise more revenue to finance the country’s socio-economic needs, largely through a progressive and simplified tax system, more efficient and effective tax collection measures through digitalization and, to some extent, from policy measures such as value-added tax on digital service providers and excise tax on sweetened beverages and junk food.Achieving fiscal stability presupposes the sustainability of fiscal policy, and fiscal stability helps “crowd in” private investment.PRICE STABILITY AND INFLATIONIn his second State of the Nation Address (SONA), President Ferdinand Marcos, Jr. singled out inflation as the country’s most pressing problem. In the first nine months of 2023, inflation averaged 6.6% — far above the upper end of the target range of 2-4% set by the BSP. If left unchecked, inflation could undermine growth. Not only does this increase costs to organizations, but it also sets in motion second-round effects as workers start demanding higher wages, consequently increasing business costs and discouraging investments.Inflation is partly driven by supply-side issues and the government is allocating more resources to the agriculture sector to boost production. Mr. Marcos also mentioned that the National Government had distributed 28,000 new tools and machinery to farmers. An additional 600 km of farm-to-market roads were laid down to support the 14 million hectares of farmland, enhancing farmer access to markets. In addition, he signed Executive Order No. 28 in May, forming the Inter-Agency Committee on Inflation and Market Outlook, which is tasked to keep inflation within government targets and boost the economy.ENHANCING CLIMATE RESILIENCEWhile price stability and fiscal sustainability are important macroeconomic issues, environmental sustainability is increasingly gaining importance. Climate change uncertainties and challenges need to be managed and both the Philippine government and the private sector are hard-pressed to deliver their commitments to addressing them. Despite climate change risks, the Philippines has the opportunity to position itself as a prime destination of foreign investments against climate change or environmental, social, and governance (ESG) investments.The government calls for embedding resilience, sustainability, and nature-based solutions in infrastructure planning and investment to enhance climate resilience. Likewise, investments in renewable energy are expected not only to enhance energy security but also reduce greenhouse gas (GHG) emissions.From an economic vantage point, GHG emissions are economic “bads” and are a cause of inefficiency as they get over-produced. Their effects, however, go beyond national borders, and while the Philippines contributes minimally to global GHG emissions, the World Risk Index 2022 report identifies the Philippines as the most disaster-prone country in the world.The government envisions that by 2028: (1) Climate and disaster risk resilience of communities and institutions will increase (2) Ecosystem resilience will be enhanced, and (3) A low-carbon economy transition is enabled.To ensure that these are realized, the government is set to safeguard cross-sectoral convergence and implement a comprehensive risk management approach to address the adverse consequences posed by climate change. It will also promote a green and blue economy coupled with improved governance to guarantee long-term climate and disaster resilience.BUILDING RESILIENCE THROUGH SUSTAINABLE DEVELOPMENTComing off from the pandemic and with the current global economic climate, it is opportune for the government to proactively drive for actionable policies and programs that focus on building the resiliency of the economy through sustainable development with greater emphasis given to addressing climate change.Navigating external and domestic economic headwinds will not be an easy feat for the administration, but the private sector will be an important catalyst for sustainable development. With the private sector sharing industry knowledge, resources and potentially even leading certain socio-economic programs and projects of the National Government, it is to be hoped that AmBisyon Natin 2040 of long and healthy lives for Filipinos that are strongly rooted, comfortable, and secure will be achieved.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.Noel P. Rabaja the Strategy and Transactions (SaT) service leader of SGV & Co.

30 October 2023

Fabian K. Delos Santos

Tax conversations with C-Suites

In a world that has to address the risks posed by climate change, social inequity, financial instability and other disruptions, companies are becoming increasingly conscious about the importance of corporate responsibility, with a particular focus on the sustainability agenda. Companies have recognized the need to take urgent social and environmental action and have started laying down a long-term sustainability strategy interwoven with building long-term value.Investors are now looking at the sustainability policies of target companies when deciding where to invest. Regulators have become more critical, intending to encourage businesses to genuinely green their operations. Consumers are beginning to consider the sustainability-related activities of companies when flexing their purchasing power, actively choosing more sustainable options despite higher price points.Sustainability is defined as the balance between the economy, environment, and equity and is usually referred to as the ability to maintain or support a process continuously over time. The UN World Commission on Environment and Development defines sustainable development as progress that “meets the needs of the present without compromising the ability of future generations to meet their own needs.” In today’s business world and in the process of being sustainable, companies ought to make use of scarce resources responsibly.This is why sustainability, and how a sustainable and effective tax ecosystem can advance it, was a key focus for the recently held 2nd SGV Tax Symposium. We see that Tax and Sustainability are critically connected in achieving our Tax Vision, where we foster transparency, inclusivity, and responsible tax practices, working with the regulators to create a level playing field that benefits businesses, individuals, and our communities.With a strong and efficient tax system, governments and regulators have the resources to promote incentives, policies and regulations that strengthen the country’s sustainability programs. In turn, when the country moves along a more sustainable and efficient socio-economic path, it creates more opportunity for increased tax revenue and compliance from responsible private and corporate citizens.We can already see this in some jurisdictions where governments are encouraging citizens and businesses to make the necessary changes in lifestyle, manufacturing, packaging, and purchasing decisions that help meet sustainability targets. At the same time, governments have been leveraging indirect tax policies to help achieve sustainability targets. It is not uncommon for governments to use both the policy stick (i.e., carbon levies, plastic packaging, excise taxes, waste management fees) — and carrot (i.e., incentives) for sustainable development.During the Conversation with C-Suites panel at the 2nd SGV Tax Symposium, executives from the real estate, investment management, and mining sectors emphasized how their respective industries promote sustainability.Robinsons Land Corp. (RLC) Chief Financial, Risk, and Compliance Officer, Kerwin Tan, discussed how the real estate business spearheads sustainable solutions in its operations. In RLC, this includes integrating solar and other renewable energy across all Robinsons malls, transitioning to LED lights, revolutionizing workspaces, and embracing digital transformation by developing mobile applications and portals that will provide easy access to Robinsons’ products and services. Their stakeholders, which include customers, tenants, and employees, are at the forefront of providing these strategic, sustainable solutions. To measure the positive impact of these projects, RLC has a data management system that allows it to effectively record the changes in its energy consumption.Meanwhile, President and Chief Executive Officer of Global Ferronickel Holdings, Inc. Dante Bravo said that the mining sector, on a macro level, is currently focused on sustainability. Mr. Bravo said Global Ferronickel has embedded environmental management solutions in its mining operations, from the clearing of vegetation, stripping of topsoil, mining, truck loading and hauling, and stockpiling, among others. He added that the company continues to adhere to global environmental standards (e.g., ISO certifications) and continues to develop and support host and neighboring communities with health assistance, educational and livelihood programs, and employee welfare, among others.While the panelists appreciate and recognize the current actions of the government in promoting sustainability, they also felt that more can be done to promote sustainability goals in various sections of the economy. The panelists agreed that the government should consider granting even more incentives, in addition to the current benefits already granted by current law, to encourage more businesses to invest in sustainable projects. It was further emphasized that this initiative should be viewed as a long-term investment that will make the country more competitive, attracting more investment, which in turn will translate to revenue via compliance and payment of taxes.The sustainability journey itself may be challenging, but the required results must be delivered sooner rather than later. Many have taken the first steps to design tax frameworks and risk management methodologies to accelerate the transition. Organizations should adjust their strategies, stay abreast of policy uncertainty, and ensure that they drive corporate sustainability to create long-term value. 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. or EY.Fabian K. Delos Santos is the head of Tax of SGV & Co.

23 October 2023

Joseph Ian M. Canlas

Accelerating sustainability with green IT

Digital technology is crucial to achieving important goals that include fulfilling compliance requirements, meeting the reporting needs of stakeholders, and implementing operational changes within an organization to meet environmental, social, and governance (ESG) and sustainability targets.The global push to achieve the 2050 net-zero target has resulted in an increased awareness of the role of IT in accelerating sustainability. According to the EY Reimagining Industry Futures Study 2023, which was based on an online survey of 5G perceptions among 1,325 enterprises worldwide, 54% of businesses believe that emerging technologies can play a vital role in this effort.The Exponential Roadmap 1.5.1, developed by the Exponential Roadmap Initiative, an accredited partner of the United Nations’ Race to Zero campaign, outlines a path to reach net zero emissions from businesses by 2030 through natural climate solutions. The information and communications technology (ICT) sector has the potential to reduce global carbon emissions by 15% and 35% directly and indirectly by 2030.While the use of digital technology is crucial for sustainability, it is equally important to prevent it from becoming a major contributor to global emissions. The adoption of new technologies could lead to increased energy consumption, hindering progress towards emission reduction targets.THE NEED FOR GREEN ITGreen IT refers to IT products and services that help organizations reduce their environmental impact, such as the issue of IT energy consumption. For example, the International Energy Agency says that data centers and data transmission networks were responsible for nearly 1% of energy-related GHG emissions in 2020. Green software, which incorporates low-carbon principles in software development and utilization, is also an important green IT practice. While the software itself does not emit carbon, it influences energy consumption.E-waste already poses environmental risks due to hazardous substances that include mercury, lead, and cadmium, which are capable of contaminating air, water, and soil. E-waste disposal adds to the ICT sector’s greenhouse gas emissions. In 2019, there were 53.6 million tons of e-waste, which could rise to 74.7 million tons by 2030, according to Statista. In addition, the mining and extraction of these materials further contribute to soil erosion and deforestation, emphasizing the need for effective material reuse and waste processing.The ICT sector can innovate green IT and maintain a net positive impact by implementing sustainable practices throughout its value chain, covering energy efficiency and sustainable supply chains.Furthermore, organizations can drive the positive impact of green IT and software by fostering an ecosystem of collaboration among stakeholders in the value chain, involving the following key players in the mix: technology providers, technology buyers, governments and other regulatory authorities.TECHNOLOGY PROVIDERSTechnology companies, ranging from global leaders to startups, are actively increasing their focus on green IT innovation and offerings to meet the growing demand and expectations in the market. As they do so, they have the responsibility to manage and disclose their carbon footprints to comply with regulatory requirements and standards, encompassing scope 1 to scope 3 emissions that result from the production and use of their technologies.Industry groups consisting of technology providers are in a favorable position to establish standards and best practices within the sector, like prioritizing energy-efficient hardware, e-waste management, and the sustainable procurement of IT equipment. Additionally, they can proactively collaborate with governments to develop policies that promote the adoption of green IT.In the Philippines, a related law is the Renewable Energy Act of 2008, which encourages the adoption of energy-efficient technologies across various sectors. There is a need for more local green-IT-specific laws or policies. Accordingly, the country would benefit from formal studies identifying green IT-related gaps and opportunities. Technology providers can incorporate green IT principles into their product and service designs to reshape the future of the IT landscape, positively impacting society and the environment.TECHNOLOGY BUYERSAs sustainability becomes a central part of an organization’s core strategies, companies are actively seeking suitable technologies, digital platforms, and applications to support their sustainability and ESG goals. While their main focus is on selecting technologies that meet sustainability requirements and tackle sustainability challenges, it is crucial for them to also consider the potential environmental impact of implementing these technologies on a larger scale.Forward-thinking and innovative companies that prioritize sustainability in their business strategies include green IT implementation in their roadmap for sustainability transformation. They must integrate green IT principles into a robust and sustainable sourcing and procurement framework while carefully choosing technology providers from the request for proposal process onwards. They may even take the extra step of adopting an internal carbon pricing mechanism to ensure that strategic decisions align with their climate ambitions. By generating market demand for green IT, these companies can drive innovation in future green IT landscapes.GOVERNMENTS AND OTHER REGULATORY AUTHORITIESGovernment and regulatory authorities also play a crucial role in driving the adoption of green IT to accelerate the transition to a sustainable future, keeping in mind the following priorities:• Provide detailed action plans with clear accountability.• Improve the design and implementation of green initiatives.• Incentivize the market and implement mandatory changes.• Increase funding to promote innovation.• Serve as a role model for other sectors of the economy.• Promote a people-centered approach involving the whole of society.Governments that have mature regulations and standards for sustainability can take the lead in implementing strategies within their organizations and departments. For instance, the United Nations, through its specialized agency, the International Telecommunication Union (ITU), establishes standards, guidance, and criteria for ICT organizations on setting net zero targets and strategies.THE SIGNIFICANCE OF GREEN ITThe adoption of green IT and software by both organizations and societies will have a significant bearing on global sustainability ambitions. By nurturing a collaborative system of stakeholders within the value chain, organizations can benefit greatly from green IT and software. 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.Joseph Ian M. Canlas is a consulting partner and part of the Climate Change and Sustainability Services team of SGV & Co.

16 October 2023

Lester Jeff D. Pawid and Mary Andrea T. Bacani

How RCEP impacts ASEAN supply chains

The Regional Comprehensive Economic Partnership (RCEP) came into force for the Philippines in June. The RCEP is a trading bloc comprising the members of the Association of Southeast Asian Nations (ASEAN) and ASEAN Plus One Free Trade Agreement (FTA) partners Japan, China, South Korea, Australia, and New Zealand. According to the RCEP text, one of the agreement’s objectives is to “establish a modern, comprehensive, high-quality, and mutually beneficial economic partnership framework to facilitate the expansion of regional trade and investment and contribute to global economic growth and development…”This is the fourth article in a supply chain series that looks at reimagining the integrated supply chain. This article will discuss how the RCEP may impact supply chains in the ASEAN.RCEP’S VALUERCEP builds on and updates the existing ASEAN Plus One FTAs and considers important trade realities, such as competition and the interdependency of value chains. It covers areas not previously included in the individual ASEAN Plus One FTAs, such as intellectual property, e-commerce, competition, small- and medium-sized enterprises (SMEs), and government procurement.RCEP also recognizes the diversity of its members in terms of development level and provides technical cooperation and capacity building to support the implementation of the Agreement, with the intent to make it more beneficial for all entities involved. In addition, RCEP is seen as a high-quality agreement as it eases market access through trade and investment rules and supports global and regional supply chains.RCEP AND SUPPLY CHAINSRCEP has the potential to support and ease regional and global value chains. The updated trade deal further lowered tariff rates or accelerated the reduction thereof. Furthermore, it commits the members to a single set of Rules of Origin (ROO), the criteria to determine the national source of a product. ROOs determine whether products are eligible for preferential treatment under trade agreements, much like a passport indicates the nationality of a visitor and, therefore, whether the holder is eligible to enter a country visa-free by treaty rules.A significant provision is cumulation, which allows an RCEP firm to count inputs or goods from other RCEP partners as local content to meet ROO requirements. The regional value content (RVC) is closely related to ROOs because it helps determine the minimum percentage of regional value a product must have to qualify for preferential trade treatment. For example, if the RVC is set at 40% of the free-on-board price, an RCEP firm can include inputs from other RCEP partners to fulfill this requirement. Meeting the requirement allows the firm to enjoy preferential tariff rates when exporting to other RCEP countries. Otherwise, higher most-favored-nation (MFN) rates will apply.BUSINESS OPPORTUNITIESAccording to figures from the Philippine Statistics Authority, the Philippines sources about 70% of its imports from and ships half of its exports to the rest of the RCEP membership. This suggests that the new trading bloc is both a source of materials and a market for produce at the same time.Accounting for nearly a third of the global population and output, the new trading bloc is now the largest in the world. Furthermore, RCEP is also the first FTA that jointly covers China, Japan, and South Korea. For firms along regional supply chains, savings come in the form of zero or substantially lower tariff rates when importing inputs from and exporting produce to the RCEP.Firms intending to benefit from RCEP’s preferential tariff rates should consult issuances of various national customs bodies. Some ancillary documents may be required, covering direct consignment, third-country invoicing, and back-to-back certificates of origin. Firms should consider the administrative costs of compliance and compare them with the incremental benefits arising from the difference between MFN and preferential rates.RCEP IN THE PHILIPPINESOverall, RCEP could have developmental implications for the Philippines. When large exporting firms partner with SMEs at the enterprise level, the latter are also effectively participating in and benefiting from regional supply chains.At the macroeconomic level, RCEP can help stimulate growth. RCEP’s effectivity coincides with significant structural reforms like the Corporate Recovery and Tax Incentives for Enterprises, which lowered the corporate income tax rate, and the amendments to the Public Service Act, Foreign Investment Act, and Retail Trade Liberalization Act, which further liberalized the economy. The government is also pursuing an infrastructure program that amounts to 5-6% of GDP. These bode well for investment-led growth.Continuous infrastructure investment and development can strengthen the Philippine link to regional and global supply chains. In the 2023 edition of the World Bank’s Logistics Performance Index, the Philippines scored 3.3 out of 5, up from 2.9 in 2018. This improvement may be attributed to the increase in the infrastructure score from 2.73 in 2018 to 3.2 in 2023.Altogether, structural reforms, infrastructure programs, and improved regional market access provided by RCEP can help the country bid for more export-driven growth. 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.Lester Jeff D. Pawid is a Strategy and Transactions (SaT) Senior Manager and Mary Andrea T. Bacani is a Supply Chain and Operations (SCO) Senior Manager of SGV & Co.

09 October 2023

Benjamin N. Villacorte and Mary Andrea T. Bacani

How green supply chains create long-term value

Historically, sustainability was a “nice-to-have” item for executive boards. However, in recent years, environmental, social, and governance (ESG) considerations have gained considerable momentum. ESG is now far from being mere boxes to check for compliance purposes, with topics like sustainability becoming ever prominent and essential agenda items in boardroom discussions.A focus on ESG is imperative for organizations as it enables them to effectively manage risk, meet stakeholder expectations, drive cost savings and efficiency, and gain a competitive advantage. By integrating ESG practices into their supply chains, business leaders can navigate risk and disruption, future-proof their organizations, and create a positive impact on the environment.Most of a company’s carbon emissions commonly stem from its supply chain, primarily through manufacturing and logistics operations. As a result, this crucial aspect of business faces mounting pressure to meet progressively ambitious sustainability goals.This is the third article in a supply chain series that previously looked at reimagining the integrated supply chain. This article will discuss how green supply chains can help create long-term value.ESG AND GREEN SUPPLY CHAINSGreen supply chains refer to the implementation of sustainable and environmentally responsible practices throughout the supply chain process. The process involves integrating eco-friendly initiatives into various stages — including sourcing raw materials, manufacturing, packaging, and distribution. “Green” here pertains to the environmental considerations of the supply chain, and “sustainable” covers the social and economic perspective of the business.ESG and green concepts in the product design up to end-of-life management should also be incorporated to enhance environmental sustainability. By integrating ESG principles, companies prioritize environmental impact, social responsibility, and strong governance throughout their operations.ESG and green supply chains are closely related, with ESG considerations forming the base of developing and implementing sustainable practices within supply chain operations. Although a green supply chain addresses only the environmental side of ESG, a sustainable supply chain encompasses the environmental, social, and governance principles of ESG. Green supply chains embody the practical implementation of ESG principles by reducing carbon emissions, minimizing waste, and adopting sustainable technologies and practices.A key part of ESG performance is to commit and take action toward a sustainable supply chain. This starts with ensuring interconnectedness and transparency in the whole of operations as well as collaboration with suppliers in adhering to green and ethical standards. Greening the supply chain brings value not just by reducing environmental pollution and waste but also by enhancing operational performance through improved production costs and asset utilization. This also builds positive brand awareness and reputation as consumer behavior shows a preference for companies or products that value their impact on the environment and society.The relationship between ESG and green supply chains is symbiotic. ESG provides the framework and guiding principles, and green supply chains concretize those principles within the supply chain to drive sustainable and responsible outcomes.SUSTAINABILITY POLICIESSince the Philippine SEC mandated sustainability reporting, companies that identify supply chains as one of their material topics are required to disclose their ESG initiatives in compliance with their reporting framework/standards used. This promotes transparency and accountability, empowering employees, customers, suppliers, investors, business partners, local communities, legislators, regulators, policymakers, and other stakeholders to make informed decisions as well as contribute to the management of companies’ economic, environmental and social impacts.In addition, Republic Act No. 11898, also known as the Extended Producer Responsibility (EPR) Act of 2022, requires obliged enterprises to establish their own EPR programs. Obliged enterprises have been given the responsibility of managing their products throughout their lifecycles, starting with plastic packaging covered in the Act, with a potential expansion of coverage in the future. The EPR Act was covered more extensively in a previous C-Suites article titled “Understanding the implications of the EPR Law.”The Philippines also has the Green Jobs Act of 2016, which promotes the creation of “green jobs” or employment that contributes to environmental preservation. Under RR No. 05-2019, businesses that offer green jobs are granted an additional deduction equal to 50% of the total expenses for skills training and research development. Moreover, the law provides that capital equipment that is directly and exclusively used in the promotion of green jobs may be imported free of taxes.Treating ESG as secondary can deter organizations from meeting their strategic objectives, including the potential loss of business opportunities and investment capital. Companies can improve their operational processes and drive cost reductions by enhancing environmental sustainability and overall ESG performance across the supply chain.KEY ESG INITIATIVESCreating a green supply chain is a manifold process. First, assessing the materiality of sustainability issues at the outset is essential, focusing on the most pressing concerns. This systemic approach allows for a targeted way to address these issues. Second, organizations should establish their strategic objectives — aligning resources, structures, and processes to sustainability imperatives identified in the initial assessment.Leadership buy-in and board oversight are crucial for consistent direction and support throughout the business. Management and suppliers should receive training in market practices, expanding sustainability goals beyond direct operations to encompass all levels of the supply chain.Deploying technology can enhance accountability and transparency, allowing for better monitoring and reporting. Moreover, leveraging buying power and influence can facilitate supply chain sustainability.Finally, organizations should consider disclosing supply chain information beyond siloed sustainability reporting mechanisms, promoting transparency, and encouraging industry-wide progress.THE FUTURE OF SUSTAINABLE SUPPLY CHAINSGreen supply chains have emerged as a critical driver of long-term value for organizations. Companies can reap a snowball effect of benefits by prioritizing sustainability and integrating environmentally responsible practices and technologies into their supply chain operations. Internal ethical leadership and support, as well as considerations of different external drivers such as customers, suppliers, and social and regulatory requirements are vital factors in integrating sustainability in an end-to-end supply chain.Not only do green supply chains help address disruption, mitigate risk, and enhance reputation, but they also drive operational efficiency, cost savings, and access to capital. Integrating a social and economic perspective to transition to a sustainable supply chain also contributes significantly to the competitiveness, long-term profitability, innovation, differentiation, and societal impact of companies.By taking this holistic approach to sustainable supply chains, organizations can pave the way toward a greener, more resilient future.The next article in this series will discuss how the Regional Comprehensive Economic Partnership (RCEP) may impact supply chains in ASEAN. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Benjamin N. Villacorte is a climate change and sustainability services partner and Mary Andrea T. Bacani is a Supply Chain and Operations (SCO) senior manager of SGV & Co.

02 October 2023

Jan Ray G. Manlapaz and Mary Andrea T. Bacani

Reimagining the digital supply chain

In recent years, there has been a substantial change in the global landscape of supply chains. Companies are dealing with a wide range of challenges that are changing the way they see supply chain strategy, from geopolitical conflicts to digital disruptions and pressures from climate change and the sustainability agenda. A new paradigm reimagining supply chains is emerging in reaction to these disruptions, forcing businesses to reconsider their existing strategies and adopt a comprehensive approach to capitalize upon new opportunities while ensuring resilience.Because of this, traditional and analog supply chain strategies may no longer be capable of effectively responding to supply chain shocks. Instead, an agile, digital supply chain consisting of intelligent monitoring, real-time data visibility and management, and crisis and exception management frameworks, among other things, can be a massive game-changer. However, there are no shortcuts to the digital transformation of the supply chain, as merely adding technology to existing supply chain management systems and processes for the sake of supply chain digitalization will not deliver the real value that businesses desire.This is the second article in a supply chain series that previously looked at integrated supply chain planning.SUPPLY CHAIN CHALLENGESAccording to an EY report, exponential data growth is another fundamental problem that continues to overwhelm most businesses at an accelerated pace. Companies that can effectively navigate the increasing complexity of new digital business models will be able to maintain a competitive advantage, but companies that are unable to do so will inhibit their ability to derive meaningful insights, leading to a barrier to achieving automation and efficiency.The disruption brought about by digital technology has significantly reshaped supply chains, accelerating supply chain digitalization. According to the Evolution to Revolution: MHI Annual Industry Report, 78% of supply chain executives in the study acknowledge the revolutionary value of digital technologies. The whole supply chain will benefit from the new opportunities for efficiency improvements as well as improved decision-making brought forth by this shift toward digitalization.Digital supply chain reimagination has also become defined by the mounting demand to improve resiliency, combat climate change, and promote sustainability. Consumers are more aware of how products affect the environment, with 75% of US consumers voicing worries in this area, according to an article titled “Majority of US Consumers Say They Will Pay More for Sustainable Products” by Sustainable Brands, a community of brand innovators shaping the future of commerce. In order to meet these changing customer expectations, businesses are adopting supply chain redesign driven by sustainability.THE FOUR PILLARS OF SUPPLY CHAIN REIMAGINATIONIn order to navigate these complexities and seize opportunities, companies have to embrace a comprehensive approach to supply chain reimagination, utilizing a framework that revolves around the following four key pillars.Supply chain sustainability and resiliency. This pillar emphasizes tech-led process excellence to build resilient supply chains through enhanced visibility and improved agility. To guarantee continuous operations and satisfy customer demands, integrated business planning, manufacturing reliability, and secure alternative bill of materials (BoMs) and sources of supply all play critical roles.End-to-end (E2E) cost optimization. For a company to stay competitive, better cost management along the entire supply chain is essential. Among the key levers necessary to achieve long-term cost reductions and operational efficiency are strategic sourcing, the elimination of manufacturing waste, and maximizing logistics expenditures. Adopting a centralized operating model for supply chain through Global Business Services (GBS) or Shared Services Center (SSC) solutions can also create significant cost savings.Supply chain process digitalization. The digitalization of supply chains opens up new opportunities for agility and efficiency. Real-time decision-making and enhanced collaboration are made possible by autonomous planning, digital factories, and procurement analytics. E2E visibility and quality management through the use of the Control Tower system also allow seamless integration between functions, enhancing the effectiveness and response of the supply chain as a whole. Leveraging a Digital Twin (a virtual model of the physical supply chain that includes a digital counterpart of every piece of the process) enables companies to run a parallel version of the supply network and simulate scenarios for better insights before making transformative changes.Strategic interventions. This final pillar includes supply chain redesign driven by sustainability, carbon footprint optimization, and segmentation and portfolio optimization. Companies can future-proof their operations and align their supply chains with shifting market dynamics by carefully reevaluating their operations and implementing asset-light solutions.Companies may significantly affect their profit and loss statements by concentrating on these four supply chain reimagination areas.UNLOCKING BENEFITS FOR BUSINESSESAccording to an assessment of prior supply chain engagements conducted by EY, adopting a supply chain reimagination framework has had a substantial positive impact on customers in four areas.First, implementing strong resilience measures can result in gains in total revenue of 3% to 5%, a forecasting accuracy of 5%, supplier lead times of 50% to 60%, and overall equipment efficiency (OEE) of 15% to 30%.Second, through route optimization and freight rate benchmarking, focusing on cost optimization can result in reductions of 4% to 6% in direct material costs, 5% to 10% in manufacturing expenses, and 6% to 10% in transportation costs.Third, embracing digital transformation in the supply chain can lower production costs by 5% to 10%, inventory carrying costs by 10% to 15%, and warehouse and distribution center operating expenses by 6% to 10%.Last, through network redesign, strategic interventions can reduce transportation costs by 10% to 25% and increase on-time-in-full (OTIF) performance so that it reaches 95% or higher.REIMAGINING THE FUTURE OF SUPPLY CHAIN MANAGEMENTThe supply chain landscape is rapidly changing as a result of a convergence of major disruptions and the demand for sustainability and resilience. However, businesses that use the framework for supply chain reimagination can elevate themselves to a leading position during this change. Enhancing digitalization, building robust supply chains, controlling costs, and aligning operations with shifting market dynamics are all possible for firms that take a comprehensive approach and make full use of technology, process excellence, and strategic interventions.Reimagining the digital supply chain is no longer a choice — it is imperative for businesses seeking long-term success as the business climate continues to evolve. Organizations may maximize the potential of their supply chains and succeed in a complex and dynamic world by reevaluating their strategies and embracing these four pillars, charting a path to increased resilience, sustainability, and autonomous supply networks.The next article in this series will discuss why green supply chains are the key to long-term value. 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.Jan Ray G. Manlapaz is a consulting partner and Mary Andrea T. Bacani is a Supply Chain and Operations (SCO) senior manager of SGV & Co.

25 September 2023

Jan Ray G. Manlapaz and Mary Andrea T. Bacani

Navigating the supply chain maze

Supply chain management is regarded as a critical function focused on operational efficiency and controlling costs, but it has been elevated into a board-level discussion in the wake of the pandemic. Supply chain professionals are now managing significant disruptions like inflation and price increases stemming from a volatile economy, labor shortages, and the growing consumer demand for faster and more dependable deliveries. The desire for better, more cohesive planning might be a priority for professionals — but it can be difficult given the day-to-day challenges from pressures and unplanned disruptions.The pandemic truly underscored how connected the world is and the vulnerability of the supply chain process. As noted at the World Economic Forum, supply chain disruptions have resulted from factors that include geopolitical uncertainties, climate change, and inflation. The rising cost of living could also reduce the availability of goods and impact demand.With these pressures mounting, the need to optimize supply chains with new and emerging technologies becomes clear. This makes it imperative to consider integrated supply chain planning in organization planning cycles.This is the first article in a supply chain series that will first look at integrated supply chain planning, the digital supply chain, greening the supply chain, and finally, how the Regional Comprehensive Economic Partnership (RCEP) can impact supply chains in ASEAN.The digital world is constantly evolving, with innovative technologies ranging from AI to the metaverse. Yet, the logistics industry still relies on antiquated systems and processes, creating risks for organizations. Businesses must consider adopting digital solutions to create value, mitigate risks, and optimize trade flows.Given the growing pressure to optimize supply chains with novel tools and technologies, it is imperative for organizations to prioritize their integrated supply chain planning. Accordingly, companies should balance two critical areas: sales and operations. It will be vital to focus on a sustainable planning approach that underscores stability and long-term growth with the following priorities:PEOPLE: CROSS-FUNCTION COLLABORATIONManaging talent effectively is crucial to integrated planning. Organizations should first consider how they can leverage their people to truly collaborate in creating, executing and monitoring plans to realize strategic objectives. It is essential to upskill key individuals across business functions to boost collaboration, identify gaps in skills, and prepare them for the increasing pace of the modern supply chain.It is also crucial for organizations not to execute plans in silos but in a holistic alignment with various business functions. Businesses must build plans by aligning the sales and marketing, procurement, operations, supply chain, and finance functions. Furthermore, having a cohesive business plan can help companies optimize inventory, manage resources, and cut costs. Bridging customer service and fulfillment functions can also enable further strategic planning to meet developing consumer demands and instill stakeholder trust.PROCESSES: INCREMENTAL IMPROVEMENTS VERSUS A SIGNIFICANT OVERHAULThe supply chain process depends on technology, but this may involve legacy platforms and outdated applications that are incompatible. It could be time for organizations to overhaul their platforms, though this will be costly and may not be a priority in the budget yet. Alternatively, gradually adopting intelligent tools could improve process outputs without putting a heavy financial strain on organizations. Proper planning and using an integrated business planning (IBP) tool could also help. IBPs can capitalize on the Cloud’s considerable data processing capabilities, driving significant progress in crucial areas.IBPs tools can bridge enterprise resource planning (ERP), customer relationship management (CRM), and financial planning platforms to provide a comprehensive business view, allowing organizations to track their progress versus their plans. These tools also facilitate scenario planning for a dynamic landscape, tactical planning that utilizes historical and market data, predictive analytics for trend forecasting, and machine learning algorithms to forecast demand that will help businesses plan and operate more effectively.DATA AND METRICS: INPUTS AND PROGRESS MEASUREMENTWhile planning tools can be helpful, high-quality data and experience-led dashboards are imperative to create a timely and accurate internal business view that appraises external market conditions and generates meaningful business insights. Consequently, organizations should define standard terms for consistency and suitable key performance indicators (KPIs) to measure progress. Board oversight and data governance will be requisite to establish appropriate policies and practices, thereby managing standards, guidelines, and data security. Finally, organizations must use data quality assessments, documentation and dashboarding tools, and lifecycle management to reduce the risks of data degradation and loss.While managing supply chain issues is a complex task, addressing the pain points of this manifold process is necessary to drive long-term value and results.OPTIMIZING THE SUPPLY CHAINSupply chain disruptions are ubiquitous — and staying abreast of these developments is vital to identifying opportunities, managing risks, and future-proofing organizations.Volatile economies, more complex and interconnected regional and global supply chain ecosystems, and highly evolving consumer demands signify that business leaders should focus on integrated supply chain planning. Embracing the IBP concept and leveraging available tools could be a game-changer because digital solutions can elevate and streamline the supply chain process, significantly improving user and customer experiences, while outdated systems can compound business risks. However, businesses should integrate technologies into existing infrastructures in an end-to-end manner and not in silos.Optimizing the supply chain entails focusing on significant areas like people, processes, and data and metrics. It is crucial to find the balance between planning and execution while carving a path for sustainability and long-term growth.The next article in this series will discuss what is next for the digital supply chain and how supply chain leaders have the opportunity to reimagine their supply chains for the future. 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.Jan Ray G. Manlapaz is a consulting partner and Mary Andrea T. Bacani is a supply chain and operations (SCO) senior manager of SGV & Co.

18 September 2023

Carlo Kristle G. Dimarucut

How digital transformation enables green energy

Environmental, social and governance (ESG) considerations and digital transformation are critical issues that boards and management have to address, making it a natural decision to leverage solutions that address both. In line with this, large-scale digital transformation is driving the adoption of renewable energy in order to reduce the severity of global climate change risks — but such a transformation also introduces potentially heightened risks of cybercrime.According to The Global Risks Report 2023-18th Edition from the World Economic Forum, environmental risks are the chief concern of surveyed professionals. Of the top 10 long-term global risks ordered by severity over a 10-year period, six were classified as environmental (failure to mitigate climate change, failure of climate-chain adaptation, natural disasters and extreme weather events, biodiversity loss and ecosystem collapse, natural resource crisis, and large-scale environmental damage incidents), and one as technological (widespread cybercrime and cyber security). However, these risks are not always distinct from one another, and organizations must find ways to align environmental and technological risks. TRANSITIONING TO GREEN ENERGYRenewable energy is considered a crucial solution to address the climate crisis, although two factors have hindered the adoption of renewable energy sources — cost and reliability or dependence on weather conditions. Currently, renewable energy is more stable and economical due to technological developments like smart grids, energy storage capacities, and artificial intelligence (AI). According to the National Grid Group, an energy company operating in the UK and US working towards a clean energy future, green energy is created and sourced without damaging the environment. Conversely, renewable energy comes from sources that replenish themselves, such as the wind and sun. While the bulk of green energy sources are renewable, not all renewable energy sources are classified as green. For example, an energy source will not be considered green if carbon emissions are involved in the generation process.Hastening the transition to green energy through digital transformation in renewable energy depends on disruptive technologies and innovations integrating different kinds of renewable energy into the bulk grid. The transition to green energy requires a two-way flow of power and information, which can be managed by the smart grid.While the network topology of the smart grid has benefits like efficacious and stable power, they come with corresponding cyber considerations:• Various energy resources with no clear cybersecurity focus and ownership• Considerable interconnections with web-based or internet-facing platforms• Data security and privacy • Consumer data collection, processing, and analysis• Threat expansion with cyber attacks • Large digital landscape or increased attack surfaceCYBERSECURITY CHALLENGESTo minimize the impact of the six significant global environmental risks stipulated by the World Economic Forum, organizations should invest in renewable energy powered by large-scale digital transformation. At the same time, organizations should consider that this transformation could lead to many vulnerabilities and risks enabled by prolific cybercrime and cybersecurity. Thus, it is vital to identify and address these threats proactively.It can be challenging to build cyber resilience because digital infrastructure and systems may be antiquated in the face of ever-evolving cyber threats. The Internet of Things (IoT), the bridge between the physical and digital world, also increases vulnerabilities exponentially. To realize the benefits of green energy, large-scale digital transformation should be enabled by a resilience strategy, governance framework, and robust cybersecurity technologies.The EY Trust by Design methodology is an extensive approach to cybersecurity that can help organizations create secure digital environments, safeguard sensitive data, and foster consumer and stakeholder trust. Moreover, the methodology inculcates a risk optimization mindset and integrates trust into services and products from their inception.Overcoming cybersecurity challenges:• Governance and oversight are crucial for organizations to prevent cybersecurity incidents, manage risks, and support business objectives. • Asset visibility is requisite for a clear understanding of all organizational assets, including a comprehensive inventory.• Reliable technology is vital to creating secure systems that can safeguard data, applications, and infrastructure from cyber threats. • Trusted components and periodic assessments are essential for identifying security vulnerabilities and prioritizing technological remediation efforts governed by business impact and risk appetite. • Supply chain and third-party risk management help maintain organizational security and resilience in the face of constantly evolving cyber threats.• AI-based monitoring and detection can distinguish between operational and cyber events, helping businesses determine the root cause of the incident with minimal human effort.• Incident response plans allow organizations to promptly recognize and respond to security threats, thus minimizing the impact. GREEN ENERGY IN THE PHILIPPINESDeveloping and optimizing the country’s renewable energy sources underscores the Philippine sustainable energy agenda. As part of Republic Act 9513, the National Renewable Energy Program (NREP) seeks to drive energy security and improve access to clean energy. In line with this, the NREP aims to expand the country’s renewable energy-based capacity to 15,304 megawatts by 2030.In 2018, the Green Energy Option program was introduced as a way for consumers to purchase electricity from renewable energy facilities. By 2021, the Energy Regulatory Commission promulgated rules to govern the program, setting technical and interconnection standards and fees for the facilities supplying renewable energy. According to Reuters, the Philippines currently ranks second in Southeast Asia in combined solar and wind power generation. By 2030, it will have added 17,809 MW of solar capacity and 7,856 MW of wind power to emerge as the top green power producer in the region. THE WAY FORWARDWhile technological developments have made renewable energy and green energy more accessible and economical, they also increase vulnerability to cyber risks and threats. With the acceleration of digitalization, companies should build cyber resilience in key areas for business continuity.Digital transformation, enabled by disruptive technologies and innovations, has led to an increased adoption of renewable energy resources. Investing in green energy is a big step to reducing the gravity of global environmental risks. However, effective board governance will be imperative for organizations to mitigate the corresponding cybercrime and cybersecurity incidents and threats.Organizations should focus on creating cyber resilience strategies and governance frameworks to foster a risk-aware culture. Creating a comprehensive methodology is critical to achieving business objectives related to reliability, cybersecurity, and environmental sustainability. 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.Carlo Kristle G. Dimarucut is a technology consulting partner of SGV & Co.

11 September 2023

Rossana A. Fajardo

How can we harness digital public goods?

The digitalization of public services will radically change the way governments interact with the people they serve and help meet their growing expectations of online access to government services. Digital Public Goods (DPGs) have the power to meet citizen expectations and accelerate digital transformation around the world. They can create long-term value and a more efficient, equitable, and prosperous future for society, businesses, and governments.DPGs, as defined by the Digital Public Goods Alliance (DPGA), are “open-source software, open data, open artificial intelligence models, open standards, and open content” that should respect privacy and other relevant laws and best practices, do no harm, and help realize the United Nations’ Sustainable Development Goals (UN SDGs). This definition is actualized through the DPG Standard, a set of nine indicators used to determine whether or not a public solution is a digital public good. Given their open-source nature, DPGs are created by communities or organizations for public use and are readily available for all governments and other entities to use, customize, and adapt for their digital public infrastructures (DPIs). The potential of DPGs is far-reaching and can move beyond the digitalization of public services, making it a significant economic and societal opportunity. Nevertheless, collaboration between governments, the private sector, and other entities is crucial in order to truly capitalize on DPG-related opportunities.The benefits of DPGs are manifold, including but not limited to the following:• Scalability. Once established, they can be easily deployed across nations.• Flexibility. They are agile and swift to adapt and deploy.• Applicability. They can support governments of different income levels, from the most developed to the least.• Cost-effectiveness. They are economical. The total cost for large countries or populations exceeding 50 million can fall between $0.24 and $0.74 per individual.DPGs DEPLOYED/DEVELOPED GLOBALLYBetween February 2022 and March 2023, the number of registered DPGs on the DPGA’s DPG register increased from 87 to 142. The figure could grow even faster, given the momentum of DPG adoption. Several factors contributed to the growth: governments realize the cost-effectiveness and efficiency of progressing digital transformation, observe the positive effects of DPGs for themselves and others, and utilize DPGs to advance the UN SDGs.EXAMPLES OF DPGsEntities can augment DPGs to enhance service delivery across areas in the public sector, such as health and social services. The DPGs listed below are a few examples that illustrate their abilities and how they can facilitate change, improving people’s lives worldwide. DHIS2This open-source platform is the world’s largest health management information system (HMIS), utilized by 76 low and middle-income countries and capable of supporting 3.2 billion people. DHIS2 software development is a global collaboration developed and managed by the HISP Centre at the University of Oslo (UiO).MOJALOOPThis open-source software enables digital financial service providers (DFSPs) to connect to each other, aiming to address the digital financial needs of 1.7 billion unbanked people globally in a profitable and straightforward manner. Mojaloop is ready to use in Tanzania and Uganda, with pilots being launched in other countries. It was first established in 2017 by the Bill & Melinda Gates Foundation to support its financial inclusion work. It is funded by the Foundation and has more than 400 developers collaborating on the software.SINGPASSThis digital identity authentication system is utilized in Singapore to give citizens access to several online government services, creating opportunities for innovation and economic growth. For example, users can use the platform to file taxes, renew their passports, and apply for housing grants. The platform’s ease of use and convenience help Singapore establish its national digital identity. Managed by the Government Technology Agency of Singapore (GovTech), Singpass is one of Singapore’s Smart Nation projects, with a vision to improve the lives of citizens, create opportunities for businesses, and transform the capabilities of government agencies.MOSIPIndia’s Modular Open-Source Identification Platform (MOSIP) DPG, as part of the government’s Aadhaar biometric identification program, supplied 1.3 billion people with a digital ID. Consequently, this allowed many unbanked individuals to open bank accounts. According to a 2019 Bank of International Settlements report, it would have taken 47 years for 80% of adults to open a bank account had India relied on traditional processes.MOSIP was first initiated by the International Institute of Information Technology-Bangalore (IIIT-B) with the vision of developing a non-proprietary platform on which foundational ID systems could be built. It became a global project five years later, funded by The Bill & Melinda Gates Foundation, Tata Trust, Omidyar Network, NORAD, and the Pratiksha Trust.COMMERCIAL OPPORTUNITIES FOR DPGsThe DPG market is in its nascent stage, and EY teams researched to evaluate and understand the commercial opportunity it poses for the private sector. EY estimates that the annual DPG market will be $100 billion by 2030, potentially growing further. The forecast shows a considerable and lucrative market for many players — spanning roles across the creation, implementation, and integration of DPGs.THE LOCAL DPG LANDSCAPEBased on a study done by the DPGA in March 2023 for six test countries, the Philippines ranked 4th in the number of deployed DPGs. With support from the DPGA, the United Nations Children’s Fund (UNICEF) Philippines is working to foster awareness in the Philippine technology sector about DPGs and identify promising solutions that could reach DPG status. Currently, the country has one registered DPG – Project AEDES.Project AEDES is a dengue data modeling portal by CirroLytix, a social impact tech company based in the Philippines, working with the support of the Department of Science and Technology. It is used to monitor dengue cases and is being implemented in select pilot cities and other countries with high cases of dengue and similar data challenges. The AEDES prototype is an information portal that forecasts dengue hotspots using correlations from dengue cases and deaths, real-time climate data, and satellite maps. The portal is also the first local tech solution assessed by the DPGA as a digital public good.Another related example is PhilSys, the country’s national identification system. PhilSys is not a DPG but an implementation of the DPG MOSIP, customized to become part of the country’s DPI. THE FUTURE OF DPGsDPGs provide countries with opportunities to build accessible, inclusive, and secure digital public infrastructure and to achieve the UN SDGs. DPGs could transform business, deliver significant economic and social value, and create a dynamic public-private sector. While there are implementation challenges that include limited financing, limited manpower, and concerns around market incentives and data security, the benefits of DPG applications are significant.Collaboration, information sharing, and education are vital for future DPG growth, but this will require coordination among diverse entities, including private-sector tech firms, experts, government agencies, and civil society organizations. Governments, the private sector, and relevant communities must work together to capitalize on DPGs’ abilities to address issues, innovate solutions, and improve lives. 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.Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

04 September 2023

Anurag Mishra

How generative AI can reshape the financial crime landscape

Financial crime is estimated to cost $1.4-3.5 trillion worldwide. With sophisticated methods deployed by criminals, government, regulators, and law enforcement often play catch-up to maintain trust in the financial system. There is an increasing need for change and innovation to tackle financial crime. Generative artificial intelligence (GenAI) has transformative capabilities for organizations, with business applications evolving rapidly. The financial industry is an early adopter of technology and is witnessing the increasing application of GenAI in fraud prevention, anti-money laundering (AML), counter terrorist and proliferation financing (CTPF), and cyber security, collectively referred to as FinCrime.THE CASE FOR GENAI ADOPTIONGenerative AI (GenAI) can boost efficiency across AML controls, allowing individuals to play a more prominent role in detecting and preventing FinCrime. Different entities are experimenting with large language models (LLMs), with results underscoring opportunities for FinCrime operations. LLMs are a type of AI algorithm that uses massively large data sets and deep learning predictive techniques to understand, summarize, and generate contextual content. GenAI is not limited to text, but can be used to extract, analyze and classify data, and augment case summaries.GenAI can train on large real-time data sets that include both normal and anomalous transactions, and can then perform statistical analysis to determine what is normal and what is anomalous.GenAI models can analyze behavioral data and process enormous amounts of customer transaction history to identify unusual events. Different fraud detection models can be evaluated to proactively detect emerging fraud patterns. GenAI can automatically flag a suspected fraud when deviations are found and trigger a case examination. This reduces the manual effort required to retrieve, analyze, and present case summaries for decision-making.Think of GenAI augmenting case examiners to detect fraud as it occurs, make faster and value-making decisions to prevent fraud, and reduce human error and biases.It is much easier to personalize fraud detection models to customer personas with GenAI. This not only allows for a personalized banking experience but also makes it harder for criminals to scale and exploit weaknesses in the system. Eventually, GenAI can generate insights to strengthen FinCrime controls. This helps banks stay ahead of the curve, detect, and prevent fraud.Malicious fraudsters are also employing GenAI technology to launch highly personalized and specific attacks on their victims. For example, fraudsters could use GenAI to analyze publicly available information and simulate fake accounts, e-mails, and calls. As such, the technology can also increase individual and organizational vulnerability and susceptibility to fraud.In the complex, digitally connected world, FinCrime poses systemic risks to the global economy. Business leaders can stay abreast of potential risks and respond with the power of GenAI to fight FinCrime. TURBOCHARGED FINCRIME CAREERSFinCrime operations are currently overly complex and manual. Detecting and preventing FinCrime is an onerous task compounded by complex policies, legacy technology, and inaccurate, voluminous and unstructured data. However, with GenAI, FinCrime roles are being elevated to the equivalent of the superhero status of saving the world in the following ways:• Auto-detection of FinCrime will reduce manual effort.• GenAI-generated case summaries will reduce manual effort and allow focus on investigation and decisions, solving and preventing FinCrimes.• Automated monitoring removes stress and allows focus on decisions and actions.• Remove the siloed view of fraud. Transactions occur across different product types, instruments, and modes. With GenAI, it’s possible to have one collaborative, informed view of customer and rogue transactions that are in deviation.• Regulatory changes and policies can be easily applied across customers, products, and modes of banking. Less time is required for compliance reporting to regulators.• Anxiety of human oversight gets eliminated with better insights and traceability.• Generates high-skilled jobs based on the interpretation of insights and faster augmented learning.• Better risk assessment, response, and efficient management.• Greater adaptability to changing strategies of criminals and fraudsters, ensuring trust in the financial system.GenAI can supplement risk assessments and detection. While FinCrime experts will still have to manage the output produced, they will have more tools and information to analyze the results, detect FinCrime, and safeguard against risk.While the technology significantly enhances organizations’ capacity to respond to FinCrime, employees and leaders should train on new skills, embrace collaboration of AI with humans to turbocharge outcomes and learn to deal with ethics, fairness, privacy, and AI-related bias and concerns.THE FUTURE OF FINCRIME AND GENAIFighting FinCrime was hostage to intrinsic human inefficiency, manual errors, and administrative burden. However, GenAI is empowering FinCrime fighting efforts with unprecedented speed and effectiveness. By utilizing LLM tools, professionals can seize opportunities to strengthen and expand the field.While GenAI has considerable promise, it may take time for specific industries to adopt the technology on a large scale. Consequently, organizations should delineate ethical considerations and data protection policies to safeguard their assets while capitalizing on the technology’s power.As FinCrime continues to evolve, business leaders must find the balance between efficiency and effectiveness, especially when dealing with risk. Organizations must be vigilant and utilize novel tools and technologies to adapt to and safeguard against the evolving digital landscape. Companies can remain competitive in the global market by seeking the advice of professionals with a deep understanding of FinCrime and AI and identifying GenAI-related opportunities and risks. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Anurag Mishra is a Financial Services Organization Technology partner of SGV & Co.