Suits the C-Suite

13 June 2022

Anurag Mishra

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

Last of three partsAnyone who has transferred money to another person’s account without having to deal with a bank employee — by e-mail, text, call or physical visit to a bank branch — is no longer a total stranger to financial technology. But keeping up with developments in the market can be dizzying, as fintech has grown exponentially of late, helped in part by the global health crisis that provided the impetus to reexamine processes and put the customer at the core of solutions.Fintech trends have been disruptive and will continue to be so especially now that the mobility restrictions since 2020 forced financial institutions to take a good look at what a digital economy is going to look like. Looking at the practical responses of banks to stay agile during the pandemic by examining processes that can be automated and making them more customer-centric, we can see that financial institutions have already set into motion what could be the beginnings of digital transformation.In some countries, financial firms are proactively taking steps to understand how their organizations can benefit from the wide array of available and emerging technologies. The experience over the past two years points to an acceleration of technological innovation in the years to come. Making sense of all the buzzwords can be a task for the uninitiated in the fintech world. It would be wise to identify which tech trends to focus on in relation to how they can impact the industry and diverse organizations.In the first part of this three-part series, we discussed the key themes anticipated within the next two years in the fintech market in Asia. In the second, we looked at tax considerations in the Philippines. In this last part of the series, we take a look at a few of the tech trends that are worth keeping an eye on as the industry continues to experience dramatic change.WHITE LABEL FINTECHWhite labeling allows firms to sell products without incurring significant development expense, time or navigating regulatory compliance. Also referred to as “Banking as a Service,” it is an authorization to brand and sell products or services developed by another company. This allows fintech firms to create a branded front-end offering layer over white label application programming interface or API-enabled platforms.This solution leverages the innovation ecosystem without the need to reinvent, reinvest in and go through the entire technology development life cycle. It significantly reduces go-to market offerings to customers and seamlessly integrates technology innovation, creative product offerings and compliance requirements in a highly regulated industry to better serve customers.White labeling is a great and attractive option for businesses to leapfrog into the modern digital world. It is a strategy for emerging companies to reduce risks and free up resources to focus on what they’re good at — develop products, build the brand, and grow their client base. For fintech startups, white label solutions allow them to meet the demands of customers, minus the learning curve. Companies availing of these solutions, however, will have limited control over product development, and the drawbacks can range from bugs and security weaknesses to failure to observe the law.DATA AGGREGATORSA customer’s financial footprint is distributed across various institutions, instruments, and platforms, making it difficult to have a full view of their transaction history. Data aggregators collate customers’ bank accounts, mortgages, brokerage accounts, and credit card data, among others, so they could provide one financial view of customers, irrespective of channel and the businesses the customers transact with. They accomplish this through APIs used by fintech firms through which customers log in to their platforms.This aggregation of data at scale is also the backbone of open banking and a free-flowing financial ecosystem. Data aggregation powers a wide gamut of fintech applications to provide financial services on demand like advising, lending, quicker money transfers etc. The portability enabled by data aggregators cuts down paperwork and allows customers to improve eligibility and access to better products/services. With a free flow of data in the financial ecosystem, firms can have a better view to offer personalized products in real time.Data aggregators’ connection with many institutions, however, can equate with multiple points for possible breaches and leaks. Security risks can also arise from web data scraping, a process that involves a computer program logging into a bank’s website using a client’s credentials and reading code to extract financial data. The industry though continues to look into superior ways of aggregating data without compromising the protection of customers. This, nevertheless, brings to the fore the question of greater regulations that establish guidelines on how financial data is accessed and stored safely. ROBOTIC PROCESS AUTOMATION OR RPACustomer experience drives loyalty to brands. Financial institutions, in turn, grow revenue and margins based on customer loyalty. Hence businesses are increasingly automating core operations to focus on enhancing customer experience and loyalty.Robotic process automation or RPA accomplishes mundane and repeatable backend processes better, faster, and more accurately. RPAs are easy, flexible, budget friendly, and quick to deploy, improving productivity while enhancing serviceability and incremental revenue. RPAs ensure mistake proofing, compliance, real-time reporting and insights in a highly regulated fintech sector.Automation is a great boost to operational efficiency. RPA’s future popularity in the world of fintech will likely be borne out of its utility to compliance and regulatory needs. With automation, businesses are able to efficiently keep audit trails for every process, supporting high compliance.VOICE-ENABLED PAYMENTS (VEP)More and more people get recommendations, shop for the best deals, and perform tasks using rapidly evolving voice assistants (e.g., Alexa, Siri, Google) backed by sophisticated natural language processing and artificial intelligence. Digital voice assistant-enabled devices are estimated to double to 8.4 billion by 2024 providing a smarter and more connected ecosystem than ever before.Many banking services are rapidly being integrated and are accessible through voice assistants. As voice encryption, voice-biometrics, multifactor authentication and voice tokenization advances, a secure voice assistant has the potential to disrupt how customers will pay in the future. The pandemic and millennials comfortable with voice over typing will accelerate adoption. VEP is projected to be used by 31% of the US adult population in 2022.This technology allows seamless, end-to-end, integrated concierge-like experience, allowing customers to multi-task better. As digital payment is the largest segment within the global fintech sector, voice integration with digital touch points will separate fintech leaders from laggards. To drive new opportunities, growth and leadership, fintech players will need to continue to rapidly adopt disruptive VEP technology.As we keep an eye on these and many other tech trends, we will continue to witness the evolving behavior of consumers, which in turn will feed into the appetite of organizations to embrace and capitalize on this wave of technological innovation. There is, however, an element of uncertainty in technologies that, although disruptive, have yet to pass regulatory scrutiny. Financial firms will have to look at how best to jump onto the bandwagon, so to speak — to work on their own projects or fire up their collaborative spirit and forge alliances with industry peers to push new technologies to wider adoption.The potential of these tech trends to help make a world of difference in how processes are improved and productivity raised can be astounding. At the end of the day though, leaders will have to go back to what matters most when embracing innovation — enhanced customer experience, services transformation, and a proven track to successful business models. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co. Anurag Mishra is a technology consulting principal of SGV & Co.

06 June 2022

Allenierey Allan V. Exclamador

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

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

30 May 2022

Vicky B. Lee-Salas

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

First of three partsWhen the smartphone became commonplace more than a decade ago, it was inconceivable for many consumers to make online purchases using their credit cards. It felt way too risky to give away sensitive credit card information in an online transaction, especially when done on a mobile device. Today, we’re faced with yet another inconceivable wave: that of opening our banking data to entities other than the bank itself.Fintech services have become widespread in Asia and the eastern Pacific Rim. Advanced fintech systems are now woven into the fabric of daily life practically in all markets in Asia where the majority of consumers have smartphones that provide them access to a growing range of virtual financial services.Asia is seen to be taking the lead in the development of fintech. Due in part to significant concerns with financial inclusion, economies in Asia are seeing a rapid pace of fintech growth. Consumer use of fintech-powered services have doubled in only two years across key Asia-Pacific markets. Fintech adoption has been at 67% in Hong Kong, Singapore, and South Korea, based on the latest EY Global FinTech Adoption Index. China, which leads with a penetration rate of 87%, sets the pace for fintech innovation. The index found that 99.5% of Chinese respondents are aware of online apps that facilitate money transfer, mobile payments, and non-bank money transfers.Many more changes are anticipated in Asia’s financial services landscape. We expect three dominant themes in Asia-Pacific markets over the next two to three years: financial regulation taking on a more active role in encouraging innovation; increased competition among virtual banks; and, increased adoption of open banking, a system that requires banks and clients to give third-party providers access to a most guarded information – clients’ banking data.REGULATORS’ OPENNESS TO INNOVATIONFinancial regulators have to weigh competing priorities, and in relation to fintech development, they have to strike a good balance between ensuring regulatory processes preserve stability and fostering financial innovation. In many parts of the world, regulators are reported to be trying new approaches to regulation so they could significantly boost oversight.In a study, leading science and technology think tank Information Technology and Innovation Foundation (ITIF) observed that many governments, seeing the value of fintech transformation, are taking steps to promote financial innovation. It cited Singapore’s creation of a fintech and innovation group to facilitate deployment of technology in its financial sector. It also took note of the launch of fintech promotion strategies in Australia and the UK. The level of stringency differs across economies, but the common thread is that they are “taking novel and interesting approaches to financial innovation with an eye to maximizing their relative competitiveness in financial services,” according to ITIF.It’s a role that regulators are embracing as markets continue to deregulate. Where before financial regulators in Asia tended to be the gatekeepers of banking and other financial services, now they are becoming advocates for flexibility, innovation and inclusion.VIRTUAL BANK COMPETITION HEATS UPFinancial regulators in the Philippines have been equally proactive as their peers in the region in pushing for fintech innovation even as they strive not to lose sight of their responsibility to foster financial stability. FinTech Alliance Philippines has been appreciative of the role of regulators, citing the creation of the Financial Sector Forum that brings together representatives from regulatory agencies as a means to rationalize regulations.The Philippines is among a few economies in Southeast Asia where regulators have issued licenses for digital banking, one area that is anticipated to record significant developments that will contribute to altering the financial landscape in the next few years. The Bangko Sentral ng Pilipinas (BSP) has already approved several digital banks’ applications. The emergence of these new entrants is seen as a game-changer in the delivery of financial products.The BSP sees the rise of digital or branch-less banks potentially driving the digital transformation of incumbent banks to stay competitive and to innovate their service offerings. Digital banking, which essentially does away with the need for customers to physically visit a bank branch to open an account or make transactions, is an important component of the central bank’s Digital Payment Transformation Roadmap. The level of encouragement from financial regulators varies across markets in Asia-Pacific, which may relate to the goal of financial inclusivity, a key theme in Southeast Asia.While the entry of virtual banks is fueling competition in banking in the region, their impact on the banking landscape is not expected to be dramatic in the short term. But in the long run, they can drive meaningful change. The traditional big banks are taking notice. In the case of Hong Kong, incumbent banks are lowering deposit minimums and sweetening account offers in anticipation of the launch of new digital banks.OPEN BANKING IN ASIAWhile virtual banking does deserve all the attention it is getting, some industry observers also see the future in open banking, a system that allows fintech providers access to banking data with customer consent to provide the latter additional services or perform transactions on their behalf. Open banking is foreseen to dramatically improve the customer digital experience.It goes far beyond the convenience of digital banking in which the set-up of bank branches is no longer required save for an office to receive customer complaints. In open banking, a mobile wallet platform or a ride-hailing service can be a super-app with expanded services to include lending, for instance, and can evaluate loan applications quickly by having pre-approved real-time access to a customer’s banking data. It can also be a personal finance app that lets you program it to “manage” your finances and tell you how much you can invest in stocks according to how much money goes into your linked bank accounts at any given month.Access is granted through open application programming interface (API), which establishes a connection between third-party providers and users’ bank accounts. This allows for banking data to be gathered and leveraged to perform a service for the customer.International Data Corporation and Finastra’s Open Banking Readiness Index found Hong Kong, Singapore, and Australia to be the top three markets in Asia in terms of progressive open banking. In the case of the Philippines, the BSP is laying down the foundations for open banking with the release of the first version of the draft Circular on Open Finance. Released in December 2020, the draft circular proposes the creation of an Open Finance Oversight Committee, an industry-led self-governing body overseen by the central bank. It would supervise open banking practices and set procedures and standards, including API architecture, data, security, and outsourcing standards.In January, the Bangko Sentral once again reinforced its support for innovation with the presentation of its three-year strategy to get open finance off the ground to boost innovation and competition in the Philippines by enabling third parties, such as fintech companies, to access and use customer finance data to develop new apps and services. Increased fintech adoption and innovation will continue to benefit most markets in Asia, contributing immensely to transforming the financial services landscape in ways that improve financial inclusion in emerging markets.There can only be progress by leaps and bounds for the fintech industry in the Philippines in the years to come as the market nears that era when very few Filipino workers would still know life before the internet. Banks have already had a good peek into the digital space due to the limitations that the pandemic created, and this can only lead to more confident steps to incorporating fintech products into their offerings.In the second part of this article, we discuss issues on taxation of fintech companies in the Philippines. 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.Vicky B. Lee-Salas is a markets leader of SGV & Co.

23 May 2022

Marie Stephanie C. Tan-Hamed

Redefining growth with humans at the core

Companies measure growth by the numbers such as profits, margins, returns, and share prices. They compete and try to win against all odds to meet shareholder expectations with impressive quarterly figures. It is the growth pressure that drives companies and brands to exert tremendous effort to gather data from consumers as they navigate the challenging highways of the digital economy, perhaps oblivious of having regarded the consumers as mere commodities rather than people. All this will have to change if brands are to take the pulse of future consumers who demand more from companies that use digital technology and processes to drive short-term revenue growth.Consumers now expect more and better from the companies they do business with. They are empowered consumers who are not satisfied with brands that only pay lip service to sustainability and purpose-led growth while conveniently sliding back to quarterly earnings as their barometer for success.In the latest EY Future Consumer Index survey, 68% of surveyed consumers think a brand’s behavior is as important as what it sells, while 69% say brands must behave ethically and according to community expectations. Yet only 38% think the positive actions brands are taking are good enough.Companies that have taken heed of the call for sustainability and the new growth strategy talk about long-term value that seeks to assess performance beyond financials to include governance, people, planet and prosperity. This redefinition of growth will need to: drive the innovation of environmentally friendly products and services; redesign customer experience; and build an operating model with humans at its core.GREEN INNOVATIONIn the EY Future Consumer Index survey, 68% of respondents think brands have a responsibility to invest in the sustainable production of goods and services. In addition, 70% say that brands must be transparent about the social and environmental impact of producing their goods and services.This clearly establishes a sense of urgency on fusing planet with profit and rejects the notion that sustainability in product and service innovation can be merely aspirational. Organizations will be better off with commercial, environmental and social sustainability embedded into their purpose, design thinking, prototyping and scaling of products and services.It begins with a little more effort to thoroughly understand a problem before coming up with a solution. Rapid problem-solving often impedes the company’s ability to solve the underlying issue. Staying in the problem longer than one feels comfortable with is a wise step towards driving sustainable innovation that is both planet and profit friendly.FUTURE OF CUSTOMER EXPERIENCEIn shaping the future of the customer experience, it helps to look at the rapid changes in technology. In the last decade alone, technological advancements have challenged companies to rethink the customer experience, and this will be the case over and over again. There is one thing that will be constant though — the human factor that rises above any technology.The EY Global Consumer Privacy Survey shows how customers want to believe in and trust the organizations they do business with. Marketing campaigns alone will not do the job though. For brands to win customer trust, they will need to align to customer values and beliefs and demonstrate that in their actions. This trust is built by knowing and engaging with customers, not as statistics but as individual living, breathing human beings.Engaging with the full spectrum of human needs increases the likelihood of collecting data ethically, and this should result in more trust from customers. This, in turn, enables brands to better anticipate and improve the products and services they deliver to customers, which leads to purposeful growth and the creation of long-term value.With customer centricity embedded throughout the enterprise, customer interactions are much more likely to be consistent. Familiarity and understanding of customer wants and desires will be spread across the different functions in the organization.There are a few ways to fast-track an organization’s way into this future customer experience while delivering on purpose and driving profit at the same time. One is talking to customers regularly and listening to what they say. Marketing chiefs can sometimes assume they already understand customers based on past interactions, and this deprives them of perspective that can be gained from an ongoing dialogue.Interactions with customers that trust the organization can uncover more data, allowing for the organization to combine quantitative information with qualitative perspectives.Marketing chiefs need to shift the mindset of the organization to focus on the desired and organizationally aligned outcome, such as how team members contribute to giving the customer a positive experience, rather than how many gadgets they developed, manufactured and sold.REINVENTING THE OPERATING MODELOrganizations should rethink their business and operating models to truly sustain healthy customer relationships. This is called for mainly because most large organizations were designed according to 20th century principles and founded on rigid structures to organize people only — without considering the impact of technology. This created functional silos that result in disconnects that do not help create a positive customer experience.Based on our EY global organization’s track record in helping clients transform their operating models for customer-centricity, a few key actions have been identified that marketing chiefs can take in partnership with leadership. One of these is creating pod teams that align to the customer lifecycle. A pod is a cross-functional team or a group of individuals with complementary skills working toward a common purpose or to accomplish tasks that form part of a larger project. It transcends existing divisions within an organization. A pod, for instance, may be dedicated to delivering a great welcome experience to all new customers in the first six months, regardless of the product or service purchased. Performance measures will then have to be tweaked to focus on the best possible customer outcome.This cross-functional team needs to be empowered to make decisions for them to be truly effective in delivering the best customer outcome. They are front-facing and therefore capable of seeing how a product or service is performing. Ideally, they should also have the leeway to make data-driven decisions to pivot or shift the direction of a product or service.Redefining growth requires a shift in mindset — a change in the way the organization looks at things to deliver new results. It requires specific steps that go beyond little tweaks here and there. Purpose-washing, or representing the brand as if it is committed to a larger purpose, does not work. Instead, companies need to reexamine their current definition of growth and redefine it in the context of authenticity of purpose and 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.Marie Stephanie C. Tan-Hamed is a Strategy and Transactions Partner of SGV & Co.

16 May 2022

Maria Kathrina S. Macaisa-Peña

Winning consumers with a future-fit operating model (Second Part)

Second of two partsConsumer product companies face the challenge of transforming to stay relevant to rapidly changing consumer needs, but global research commissioned by EY reveals concerns in whether leaders are taking the right actions to steer their organizations.In a recent global C-Suite survey, “Becoming Future Fit: Challenges and Opportunities for Today’s Consumer Products Companies,” which was commissioned by EY from MIT SMR Connections, 86% of the surveyed C-Suites said transformation was essential to become future-ready, but they face uneven progress due to conflicting priorities and a shortage of talent necessary to facilitate change. Unless companies find ways to overcome these hurdles, they will fail to achieve their transformation goals and grow increasingly out of step with the demands of tomorrow’s consumers.In the first part of this two-part article, we discussed the first two key design principles necessary to drive agility, responsiveness and resilience: becoming part of dynamic business ecosystems and building upon data and analytics with data fabric. In this second part, we discuss the remaining three key design principles: encouraging talent flexibility, innovating at scale and embedding Purpose into every facet of the organization.For these principles to be at their most effective, it is best that organizations excel in all rather than merely do well in one or two, and they must be accomplished in a manner that builds and sustains trust not just with consumers but with their people and all their ecosystem partners.ENCOURAGE TALENT FLEXIBILITYTransformation will require developing people with deep skills in key areas such as data transformation, but organizations will also need generalists across functions capable of working together in new ways. An adaptive workforce and culture will be able thrive when supported by emerging technologies and new methods of collaboration in a reimagined workplace. In the EY 2021 Work Reimagined Employee Survey, emphasis is placed in putting humans at the center with the future of work enabled by transformative digital tools.INNOVATE AT SCALEEveryone must be involved in the effort to innovate. People on the frontlines are often the best sources of ideas, as they deal with consumer and ecosystem partners directly and on a daily basis, but these ideas are often either not captured or are weighed down by rigid processes.By taking a future-back approach to strategic planning, investing in data and moving toward resilient supply networks driven by data, companies will be able to innovate at scale and enable hyper personalization. The most successfully innovative ideas support technologies and cultures that capture, rapidly develop and scale ideas that work, and move to the forefront of reshaping both customer and industry expectations. EMBED A PURPOSE-LED STRATEGYThe purpose of an organization defines its value propositions, its role in ecosystems, how it attracts and retains talent, its partners and which consumers it serves. Although purpose and sustainability are key drivers of value, they are not always made an integral part of operations. Although sector-specific issues vary, a purpose-led growth strategy can address critical issues of trust, technology, trade and sustainability while keeping humans at the center of every decision.As leaders look to reframe for the future of their organizations, investors, consumers, employees and the wider society mandate them to become more purpose-led in creating long-term value. The objectives are growth that is accelerated yet sustainable, a stronger market position, and a better working world for all stakeholders.KEY ACTIONS FOR A FUTURE-FIT OPERATING MODELWhile there is no clear finish line in the race to become future fit, organizations that transform around the five principles will be in a much better position to stay ahead of changing market forces. Fostering better relationships with their consumers will lead to long-term relationships on foundations of trust while being in a stronger position to collaborate with partners with increased agility, enabling them to bring products to market quicker.CEOs can take three key actions that are crucial in delivering a future-fit operating model, the first of which is to set a leadership vision that disrupts organizational barriers. Although the organization is on a transformation journey, it is essential to ensure the entire organization is on the journey as well. CEOs are meant to challenge the orthodox and inspire action, but the Becoming Future Fit global survey reveals that 63% of leaders expected corporate culture to be a source of resistance, while 55% cited the failure to orchestrate a transformation roadmap to be another potential barrier.Second, CEOs must be realistic in setting timelines to build capabilities. In the global survey, 61% of leaders said it was critical to create a flexible talent pool within two years, but an adjunct professor quoted in the survey reports that it takes three to seven years just to onboard everyone, align incentives, and get buy-in.Lastly, leaders must start from what is necessary in the future, and not based on what they are capable of today. The global survey found that although 77% of leaders said they had the emerging technologies necessary to transform their operating model, 70% identified the need to upgrade their technology infrastructure as a significant barrier to transformation. This contradiction highlights the gap between having the needed capabilities for today instead of tomorrow, creating consequences in delivering the transformation agenda.THE NEED FOR CONTINUOUS ADAPTATIONIt should be established that there is no single business model that can win in the future at scale, as CEOs will need to deliver many different models, strategies and propositions from a core operating model. Leaders will need to keep adapting business strategies and priorities to anticipate potential disruptors and reflect volatile market conditions.This requires a perspective that does not make the present and future mutually exclusive. Leaders must employ the mindset that the value they create today will fund their transformation in the future, while investments made in future transformation will aid in creating value today — presenting the opportunity to create a virtuous cycle. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Maria Kathrina S. Macaisa-Peña is a business consulting partner and the consumer products and retail sector leader of SGV & Co.

09 May 2022

Maria Kathrina S. Macaisa-Peña

Winning consumers with a future-fit operating model (First Part)

First of two partsChief executive officers of global consumer product companies face the challenge of transforming their organizations at a rapid pace to ensure they stay relevant to evolving consumers. Part of this challenge entails strategizing and delivering multiple business models and propositions swiftly, but due to time and cost constraints, CEOs cannot build a new operating model from scratch every time something new has to be done.This calls for more agile, responsive and resilient ways of working that will allow consumer companies to pivot overnight when necessary. In fact, according to a recent global C-Suite survey commissioned by EY from MIT SMR Connections, Becoming Future Fit: Challenges and Opportunities for Today’s Consumer Products Companies, 86% of the surveyed C-Suites said transformation was essential to become future ready. However, the study also revealed that there was great uncertainty in whether leaders are keeping the process of continual change in their organizations on the right track.How products, services and experiences are valued is dictated by evolving consumer perspectives, while technology is key to enabling new ways of purchasing and engaging with products. Technology is also what redefines the kind of value propositions that companies can offer consumers, as well as how these propositions are delivered. There are increasingly more options in how companies can design, create, market, combine, package, and deliver their products and experiences to get them closer to the consumer than ever, enabled by technological capabilities in data and analytics.CEOs will need to apply a transformation mindset and create a C-Suite agenda reflecting the new reality of things. With the pandemic bringing to light uncertainty and the urgent need for technological change, these and more factors have already changed every aspect of a consumer’s life and will continue to do so. Their needs, expectations and behaviors have shifted in ways that put the old ways of working and the companies that propagate them at risk.The current times require companies to be agile, responsive, and resilient. These characteristics can be built into a business by applying five interconnected design principles that CEOs must follow to lead systemic transformation and become future-ready.The first of this two-part article will discuss the first two principles: becoming part of dynamic business ecosystems and building upon data and analytics with data fabric.BECOME PART OF DYNAMIC BUSINESS ECOSYSTEMSCompanies that harness dynamic business ecosystems are better positioned to drive capital efficiency and innovation that creates long-term customer value. It becomes imperative to have a good understanding of ecosystems to stay ahead of the pace of change, especially in anticipation of potential disruptors.Those who participate in business ecosystems are more likely to create increased value in a group than they would individually, putting companies who are unable to adapt at the risk of falling behind. By building ecosystem models into the structure of their value creation strategy, consumer companies can more effectively navigate the digital space and more quickly generate customer value.A previous Suits the C-Suites article, How to win Asia-Pacific consumers in the new era, found that digital business ecosystems have emerged in recent years to allow companies to complement each other and offer interconnected products and services in a singular integrated experience. This is already seen in the super apps that consumers are familiar with today, with local examples such as ride-sharing apps with expanded services that include on-demand purchase assistance, food delivery, and even bill payment functions.BUILD UPON DATA AND ANALYTICS WITH DATA FABRICCompanies are facing more pressure than ever to become data-driven as leaders understand the value of data and use it to generate valuable insights. While a listening organization that is built on data and analytics allows CEOs to make timely, informed decisions, simply prioritizing analytics is not enough. Data fabric, a set of independent services put together to provide a single, focused view of data relevant to business across all sources, will be necessary for many large enterprises to operationalize data in order to address specific challenges as well as innovate.Digital networks and their data flows serve as the connective tissue and nervous system that lets the body of the ecosystem function by integrating disparate data sources. Data fabric connects the threads of information across an enterprise, delivering value in the short term with a long-term transformation strategy. It is not designed to collect and store information, as opposed to data warehouses, and there is no need to replicate data or start from scratch when searching and aggregating it.By utilizing the data fabric approach, data is integrated into useful formats that allow for maximum reuse. It enables sharing, portability and governance by intertwining threads of structured and unstructured data to form a consolidated view made available to users in formats they can use and in terms they can understand.In the second part of this article, we discuss the remaining three key design principles necessary to drive agility, responsiveness and resilience: encouraging talent flexibility, innovating at scale, and embedding a purpose-led strategy into every facet of the organization. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Maria Kathrina S. Macaisa-Peña is a business consulting partner and the consumer products and retail sector leader of SGV & Co.

02 May 2022

Czarina R. Miranda

Managing the hybrid workforce (Second Part)

Second of two partsA look into worker sentiment points to a general preference for an arrangement that involves flexibility in when and where employees perform their duties.For one, the recent EY Future Consumer Index shows employees “losing interest in pre-pandemic work patterns,” a finding that reinforces those made in the EY 2021 Work Reimagined Employee Survey that showed the majority of surveyed employees in Southeast Asia preferred not to return to pre-COVID ways of working.In the first part of this article, we looked at the rise of the hybrid workforce and tackled the challenges in managing the workplace. Now we will look at the challenges of keeping employee well-being at the forefront in the hybrid work environment.Two years of remote work have given employees more choice over how they spend their time and how to be productive outside of the office. It has given them a better appreciation of how important the quality of their time is in comparison to how much they earn. They have found renewed enthusiasm for staying in and buying experiences rather than new material goods.It’s a cultural shift that can have profound implications for corporate leaders. One area that will demand greater attention is managing the workforce and the company culture as organizations institutionalize hybrid work strategies. We look at a few key items critical to success in embracing the flexibility that most employees crave for after years of remote work.THE RIGHT WORKFORCE STRATEGYThe level of uncertainty on how an organization’s “return-to-office” position unfolds post-pandemic can be as high as that felt in the first couple of weeks when the pandemic catapulted much of the country into lockdown in 2020. How organizations have remained productive throughout the last two years can fuel speculation among employees who favor continuing with telecommuting.They certainly will look to the leadership team for a clear message on the workforce strategy that will be in force in our post-pandemic world. It may not suffice to simply confirm that an organization will embrace a hybrid workforce strategy. Corporate leaders will have to answer such questions as whether the organization is leaning towards a remote-first strategy or is it gravitating back to the traditional set-up with a little flexibility.But how does the organization arrive at such a decision? Do we bring the employee along for the journey and listen to what they have to say? All this will depend on company culture. Once a strategy is chosen, the workforce approach can be documented properly so that the entire organization is prepared to support this decision.Communicating this to the entire organization can help various teams decide on how they can best support and enforce the strategy. Will a playbook be necessary to manage the change over the next six to 12 months?A clear workforce strategy and a communication plan can work favorably for employees. It tells them what the company wants and gives teams the chance to contribute to achieving goals with the end-view of maintaining the hybrid workplace.SETTING MILESTONESThe last thing corporate leaders would want to be in is a situation that requires closer monitoring of employee activity. Will putting in place measures that allow management to do real-time tracking of employee activity run counter to the workforce strategy? Workers may look at closer monitoring as a sign of a lack of trust, and this may eventually adversely affect company culture and employee engagement and retention.To choose a hybrid team as a workforce strategy moving forward may be taken to mean as accepting that productivity has not been compromised over the past two years, when the pandemic forced us into remote work. This is the message that workers will read from a workforce decision to go hybrid. It can reinforce their own argument that it is possible to keep productivity up even in the confines of their homes or other alternative work sites.It pays to set milestones on productivity to help teams work in unison to continue to deserve the flexibility that they desire from hybrid work arrangements. Clear milestones make it easier for teams to figure out on their own how to achieve team goals even as they remain in the comfort of their homes for most of the work week.It is advisable though for teams to have a set day of the week when they are compelled to be in the office for various reasons. It can create what many have referred to as moments of spontaneous exchange of ideas that lead to innovation, heightened productivity, or better ways of doing things in the organization. It can also provide an “anchor” for your people to feel connected to the organization and to each other. This is especially meaningful to possible new hires who were onboarded during the pandemic and who may not have yet had in-person interactions with other team members.PROMOTING INCLUSIVE LEADERSHIPChoosing which set of workers can be allowed to work from home and who remains on-site may not be as simple as identifying who faces clients and who works at a plant. Hybrid work models can be vulnerable to instances of resentment when disgruntled staff can feel left out of the perceived benefits of remote work, or conversely, remote employees may feel that those physically present in the office are more “favored” by the managers. It’s friction that, if left unresolved, may eventually create trouble within and among teams and stand in the way of productivity. However, building a company culture that fosters inclusion and a sense of belonging will help prevent this from happening.With a remote workforce, an inclusive workplace culture becomes all the more important in keeping employees engaged. It all begins with a sense of belonging that can translate to employee satisfaction with work and productivity. In the traditional work arrangements, it is easier to cultivate that much-needed sense of community among team members. Remote work, however, can hinder interaction that is a building block to building belonging.Leadership can play a vital role in this department to ensure that employee welfare programs adapt to these realities. The hybrid workplace also presents an opportunity to revisit programs on diversity, equity, and inclusion (DE&I), as this can contribute to successful recruitment and employee retention.There can be many more challenges to learn along the way as most organizations take this route. Leaders’ responses can vary from one organization to another, but what matters is keeping morale and productivity high. In designing remote and hybrid work strategies, it is best for leaders to place employee well-being at the forefront and optimize available resources to support employees. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Czarina R. Miranda is the People Advisory Services Leader of SGV & Co.

25 April 2022

Czarina R. Miranda

Managing the hybrid workforce (First Part)

First of two partsFor many organizations trying to regain their footing post-pandemic, it can be quite a paradigm shift to make decisions on adopting hybrid work models, especially since health alert levels continue to be lowered as a means of stimulating economic activity. Hence, under the new normal, corporate leaders will have to address new challenges and questions in managing hybrid teams.There can be great reluctance on the part of organizations to come to terms with the need for a flexible workforce post-pandemic. While opinions vary on the actual productivity that remote work has delivered in the past two years vis a vis pre-pandemic operations, flexible work arrangements offered an avenue for many organizations to remain operational despite the lockdown. There is also anecdotal evidence in support of how various organizations remained productive with telecommuting. However, each organization will need to gauge productivity for themselves given the scale and nature of their operations.A look into worker sentiment points to a general preference for an arrangement that involves flexibility in when and where employees perform their duties. The recent EY Future Consumer Index shows employees “losing interest in pre-pandemic work patterns,” a finding that reinforces those made in the EY 2021 Work Reimagined Employee Survey that showed the majority of surveyed employees in Southeast Asia preferred not to return to pre-COVID ways of working.In the case of the business process outsourcing industry, which employs an estimated 1.4 million workers, there has been overwhelming preference on the part of the talent for a balanced, hybrid work arrangement. This has prompted industry leaders to propose that the government reconsider its order for the outsourcing companies to prepare for a return to full office operations lest they lose their tax perks that are contingent on full on-site operations.Over the past two years, hybrid teams have attracted an abundance of attention. Employees generally favor the opportunity to distance themselves from the workplace — both geographically and emotionally. Filipinos working in the National Capital Region and key cities notorious for traffic congestion found great relief from the hassles of the daily commute. In the human resources domain, the conversations these days among experts often gravitate to the paths that organizations plan to take post-pandemic.The idea of hybrid work models being in the forefront of conversations in human resources did not happen by chance though, even with the lockdowns providing the impetus for organizations to stay agile and quickly find ways to keep operations going amid the restrictions on mobility especially in the first few months of the community quarantine. If you look at legislation related to hybrid work models, telecommuting was a concept already found in our legislative bills before health authorities detected the first COVID-19 case in the Philippines.REMOTE WORK POLICYRepublic Act 11165 or the Telecommuting Act was signed in Dec. 2018 or more than a year before the pandemic. The law formalizes the option for employees to work from home and declares telecommuting as an alternative work arrangement that both employers and employees may implement upon mutual consent. The law also sets out the rights and duties of both employers and employees and promotes employee welfare.Telecommuting and other alternative work models have since become an important subject for legislation and policymaking.A look into our evolving policy regime on flexible work models brings to mind the Department of Labor and Employment’s Labor Advisory No. 09 Series of 2020 which seeks to assist and guide employers and employees in the implementation of “various flexible work arrangements as alternative coping mechanism and remedial measures” during the pandemic. This may not, however, bolster the narrative for hybrid teams because its use of the term “flexible work arrangements” can actually worry employees; “arrangements” referred to in the policy are reduced work hours or workdays, rotation of workers, and forced leave — so-called “better alternatives than outright termination of the services of the employees or the total closure of the establishments.”Responsibilities of employers to their employees are likely to evolve as well if hybrid work models were indeed to become the norm.The experience with telecommuting during the pandemic has, in fact, called the attention of lawmakers to the issue of rest hours as employers’ control over employees now extends beyond work hours through the use of phone, email, and messaging apps. With technology and the ease of communication that it brings, it is easy for lines to blur between work and home. Employees can easily fall into the trap of voluntarily keeping lines of communication open and their devices switched on beyond work hours even if not required by their superiors.Senate Bill 2475 or the Workers Rest Law proposes penalties on employers who intrude on workers’ rest hours to prevent work from depriving employees of their personal time.COMPRESSED WORKWEEKThe government’s economic managers have also considered a proposal for a four-day workweek to help businesses cut costs. There are still no clear signs on whether this proposal will lead to a new law or a department order since the government is likely to present this as management prerogative rather than a mandate for companies to follow.Two years of telecommuting has also given rise to a host of concerns on the part of employees who are responsible for staying available for tasks and meetings during work hours. While remote work saves them the costs and hassles of the daily commute, in return they carry the burden of logistics, internet and utility expenses. Senate Bill 1706 seeks to ease this burden by providing a tax break equivalent to a P25 reduction from the taxable income for every hour worked from home.There have been companies that have opted to extend financial assistance to specific teams within the organization, whose continued productivity weigh more than the cost of any internet connectivity subsidy.OFFICE SPACEOther practical considerations that many companies choosing the hybrid team path will have to tackle include the use of leased office space. Some have had to contend with being unable to negotiate significant discounts on office lease contracts despite the extended lockdowns in the Philippines that kept most workstations unoccupied. A decision to pursue a hybrid work model post-pandemic will mean reconsidering an organization’s pre-pandemic need for space.As organizations explore options to adjust their use of space and optimizing every square meter, some have looked into the hoteling concept (telecommuters reserve a workstation or desk for their in-office days) or hot desking (an employee finds and works at any open seat when in the office). Hoteling is seen as a way of cutting an organization’s office space requirements and costs while also ensuring that social distancing can be managed should employees physically enter the workplace. This can offset investments in equipment and technology that may be needed to support a hybrid team and keep members collaborating as well as responsive to client needs.There can be many more challenges to learn along the way as most organizations take this route, and leaders’ responses can vary from one company to another. As organizations devise their own mix of work arrangements that are suitable to their business models, this direction cannot be seen as a partial return to the old “normal.” Instead, this charts a new path forward that acknowledges the changes in workforce needs and the opportunity for leadership to reimagine the future of work.In the second part of this article, we will talk about the challenges of keeping employee well-being at the forefront in the hybrid work environment. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Czarina R. Miranda is the People Advisory Services Leader of SGV & Co.

18 April 2022

Aris C. Malantic

Why analytics are essential to quality non-financial corporate reporting

EY’s recent Global Corporate Reporting Survey tells us that change in corporate reporting is accelerating. In particular, the need to better communicate an organization’s ESG performance is putting significant pressure on the finance leaders responsible for its preparation — requiring finance teams to beef up their analytics capabilities.Late last year, more than 1,000 CFOs, financial controllers and senior finance leaders of large organizations across 26 countries — including 250 in Asia-Pacific — were surveyed to understand the challenges they face in corporate reporting.The biggest theme emerging from this research is that, alongside the traditional financial reporting that finance leaders oversee, investors and other stakeholders want consistent and credible ESG disclosures on material issues to help them understand how a company creates long-term value and sustainable growth.EY survey participants are not alone in noticing this trend. At EY, we’re seeing growing increased pressure on corporates to improve their ESG reporting — from equity investors, insurers, lenders, bondholders and asset managers, as well as customers who all want more details on ESG factors to assess the full impact of their economic decisions.ADVANCED ANALYTICS KEY TO EXTRACTING ESG METRICS AND INSIGHTS Extracting ESG insights from data is complex and time-consuming — an almost impossible manual task. It requires the use of advanced analytics, which are now available to help companies structure, synthesize, interpret and derive insights from voluminous data, and create credible and useful ESG reporting. Advanced analytics is particularly important in ESG reporting because of the need to address and relate significant amounts of unstructured data.Not surprisingly, the EY Global Corporate Reporting Survey found the top technology investment priority for finance leaders over the next three years is in advanced and predictive analytics. This priority is particularly felt in Asia-Pacific where 47% of regional respondents (68% in China) vs. 38% of global respondents have analytics as their top tech investment priority.DATA VOLUME AND QUALITY ARE STILL STUMBLING BLOCKSYet even as finance teams seek to invest in analytics and build a more agile financial planning and analysis approach, several data challenges stand in the way. According to EY Asia-Pacific survey participants, the biggest hurdles include the sheer volume of external data, followed closely by data quality and comparability issues. Lack of timely data and inefficient data integration are also problematic.Analytics starts with data, but techniques such as predictive modeling, statistics and visualization are also important in turning that data into timely and actionable insights.For example, organizations can enhance the quality of reporting by introducing forward-looking insights, using external data to corroborate and provide analysis on future trends. Thereafter, this downstream reporting outcome can be used to streamline upstream activities, such as capturing data in the right format to allow for efficient collection and analysis.However, this requires proper planning from data collection to reporting, with technology as a key enabler. In other words, this process should be considered as part of an organization’s digital transformation journey.COLLABORATION ESSENTIAL TO BUILD NEW ANALYTICS CAPABILITIESDeploying these sorts of advanced solutions requires more than finance teams buying new technology. It will take a cross-disciplinary effort that combines advanced data science skills, business domain expertise, and finance and ESG experience.Developing an approach that mimics human efforts is a guided process. It’s not simply about developing algorithms — it can require learning and incorporating the human decision-making process. The finance team will need to work together with key stakeholders, such as the analytics centers of excellence, to define the use cases for advanced ESG analytics and then collaborate during the development process.RESOURCES AND SUPPORT REQUIRED TO DRIVE REPORTING EXCELLENCEBetter quality non-financial corporate reporting, underpinned by advanced data analytics, will be essential to meet the changing needs of investors and stakeholders. Finance leaders need to drive innovation by setting out a bold technology road map for transforming financial analytics and providing enhanced and trusted reporting, including advanced tools such as AI (artificial intelligence).To support them, boards should assess whether finance leaders have adequate resources and budgets to address these challenges and increase their use of advanced data analytics to deliver more robust non-financial corporate reporting. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Aris C. Malantic is a Market Group Leader and the Financial Accounting Advisory Services (FAAS) Leader of SGV & Co., as well as the EY Asean FAAS Leader.

11 April 2022

Arthur M. Maddalora

Accounting considerations for the oil and gas sector as renewable energy adoption drives ESG reporting

Globally, more and more countries continue to increase their focus on developing renewable energy sources, both due to the increasing pressure from various stakeholders, as well as the acknowledgement of the clear and present danger posed by climate change. Because of this, environmental, social, and governance (ESG) reporting has become a top priority for most boards.As the country gains momentum in shifting to renewable energy, we expect that financial reporting will have to reflect the commitments and actions of most organizations, notably those in the oil and gas sector, in tackling climate change. As a signatory to the Paris Agreement, the Philippines, being a country that is particularly vulnerable to climate-related risks, has pledged to reduce its own greenhouse gas emissions by 75% from its 2015 levels by the year 2030.Given the increasing global climate concerns and strong interest in achieving the United Nations Sustainable Development Goal 7 of ensuring access to affordable, reliable, sustainable and modern energy for all, the Department of Energy (DoE) is pursuing a Clean Energy Scenario setting a target of 35% renewable energy share in the power generation mix by 2030 and more than 50% by 2040. As of 2020, renewable energy accounted for 21.2% of the Philippine power generation mix.OIL AND GAS REMAIN VITAL TO ENERGY SECURITYThe DoE reported that in 2020, indigenous sources comprised almost 53% of the energy supply mix, out of which 6.6% was accounted for by the oil and gas sector, mainly from three petroleum service contracts (SCs): SC38 Malampaya, SC14C1 Galoc, and SC49 Alegria. Malampaya and Galoc are projected to be depleted by 2024 and 2025, respectively.However, in October 2020, the President lifted the moratorium on oil and gas exploration in disputed areas in the West Philippine Sea. One of the areas that will significantly benefit from renewed exploration is SC72 Recto Bank, which is operated by a subsidiary of PXP Energy Corp. SC72’s Sampaguita Gas Field is reported to contain prospective resources of 3.1 trillion cubic feet of gas. This project, once developed and made operational, can fill the void that will be left by Malampaya and Galoc.The reality is that until more renewable energy sources are developed, oil and gas will remain a significant component of the Philippine energy mix. This is why, given the global emphasis on climate-related reporting, oil and gas industry players should be seen as being proactive and taking the lead in addressing ESG concerns.FINANCIAL REPORTING FOR CLIMATE CHANGESustainability reporting is an important factor in improving a company’s sustainability commitment and its relationship with investors and customers.With this, the Securities and Exchange Commission, through its Memorandum Circular No. 4-2019, has provided guidance regarding disclosure requirements relating to sustainability reporting as an attachment to Publicly-Listed Companies’ annual reports (SEC Form 17-A).As climate-related matters continue to evolve and entities make further commitments and take additional actions to tackle climate change, it is important that they ensure their financial statements reflect the most updated assessment of climate-related risks. In November 2021, the International Financial Reporting Standards (IFRS) Foundation announced the establishment of the International Sustainability Standards Boards (ISSB), which is tasked to develop global standards linked to sustainability disclosures including climate and other environmental matters. As of 31 March 2022, the ISSB has issued two Exposure Drafts on IFRS Sustainability Disclosure Standards for public comment.While the Philippine Financial Reporting Standards (PFRSs) do not as yet explicitly reference climate change, climate risk and other climate-related matters, there may still be anticipated impacts on oil and gas companies over several areas of accounting as follows.General disclosure requirements. Entities are required, at a minimum, to follow the specific disclosure requirements in each PFRS standard. In determining the extent of disclosure, entities are required to carefully evaluate whether users of financial statements can assess the effects of climate change on their financial statements. If climate-related matters could reasonably expect to influence the decisions of the users of the financial statements, this information must be disclosed.Going concern. In many cases, climate risk may not add significant going concern uncertainty in the short term. However, Philippine Accounting Standards (PAS) 1 requires disclosures of material uncertainties. Climate-related matters could create material uncertainties related to events or conditions that cast significant doubt upon an entity’s ability to continue as a going concern. In such a case, although going concern may be assumed, additional disclosures explaining the uncertainties associated with the assumption would be required.Exploration and evaluation assets. Entities should consider the impact of climate risk and potential future developments, including the sustainability of its current business model and commercial viability, in assessing the recoverability of its exploration and evaluation assets (i.e., deferred exploration costs) and provide appropriate disclosures.Property, plant and equipment (PP&E). Climate-related matters have the potential to significantly impact the useful life, residual value and decommissioning, and restoration of PP&E (e.g., wells, platforms and related assets, refineries, retail service stations, etc.). Climate change and the associated legislation to promote sustainability increase the risk that PP&E items become “stranded assets” whose carrying value can no longer be recovered within the entity’s existing business model. Given the uncertainties around the impact of climate change, disclosures should be enhanced to allow the users of financial statements to understand and evaluate the judgements applied by management in recognizing and measuring items of PP&E.Impairment of assets. The extent to which certain assets, processes or activities will be impacted by climate-related business requirements and how climate-related risks and opportunities will affect an entity’s forward-looking information, such as cash flow projections, may require significant judgement. Entities should consider what information users rely on in assessing the entity’s (lack of) exposure to climate-related risks.Provisions. As entities take actions and initiatives to address the consequences of climate change, these actions may result in the recognition of new liabilities or, where the criteria for recognition are not met, new contingent liabilities have to be disclosed. Entities should ensure that sufficient disclosures are provided to allow users of financial statements to understand those uncertainties, how climate transition has been considered in the measurement of a provision or disclosure of a contingent liability, and the assumptions and judgements made by management in recognizing and measuring provisions.In a world that is increasingly sitting up and taking note of ESG concerns, the pressure on the oil and gas sector to help address climate risks will likewise continue to mount. While the above list of climate-related considerations is by no means all-inclusive and may vary between entities, they offer a starting point for the industry to take a proactive and progressive stance and demonstrate how it is doing its part to make the global climate change ambition a reality. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Arthur M. Maddalora is a senior manager from the Assurance Service Line of SGV & Co.