Suits the C-Suite

20 May 2024

Aaron C. Escartin

The evolving role of financial controllers

The financial controller role has transformed dramatically, with emerging technologies and advanced data analytics, along with the growing importance of environmental, social, and governance (ESG) considerations, introducing a fresh perspective to company planning. The traditional duties of financial controllers, which used to focus on historical financial reporting and regulatory compliance, now demand a broader range of skills and responsibilities.Their responsibilities have broadened beyond basic bookkeeping – they are now expected to adopt a proactive and visionary mindset, taking on the role of strategic business overseers. Modern controllers must be well-versed in a variety of competencies; they must excel in accounting and be capable of managing data, participating in strategic corporate conversations, and acting as reliable counselors. Their role has progressed into one that focuses on directing and ensuring the achievement of value, positioning them at the core of financial strategy.The increasing need for real-time and predictive financial reporting has been a major catalyst for this shift, with the role now including elements of financial planning and analysis (FP&A). Though controllers used to focus on internal transactional duties, technological advancements and evolving business expectations are pushing the role to become more extroverted.Incorporating ESG factors into fiscal planningAs ESG factors gain prominence in corporate planning and risk evaluation, it is essential for controllers to weave them into the fabric of financial forecasting and disclosure practices. This integration should be in harmony with the company's sustainability objectives and effectively communicated to all stakeholders.Some organizations are now appointing ESG-specific controllers, positioning the controllership role at the vanguard of this pivotal strategic initiative. With the growing need for verified ESG reporting, controllers are well-placed to spearhead this domain within their companies. This marks a considerable shift from previous times when compliance with statutory or similar regulatory reporting might not have been at the forefront of many corporate controller agendas.Familiarity with non-financial reporting standards, such as those set by the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), is becoming indispensable. These standards provide a blueprint for evaluating and disclosing sustainability efforts, tasks that now fall under the purview of financial controllers.In a globally intertwined business environment, the challenge lies in ensuring adherence to a variety of regulations across different markets while keeping financial management practices consistent with both international benchmarks and local mandates. Controllers are expected to perform thorough due diligence and maintain a comprehensive international outlook to protect the company's cross-border activities.The controllership should embrace a "glocal" (globally local) operational framework, capitalizing on centralization to enhance value while also ensuring that compliance, resilience, and risk management are supported at the local level. This new model for controllers aims to strike a balance between shared services and business partnership roles, with compliance functions remaining centralized. To adapt effectively, controllers must integrate strategies that utilize technology and data to streamline and standardize processes, all while upholding a local presence that supports compliance and risk oversight.In the era of digital finance, the sheer amount and velocity of financial data add unprecedented complexity to the task of ensuring precision in financial reporting. Controllers have the critical responsibility of guaranteeing that financial statements are free of material misstatements and reflect a true and just representation of the company's financial status. The rapid evolution of technology and regulatory frameworks demand financial controllers to dedicate themselves to continuous learning, enabling them to anticipate trends and challenges by adapting their knowledge and practices to stay relevant and efficient.Expanding the financial controller roleThe expanding role of the financial controller now encompasses a more prominent role in strategic decision-making processes, including steering investment approaches, navigating risks, and pinpointing growth opportunities. They are emerging as pivotal figures in formulating business strategies, charged with navigating their companies through market volatility with a decisive grip on fiscal instruments.Moreover, they must master sophisticated financial software platforms that not only simplify financial processes but also unlock the potential for detailed data analysis. Controllers must become fluent in the language of technology, providing a nuanced perspective on the financial well-being of the company, and facilitating predictive insights. They should approach their role with an open mind and curiosity, ready to embrace new tools, functionalities, and technologies. At the same time, they must exercise discernment to choose technologies that are appropriate for their organization and specific circumstances.Controllers must cultivate a dual expertise: a deep grasp of financial principles coupled with skills in data analytics. With these capabilities, they can translate intricate data into clear insights, formulate corporate strategies, spur innovation, and promote ethical leadership. By nurturing sustainable business operations and maintaining the integrity of financial disclosures, controllers establish themselves as vital consultants within their organizations, equipped to manage the intricacies of today's business landscape.From traditional bookkeepers, financial controllers can become "value articulators" – guardians of value delivery who evaluate the financial outcomes of investments. Today's controllers transcend transactional duties, embracing data and technology with a forward-looking mindset crucial for steering sound decisions, ensuring regulatory adherence, and propelling the organization towards resilience and expansion. Preparing for the future of controllershipTo navigate the evolving landscape of controllership and prepare for its future, financial controllers must proactively refine their expertise and adapt to new challenges. A commitment to continuous professional development is essential, with a focus on acquiring knowledge in data analytics and mastering advanced financial software platforms. Controllers should immerse themselves in the latest fintech innovations, selecting tools that align with their company's specific needs. This discernment will ensure they remain competitive, leveraging automation and predictive analytics to drive business success.Additionally, understanding and integrating ESG principles into financial strategies is becoming increasingly important. Controllers should become well-versed in non-financial reporting frameworks, enabling them to align financial strategies with sustainability goals and communicate these efforts effectively to stakeholders.In our interconnected global economy, maintaining awareness of international regulations is paramount as well. Controllers must develop strategies that ensure compliance across various markets while harmonizing financial management practices, safeguarding company operations across borders. Cybersecurity vigilance is another critical area. Financial controllers must prioritize financial data security, implementing robust data governance measures and staying informed about the latest cybersecurity best practices to protect the company's financial information and reputation.Finally, controllers should actively engage in strategic business discussions and investment decisions. By doing so, they position themselves as chief value officers and vital business partners, contributing significantly to the company's strategic direction and value creation. This strategic business involvement ensures that controllers are not just number crunchers – but key players in shaping the future of their organizations. Aaron C. Escartin is a Global Compliance and Reporting (GCR) Tax Partner of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

13 May 2024

Bonar A. Laureto

Climate resilience: Innovations in Philippine businesses

Due to escalating climate challenges, Philippine businesses must redefine resilience by navigating risks and capitalizing on emerging opportunities. The previous article explored the foundational principles of climate resilience, emphasizing the imperative for Philippine businesses to adapt and thrive amid climate threats. The discussion highlighted how understanding and managing both physical and transition risks are crucial, alongside strategic shifts towards sustainability that bolster growth and help secure a competitive advantage. This article explores how leading companies are leveraging their proactive strategies to improve their market position and drive long-term value, as shared by these companies at the recently held SGV Knowledge Institute event entitled Climate Convergence: Actions Toward a Resilient Future. Energy Development Corporation (EDC): Proactive risk managementEDC's risk management strategies, born from firsthand experiences with climate-related disasters, illustrate the importance of preparedness and adaptive operations. Their structured approach not only safeguards against immediate risks but also builds a foundation for resilience, showcasing how businesses can thrive amid environmental uncertainties.When Super Typhoon Yolanda hit EDC's geothermal power plants in Leyte, it took them four months to restore generation capacity. In response, the company invested over ₱350 million in resilience measures to typhoon-proof its Leyte plants. Concurrently, EDC reinforced its dedication to climate change mitigation by committing never to build, develop, or invest in coal-fired power plants. In addition, EDC launched the Net Zero Carbon Alliance framework that aims to help its partners achieve carbon neutrality. JG Summit Holdings, Inc.: Systematic climate hazard mitigationJG Summit Holdings, Inc.’s strategy to assess and enhance resilience against projected climate hazards showcases their approach to safeguarding assets. Specifically, they initiated a pragmatic strategy to progressively enhance resilience across its portfolio. The conglomerate has also launched initiatives to integrate climate risk intelligence into its strategic businesses processes. Using a data-driven approach, it leverages the latest climate science and granular Philippine-specific data to thoroughly assess its facilities' exposure to climate hazards. Concurrently, the conglomerate conducts vulnerability assessments on select business-critical facilities to evaluate their ability to withstand extreme weather events, shaping retrofitting strategies, refining maintenance protocols and emergency response plans, and establishing necessary backups and redundancies applicable across their portfolio. Central to these efforts is capability building, with significant investments in training risk managers to interpret and utilize climate data at scale. SteelAsia Manufacturing Corp. (SteelAsia): Pioneering green steel productionSteelAsia’s journey toward a net-zero future by 2050 demonstrates a transformative approach to decarbonization and managing transition risks. By integrating advanced technologies and prioritizing the use of recycled materials, SteelAsia is reducing its carbon footprint and aligning itself with global demands for sustainable building materials. These solutions include using recycled scrap steel and electric arc furnace (EAF) technology powered by renewable energy, allowing SteelAsia to reduce its emissions intensity (ton of CO2 produced per ton of steel) by 87% compared to the industry-standard Blast Furnace-Basic Oxygen Furnace method. By adopting the cleanest technologies and learning from global advancements, SteelAsia has emerged as a global leader in green steel production, achieving one of the lowest emission rates in a traditionally hard-to-abate sector. In addition to direct emissions reductions, avoiding the cycle of exporting scrap only to import finished products enables SteelAsia to significantly cut emissions along the entire supply chain and deliver steel to its customers more quickly and efficiently. Compared to global competitors, SteelAsia offers dual benefits: their locally produced green steel reduces customers’ embodied emissions and ensures shorter wait times.Nickel Asia Corporation (NAC): Reimagining mining with sustainabilityNAC is actively enhancing its environmental protocols by adopting sustainable mining practices, such as obtaining Science Based Targets initiative (SBTi) certification and implementing comprehensive emission management strategies. These initiatives demonstrate NAC’s commitment to reducing its ecological footprint while maintaining profitability, setting a benchmark for sustainable practices in the mining sector.They tackled one of mining’s main emissions source — fuel used in operations and mineral transport — by investing in low-emission technologies like hybrid excavators that improve fuel efficiency and cut fuel costs. These efforts will have reduced an estimated 35,000 tCO2e in Scope 1 and 2 emissions by 2025, merging sustainability with operational efficiency.BDO Unibank, Inc.: Leading with sustainable financeThrough its Sustainable Finance Framework, BDO supports projects that offer environmental and social benefits, aligning investment with sustainable growth. This proactive approach addresses the financial aspects of climate resilience and emphasizes the financial sector’s role in fostering a sustainable future. Since 2010, its Sustainable Finance Desk under the Institutional Banking Group has financed projects that pursue energy efficiency, pollution prevention and control, and sustainable management of natural resources and land use.In particular, BDO has directed a significant portion of its business lending — 34% — toward environmental and social projects. Its ASEAN sustainability bond program, the largest of its kind in the Philippines, raised PHP52.7 billion for 39 projects encompassing renewable energy, roads & basic infrastructure, affordable housing, food security, and other green and social initiatives. Additionally, BDO has issued USD150 million worth of green bonds that finance seven renewable energy projects across wind, biomass, and hydro. More recently, BDO introduced a USD100 million blue bond program, the first of its kind in the country, dedicated to financing projects that enhance bulk water supply and improve wastewater management.SGV & Co. (SGV): Walking the talkSGV is at the forefront of managing its climate risks and spearheading solutions that empower its clients to enhance their management of climate risks and opportunities. The firm has taken decisive action to reduce its emissions, with a particular focus on power consumption, the primary source of its emissions. By transitioning to renewable energy sources under the Department of Energy’s Green Energy Option Program (GEOP), the firm has made significant strides in cutting down emissions related to electricity. This program enables consumers to switch from conventional energy supplies to renewable sources within the country. Part of the Firm’s portfolio of initiatives includes producing thought leadership reports and articles on sustainability and relevant regulations surrounding it, as well as crafting the annual SGV Sustainability Report and Beyond the Bottom Line publications.SGV has further strengthened its capabilities to confront climate-related challenges by establishing a robust climate risk advisory team composed of climate science, geology, and engineering professionals. This strategic development equips the firm to analyze projected climate hazards, develop localized climate hazard information, and perform in-depth vulnerability assessments across assets and portfolios — overcoming a major hurdle in crafting effective climate resilience strategies for its clientele.Advancing the country’s sustainability journeyToday, Philippine companies are not only safeguarding their future – they are actively shaping the narrative of sustainable development within the country. As we can see from the above examples, businesses, in close cooperation with Government, are pivotal in steering the country toward a resilient, sustainable trajectory.In a rapidly evolving business landscape, further shaped by the pressing imperatives of climate dynamics, trailblazing entities can offer blueprints for action. Through innovative approaches to the intertwined risks and opportunities of climate change, companies can find new ways to gain a competitive edge in an economy increasingly defined by sustainability. Bonar A. Laureto is a Sustainability Services Principal of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

22 April 2024

Ana Katrina C. De Jesus

Achieving transfer pricing certainty

Global tax reforms are leading to double taxation risks, which are significantly altering businesses' approaches to transfer pricing certainty and operational transfer pricing needs. Other key concerns include inflation, increased focus on enforcement by tax authorities, environmental, social, and governance (ESG) pressures, advancements in transfer pricing related technologies, such as generative artificial intelligence (GenAI) and transfer pricing dispute resolution tools, and changes in supply chain.EY recently released the results of the 2024 International Tax and Transfer Pricing Survey, which sampled 1,000 senior tax and finance professionals from large companies in 47 jurisdictions across 19 industries. The survey, which was conducted by an independent provider, highlighted the increasing need for businesses to implement robust transfer pricing policies given new international tax risks. This article will tackle the concerns, challenges, and considerations that were identified by surveyed tax and finance professionals.The role of transfer pricingHistorically, transfer pricing has followed a linear approach that comprises planning, implementation, compliance, and controversy. With the changing landscape, tax and transfer pricing professionals need to engage more strategically with the broader business, considering the rapid increase in double taxation risks and external pressures. Tax audits are expected to increase and intensify, with transfer pricing identified as a top risk area. Tax authorities are now going beyond traditional, functional interviews by processing more details about taxpayers’ global operations, including how tax obligations and business activities align in specific jurisdictions.The data accessed by tax authorities in this evolving tax controversy landscape can be utilized by GenAI and related technologies, allowing them to conduct the audit and process data more effectively. Public regulatory filings, social media profiles, news articles and intellectual property registrations are some sources of information that tax authorities can analyze to evaluate risks and challenge a taxpayer’s position. In the Philippines, the Bureau of Internal Revenue (BIR) identified the creation of a Transfer Pricing Office as a priority program for 2024. The new office will be expected to monitor compliance with transfer pricing documentation requirements, including the preparation and maintenance of local files, master files, and country-by-country reports (CbCR). These will be done pursuant to the minimum standards of the BEPS Action Plans as basis for strategic decision making and managing tax compliance risks. Consequently, the BIR will be keeping a keen eye on cross-border transactions to ensure fair and accurate allocation of costs and profits. The need to standardize data to manage tax controversyTraditional transfer pricing operations are labor-intensive, especially those focused on compliance. Reconciliations and adjustments should ensure that intercompany pricing policy continuously occurs throughout the year, and not just by the end. Gathering the required data for fact-finding, such as financials, taxes, and supply chain information for open years, becomes a challenge when sourced from multiple systems and jurisdictions. This is particularly evident in tax audit cases because taxpayers are expected to respond within a limited period.Increased technology adoption can enable traditional operations and compliance functions in this changing landscape. Taxpayers must plan ahead to harness the power of data, systems, and technology. Investing in data strategy system improvement and advanced operational transfer pricing technology or partnering with a service provider who has built these capabilities can facilitate transfer pricing certainty.Likewise, tax and transfer pricing professionals may resort to GenAI tools to align the group’s transfer pricing policies while identifying and addressing tax risks. This will revolutionize how professionals prepare, analyze, and present data to ensure that their positions are clear, defensible, and easily understood. With the rollout of Pillar Two and disclosure of CbCR in a number of tax jurisdictions, businesses must standardize their internal data to efficiently manage tax authority controversy and Pillar Two calculations. The Philippines has recently accepted the invitation from the Organization for Economic Co-operation and Development (OECD) to join the Inclusive Framework on BEPS, but the country has yet to see local adoption of the Pillar Two rules. To be proactive, tax and transfer pricing professionals should start standardizing their internal transfer pricing data.Transfer pricing certainty through dispute resolution programsTransfer pricing certainty can be realized through various factors, such as increasing interest in advance pricing agreements (APA), mutual agreement procedures, and other dispute resolution programs by tax administrations. In some tax jurisdictions, the International Compliance Assurance Program (ICAP) is considered as a pre-filing and dispute resolution mechanism. Moreover, the ICAP coordinates between a multinational enterprise (MNE) group and multiple tax administrations through the effective use of transfer pricing documentation, including the MNE group’s CbCR to improve multilateral tax certainty.In the Philippines, there have been discussions on the upcoming release of the APA Guidelines to fortify transfer pricing implementation. APA is a mechanism where the tax authority and the taxpayer would agree in advance on the appropriate set of criteria (e.g. transfer pricing method, comparables and appropriate adjustments) to ascertain the transfer prices of controlled transactions over a fixed period of time. Tax and transfer pricing professionals foresee that unilateral APAs will be useful to manage transfer pricing related controversy. How can professionals prepare for the new reality?Tax and transfer pricing professionals highlight escalating concerns regarding double taxation and broader tax and legislative changes, emphasizing the emergence of a new era where businesses are seeking more certainty in their transfer pricing positions.Some measures that companies can take include: focusing on transfer pricing certainty, mapping out future and current dispute resolution mechanisms, centralize processes around standard data to decrease risk, prepare for increasing application of data to define the company’s transfer pricing approach. These measures, naturally, will require the cooperation and support of the company’s C-level executives. Realizing transfer pricing certaintyTax and Finance departments should prioritize transfer pricing certainty through standardized data, modified processes, and technology adoption to facilitate dispute resolution. Tax and transfer pricing professionals should collaborate more closely with the C-suite in making business decisions to enhance certainty from the outset of any business changes and to effectively navigate the evolving regulatory environment.Internally, tax and transfer pricing policies should align with the organization’s broader public image. Externally, pre-filing and dispute resolution programs should be considered.Preparation is also key. Taxpayers that invest in modern transfer pricing approaches will be adequately equipped to engage with tax authorities in future controversies and better support their positions. Finally, tax and transfer pricing professionals must recalibrate and adapt their strategies in response to the changing global tax and economic landscape. Ana Katrina C. De Jesus is a Tax Principal of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

22 April 2024

Rossana A. Fajardo

How can shifting dynamics help revitalize your workforce

In the aftermath of the COVID-19 pandemic, the Philippine labor market has shown a remarkable recovery and transformation. Comparing data from Philippine Statistics Authority (PSA) Labor Force Surveysin April 2020 and February 2024, an increase in employment rates — from 82.4% to 96.5% — has been noted. This represents a substantial growth of 15.15 million in the workforce, showing a robust entry of the working-age population into active employment since the onslaught of the pandemic.Amidst the broader economic rebound, one of the most striking differences that can be derived from the pre-pandemic and post-pandemic Labor Force Surveys is the reduction of average weekly work hours in the country, from 43.2 hours in 2019 to 40.1 hours in 2024. It coincides against a backdrop of strong economic recovery post-pandemic. According to the Philippine News Agency (PNA), the Philippine government’s official web-based newswire service, the economy continued to flourish after a sharp rebound to 5.6% GDP growth in 2021 from the 2020 downturn. According to the DOF, it achieved an unprecedented 7.6% growth in 2022, and last year, the country posted 5.6% growth, making it the fastest growing economy among its peers in the Association of Southeast Asian Nation (Asean).This three-hour reduction might seem modest, but it serves as a microcosm of current global trends that have been magnified by the pandemic. These include the rapid adoption of remote work, increased flexibility, and a broader cultural shift towards the “Great Rebalancing” — a movement to recalibrate work policies and prioritize employee well-being and personalized work arrangements, often entailing shorter hours.Today, employees are motivated by the desire for more comprehensive total rewards packages, improved well-being, and the necessary skills to thrive in a world that increasingly values work flexibility.According to the EY 2023 Work Reimagined Survey, these trends are integral to the seismic shifts defining the “next normal” in work. This survey was conducted through an anonymous online poll involving 17,050 employees and 1,575 employers across 25 different sectors and more than 20 geographies, including the Americas, Asia-Pacific (including Southeast Asia (SEA) — Indonesia, Malaysia, the Philippines and Singapore), and EMEIA (Europe, the Middle East, India, and Africa). The survey underscores distinct perspectives on work between employers and employees, particularly regarding the balance of power in the workplace. It highlights that while employers generally believe economic challenges will reduce employee turnover, as many as 34% of employees are considering changing jobs within this year. It also shows that as hybrid work evolves, it demands a deeper understanding of how technology, office infrastructure, and employee amenities impact productivity, organizational cohesion, and trust. Rebalancing power dynamicsTraditionally, employers held more influence and control in the workplace. However, perceptions have shifted since the pre-pandemic period, with fewer respondents now believing that employers maintain the upper hand.Interpreting current market conditions from different perspectives can influence how employers and employees perceive each other. For example, the disparity in their views on financial pressures can create an imbalance in workplace power dynamics. This imbalance is evident in survey findings, where only 47% of employees believe their organization is facing growth or profit challenges, compared to 61% of employers.Rightsizing rewards, boosting retention ratesTo secure sought-after skills, organizations must develop talent from within or recruit new hires effectively. One way to do this is to ensure that compensation and career opportunities are competitive, both internally and externally. Both employees (80%) and employers (79%) surveyed also agree that “total rewards” programs need “moderate” to “extensive” changes. Total rewards encompass various factors like time off, recognition, well-being, and health and retirement benefits.Organizations can improve their ability to attract and retain talent by developing offerings that enhance the employee value proposition (EVP) through market benchmarking and internal surveys. By restructuring total rewards programs to align with the broader objectives of the EVP, these initiatives can positively impact perceptions of change and transformation, innovative work methods, and leadership approaches.Fostering a people-first cultureA major action point is to define and cultivate a people-first culture – with humans at the center — and emphasizing trust. However, only 64% of employees surveyed agreed with the statement that employees feel trusted and empowered by their leaders compared with employers who agreed (81%), showing a 17-point gap.Trust and empathy foster positive results, essential for effective leadership, team cohesion, and organizational success. These work values can be exemplified by transitioning from individual to collaborative thinking — a shift from a “me” mindset to a co-created “we” mindset. Meanwhile, transparency and tracking of behaviors, attitudes, and results from diverse data can help build trust. Understanding these metrics can enhance a sustainable collective mission, purpose, and culture.Enhancing the workplace experienceEmployers and employees hold divergent views on talent, culture, and leadership. Specifically, 76% of employers agreed that “Leadership cares about employees as people,” compared to only 54% of employees. On the other hand, 59% of employees and 78% of employers agreed that “Employees have the ability to innovate and/or have time for unplanned collaboration.”These gaps underscore the need for an overall workplace environment aligned with employees’ realities to foster a more engaging and supportive workspace, thereby boosting satisfaction, retention, and productivity.Reinventing workIn today's work landscape, flexibility in work arrangements is not just desired but expected, especially for knowledge-based roles, with more than a third of employees expressing a preference for full remote work. To adapt, organizations must pinpoint which roles can effectively function remotely and devise comprehensive strategies, leveraging appropriate technologies and refining processes to facilitate seamless transitions to hybrid work environments. This approach should encompass not only work operations but also learning initiatives and the nurturing of company culture.Moreover, establishing guidelines for sourcing talent across different regions can mitigate risks while maximizing the advantages of flexible work for both the organization and its mobile employees. While real estate may not directly impact employee satisfaction, the study shows that it does influence culture, productivity, and retention. Therefore, investing in well-designed spaces that foster social connections and collaboration can yield significant returns.Upscaling AI Both employers and employees recognize the promise of Generative Artificial intelligence (GenAI), which has recently entered mainstream technology discussions. One of the key advantages of this disruptive technology is its ability to generate initial drafts of work, which can then be reviewed and refined by human users.In Southeast Asia, as high as 64% of employees and 86% of employers have a positive outlook on the potential of GenAI to enhance working flexibility. Despite this, only 25% are committed to offering training in GenAI-related skills.In addition to acquiring new technical skills such as in GenAI, organizations must also evaluate employee soft skills such as critical thinking and resilience to ensure that their talent strategies align with business objectives, commitments to diversity, equity, and inclusion (DE&I), and fosters a culture of trust. Redefining workforce dynamicsAmidst the evolving work landscape and dynamics, companies are urged to equip their teams to handle uncertainty and to offer the necessary financial, physical, emotional, and social support to help them excel. More and more, fostering an environment where employees can thrive and better support organizational success is becoming an imperative. Rossana A. Fajardo is the EY ASEAN Business Consulting Leader and the Consulting Service Line Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

22 April 2024

Bonar A. Laureto

Charting a resilient future: A business imperative for the Philippines

In an era where climate change reshapes global economies, resilience transitions from a mere buzzword to a fundamental business strategy. For the Philippines, a nation perennially at the crossroads of climatic upheavals, this transition is not just strategic—it's existential. The imperative for climate resilience is underscored by scientific projections, economic analyses, and policy shifts that beckon Philippine businesses toward sustainability and resilience.This article discusses the importance of informed action, strategic foresight, and collaboration in building climate resilience. It highlights the pivotal role of business leadership in promoting sustainability and resilience as key drivers of economic growth and competitive advantage in the Philippines. The second part of this series will focus on practical strategies and success stories, providing a roadmap for businesses to effectively manage climate risk with agility and insight.Understanding climate resilience: A business necessityAt its core, climate resilience involves the capacity of businesses to adapt, survive, and thrive in the face of climate-induced disruptions. This notion gains prominence against the backdrop of the Philippines' acute vulnerability to climate risks, highlighted by its ranking on Germanwatch’s most recent Global Climate Risk Index, an annual report that analyzes the effects of weather-related loss events. Germanwatch is a non-profit organization that monitors global climate policies and human rights issues. Moreover, a recent publication from the Swiss Re Institute, a leading wholesale provider of reinsurance, highlights the economic impact of climate change, identifying the Philippines as the country most economically exposed to weather-related perils like floods and tropical cyclones. In addition, new research by international journal Nature, titled The economic commitment of climate change, suggests that the world economy is committed to an income reduction of 19% within the next 26 years due to climate change, regardless of future emission choices. These damages outweigh the mitigation costs required to limit global warming to 2 °C by sixfold over this near-term time frame. The World Economic Forum also states that by 2050, climate change will cause an additional 14.5 million deaths and $12.5 trillion in economic losses worldwide. Healthcare systems will see an additional $1.1 trillion burden due to climate-induced effects, with floods, droughts, and heat waves identified as leading causes of climate-related mortality and economic losses, and the rise and spread of climate-sensitive diseases like malaria and dengue. The Philippines typically experiences a significant 3% loss in GDP due to weather events, highlighting the urgency for adaptation measures to mitigate economic losses. The Swiss Re report Changing climates: the heat is (still) on emphasizes the importance of accurately pricing climate change risks to catalyze necessary investments in adapting and resilience-building efforts. The warming world and its implications for the PhilippinesThe Philippine economy, with its significant reliance on agriculture, tourism, and real estate, is particularly susceptible to climate-induced hazards. Flooding and droughts threaten agricultural productivity and asset values, and extreme heat elevates energy demands and costs. Furthermore, typhoons and storm surges can devastate tourism assets, a crucial income source for many communities. With scientists warning of intensified, extreme weather events in a warming world, the cost to the country’s economy can only go up. The insurance industry, grappling with losses from natural catastrophes, echoes this concern, highlighting a burgeoning coverage gap and the escalating cost of insurance in the Philippines. Local perspectivesThe urgency for climate resilience is echoed in the corridors of power, with Philippine President Ferdinand R. Marcos Jr. elucidating the stark reality of the country’s economic exposure to climate risks. In March 2024, the President emphasized the economy's resilience against climate impacts, suggesting that without these challenges, the country's economic strength would be more apparent. He made these remarks to highlight the importance of understanding and mitigating climate risks for economic development. During the APEC CEO Summit in November 2022, the President also underscored the necessity of resilient infrastructure to combat climate threats, further underlining his commitment to climate resilience as a foundational element for the nation's growth. In addition, the country’s Finance Secretary has expressed the need for developing insurance products specifically designed to address climate change-related natural disasters. This underscores his recognition of the increasing importance of adaptive measures in the financial sector to mitigate the economic impacts of climate-related events. Regulatory landscapes and strategic imperativesThe Philippine Securities and Exchange Commission’s mandate for publicly-listed companies (PLCs) to disclose climate hazard exposures and risk mitigation strategies illustrates a pivotal shift toward transparency and accountability in climate risk management. Aligned with global sustainability reporting standards, this regulatory evolution underscores the importance of integrating climate considerations into corporate governance and strategic planning. Similarly, the mandate of the Bangko Sentral ng Pilipinas on environmental and social risk management and climate stress testing for banks systemically integrates climate resilience in the financial sector, influencing corporate strategies across the board.Corporate leadership in actionMany PLC and non-PLC Philippine corporations are proactively bolstering their defenses against climate change, with key industry leaders conducting in-depth climate risk evaluations in line with Task Force on Climate-Related Financial Disclosures (TCFD) guidelines. These comprehensive assessments deploy sophisticated climate models to gauge the potential severity and occurrence rate of climate-related threats, aiming to assess how these factors might impact corporate assets. This forward-thinking approach demonstrates a broader commitment to sustainability and risk management, safeguarding stakeholder interests and ensuring long-term corporate value, which goes beyond standard regulatory requirements.To continue this discussion, the next article will explore how leading Philippine companies are leveraging their proactive sustainability strategies to improve their market position and drive long-term value. Bonar A. Laureto is an Assurance Principal and part of the Climate Change and Sustainability Services team of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

15 April 2024

Bernalette L. Ramos & Charisse Rossielin Y. Cruz

Securing a competitive advantage in the insurance industry

Stiff competition, shifting regulatory policies, and increased investor expectations have elevated the importance of trust and transparency in today’s insurance industry. Investors are seeking not only greater coverage that spans years or decades but also ethical practices and long-term viability. This trend underscores the current investor climate where discernment is especially airtight, promoting healthy and sustainable practices within the industry.However, this development comes with its own set of challenges for insurers, including developing robust risk management mechanisms and adopting newer technologies across a range of services. Amidst growing competition, the main challenge for most insurers will be transforming their organizations into “preferred partners” instead of mere product providers.These trends and insights were highlighted in the EY Global Insurance Outlook 2024; furthermore, this comprehensive report explores purposeful strategies to help insurers achieve sustainable performance given the ever-evolving nature of the industry. The report provides salient insights, giving insurers the following key points of action to secure a competitive advantage.Prioritize trustTrust is the bedrock of the insurance industry—the core of every interaction, communication, and policy. Moreover, trustworthiness actively guides product development, customer-facing process automation, ecosystem partner evaluation, and technology adoption.Consumers will trust firms that provide the right advice, create the right solutions, and provide products and services that deliver tangible societal value. According to the EY Global Insurance Survey 2021, most consumers (79%) trust insurers that demonstrate genuine commitment to Environmental, social and governance (ESG) principles when making purchasing decisions. Additionally, 43% prefer purchasing from companies that positively contribute to societal welfare, despite higher costs. By incorporating trust into the company's strategies, insurers can attract loyal customers, increase profitability, and reinforce relationships with partners and regulators.Ensure transparency and privacyWhile insurers should take advantage of generative AI (GenAI) to reduce the savings and protection gap and satisfy new customer demand, companies should also be mindful of its actual and perceived risks. This gap refers to the shortfall between what individuals have saved for their future needs and what they should ideally have to adequately protect themselves or their assets against various risks, such as health issues, job loss, and damage or loss of property. The EY European Financial Services AI Survey 2023 showed that privacy (31%) ranks as the top concern among European Insurance executives around the ethics of GenAI followed by discrimination, bias, and fairness (26%); and transparency and explainability (21%). More than just legal and regulatory requirements, transparency and privacy are key components to establishing and maintaining client trust. Because data privacy is a significant public concern, companies must secure investor information and maintain transparency regarding its use and access. Redesign, simplify, and personalize your productsGiven the industry’s dynamic nature, prioritizing customer-centricity has emerged as the strategic “north star” for all insurance companies. This involves providing customized products that are convenient to procure, cost-effective, and augmentable with supplementary services and personalized recommendations. Prioritizing the needs and preferences of customers requires companies to undergo a holistic transformation across various aspects of their operations. This includes updating technology infrastructures, redesigning product portfolios, and restructuring organizational setup to better engage and serve new and existing customers.Precise customer knowledge is the foundation for more a personalized service and richer experiences delivered via preferred channels. According to EY Tech Horizon Global Survey 2022, 9% of global insurers plan to use AI and data science to drive product innovation through new offerings and personalization.Innovate with data for valueRevisit existing data from a new perspective, one that delivers value-driven solutions to your investors and partners. During tumultuous times, stakeholders want insurers to deliver more value through comprehensive policies, holistic solutions, and personalized experiences.Embrace “impact by design”The “impact by design” principle harmonizes the interests of the planet, people, and profit in developing products, services, or solutions that deliver societal value. Incorporating this into the company’s strategy leads to stronger customer acquisition and loyalty, higher employee satisfaction, and improved access to capital. Nowadays, compliance-driven thinking and expanded philanthropic endeavors are imperative. Specifically, product innovation, new business models, and purposeful investments can help insurers unlock growth as they safeguard themselves against climate risk, promote financial well-being, and encourage physical and mental health. Engage regulators to address protection and savings gaps Proactively addressing consumer protection and savings gaps with authorities and regulators demonstrates the commitment of an organization to building trust and confidence in the market, shaping a more favorable business environment for everyone.Measure trust effectivelyTo evaluate investor trust or perception, organizations must first establish specific metrics. Quantifying trust allows the company to track progress, identify pain points, and cultivate integrity among stakeholders. Having a high degree of trust is a hallmark of the world’s top insurance brands. The most trusted insurers have a larger and more loyal client base, increased profitability, and more lucrative relationships with partners and regulators.As highlighted in the 2024 EY Global Insurance Outlook, firms that don’t address today’s historically low levels of customer trust will be vulnerable to rising competition from outside the industry, including firms from the technology, automotive, retail, consumer goods, and banking sectors. An insurance industry that lacks trust will struggle to build strong customer relationships and grow its market share.Strengthen data securityGenAI promises to revolutionize risk assessment, claims processing, marketing, sales, and other essential business functions. Consequently, senior leaders must take the time to establish robust governance models and policies that ensure the responsible and ethical use of AI. Identifying the full range of risks, which includes data breaches and reputational issues, and designing the right framework for managing them are the top priorities. Data security is non-negotiable for stakeholders, so strong safeguarding measures are necessary to increase investor confidence in the brand.If insurers don’t deliver what the consumers want — precisely when, where, and how they want it — customers will take their business elsewhere. Bernalette L. Ramos is an Assurance Partner and the Insurance Sector Leader, and Charisse Rossielin Y. Cruz is a Business Consulting Partner and the Insurance Sector Deputy Leader, both of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co

08 April 2024

Christian G. Lauron and Janeth T. Nuñez-Javier

Priorities for financial services firms in the digital age

Political and economic issues are not the sole contributors to the growing complexity of the global financial services landscape. Digital assets and the digitalization of finance, including digital payments and artificial intelligence (AI), are also greatly impacting regulator standards for effective supervision. In the Philippines, the digital transformations of the banking and financial services sectors are rapidly accelerating, driven by efforts to integrate more Filipinos into the formal banking system. Data from the Bangko Sentral ng Pilipinas (BSP) shows that approximately 22 million Filipinos acquired access to formal financial accounts between 2019 and 2021. This development indicates an increase in banked Filipino adults to around 56% in 2021, up from 29% in 2019.This development was driven by the faster growth in digital payments, particularly in merchant payments, peer-to-peer remittances, and business transactions of salaries and wages. BSP aims to digitalize 50% of retail payments and to onboard at least 70% of adult Filipinos into the formal financial system.Last week, we discussed trends covered in the 2024 EY Global Financial Services Regulatory Outlook Report, which highlights areas of longstanding regulatory interests. This article will focus on four critical areas that financial services firms need to prioritize in the age of digitalization and AI. Upgrading legacy systems through upskillingThe financial services industry is increasingly focused on modernizing outdated systems and embracing an agile approach across all business functions. Therefore, firms must remodel their operating structures to enhance agility and efficiency.A key focus is upskilling, particularly for Chief Risk Officers (CROs), who must understand the risks associated with cloud computing and predictive analytics. Moreover, they need to grasp the implications of emerging technologies, such as machine learning, and adapt to new processes and methodologies, such as the agile approach.Some firms are still struggling to update legacy systems, however, leading to greater regulatory scrutiny. The 12th EY and Institute of International Finance (IIF) Global Risk Management Survey found that 94% of CROs say they need new skills and resources to meet the changing needs of the risk management function, with data science and cyber expertise topping the list.Enhancing digital transformation resilienceAccording to the 11th AnnualEY/IIF Global Bank Risk Management Survey, CROs expect their senior management team to focus on implementing process automation (88%), modernizing core IT functions (66%), using analytics to improve customer insights (64%), cloud migration and adoption (63%), and customer self-service capabilities (63%) over the next few years.However, if not integrated effectively, such changes can introduce unwanted risks. Introducing a third-party technology, a common requirement of digital transformations, can be revolutionary for customers and for internal ways of working, but it can increase a bank’s risk profile.Also, per EY’s 2024 Global Financial Services Regulatory Outlook, regulators will continue raising the standard of digital resilience and tackle increased operational reliance on IT systems, third-party service providers, and innovative technologies, which increases complexity and interconnections within the financial system and is driven by digital transformation. Proactive monitoring to address cybersecurity risksAmidst unprecedented levels of volatility and global uncertainty, cybersecurity has remained top of the list of near-term risks for banks around the world.The 13th EY/IIF Bank Risk Management Survey showed that in the short term, nearly three out of four CROs identified cybersecurity risk as their top concern over the next 12 months (73%) and two-thirds (66%) of respondents naming liquidity risk as the top financial risk for the next year.The report, which was based on data from 86 banks across 37 countries, explored the dynamic nature of risk management in banking. For example, CROs must be vigilant regarding the rise in fraud and other financial crimes caused by economic stress. Given the constantly evolving cyber threats, socioeconomic disruptions, and third-party risks, organizations must be proactive and agile.Establishing cross-functional teams and an AI governance frameworkAI regulation has advanced in the past years but still lacks overall clarity. International bodies such as the Organization for Economic Cooperation and Development and the United Nations are developing guidelines to support coordinated approaches for responsible AI use.Various governments are pushing ahead with new legislation. For example, China included a draft AI law in their 2023 legislative work plan, but the process timeline is unclear. Canada also seeks to establish legislation through an AI and Data Act. However, some countries are cautious about government interventions, which might stifle innovation. The United States, Japan, South Korea, and Singapore are focusing on voluntary guidelines. Recently, EU institutions have reached an agreement on its AI Act, a comprehensive legal framework regulating AI and a landmark in global AI regulation. On a micro level, AI adoption will continue to advance in the banking industry, from both a business and risk management perspective. Utilizing advanced technologies will be critical to realizing positive outcomes from digital transformations; therefore, organizations must establish technology- and AI-enabled risk management teams as well as a robust AI governance framework.Future-proofing in the digital ageAmidst financial pressures, new competition, regulatory scrutiny, and shifting consumer behavior, banks are under pressure to embrace new technologies and pivot towards digitalization.While financial regulators are considering the need for new rules to complement their existing authority, financial services firms should focus their attention on building resilience through senior management accountability, developing and implementing an enhanced operational resilience framework, and addressing operational disruptions. Finally, they should create cross-functional teams for AI projects to manage risk and compliance effectively. Establishing a comprehensive governance framework for adopting digital or new technologies can help organizations realize benefits and minimize risk, strengthening their positions in the digital era. Christian G. Lauron is the Financial Services Organization (FSO) Leader and Janeth T. Nuñez-Javier is the Banking and Capital Markets (BCM) Sector Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

01 April 2024

Christian G. Lauron and Janeth T. Nuñez-Javier

Financial institutions trends in 2024

This year, the global financial services landscape will be impacted by factors such as volatile geopolitics, rising energy costs, and rampant inflation. The spillover regulatory effects from high-profile bank failures last 2023 will also be felt this year and beyond, but they are not entirely unfavorable.For example, more global regulatory reforms are taking shape to address the impact of the TBTF dilemma, or the perception that “the banks are too big to fail.” This theory refers to the situation where interconnected financial institutions have grown so large that their collapse could severely impact the entire financial system.The 2024 EY Global Financial Services Regulatory Outlook Report highlights areas of longstanding regulatory interests. Among the priorities discussed, this article will explore five trends for banks and financial institutions.Digitalization of finance and integration of AIWith digitalization becoming the norm, some firms are struggling to update legacy systems, leading to greater regulatory scrutiny. This challenge will impact not only banks but also other institutions. Consequently, regulators will raise their standards of operational resilience, particularly in areas like technology. Doing so requires firms to reduce deficiencies in IT outsourcing, IT security, and data governance.Financial regulators are looking to implement new rules for better control and ethical use of artificial intelligence (AI). Adopting responsible AI practices bolsters customer trust and strengthens a company’s reputation, setting it apart from its competitors. This strategic positioning can unlock growth opportunities and drive long-term success. Increasing importance of ESGThere is a greater regulatory oversight on environmental, social, and governance (ESG)-related reporting and disclosures as well as climate-risk management and stress-testing. Financial regulators worldwide are focusing on net-zero transition planning, with a growing supervisory focus on carbon markets and greenwashing risks. In 2023, the International Sustainability Standards Board (ISSB) issued sustainability disclosure standards with the goal of standardizing sustainability reporting. Furthermore, the Philippines is one of the countries planning to adopt these standards for local implementation.The significant decline in the variety and variability of life forms on Earth, also known as biodiversity loss, is also posing a systemic risk to economies and financial systems. This phenomenon encompasses the reduction of species, genetic diversity, and natural habitats on the planet. With the ISSB identifying it as an upcoming focus area, biodiversity loss is expected to receive increased attention.Regulators require firms to have concrete plans to manage their financial risk exposure as they transition to net-zero. Net-zero targets will require an organization-wide transformation, a robust plan that considers biodiversity and climate-related risks, and a flexible roadmap for firms to enable these changes. An institution-wide approach should incorporate business strategy, governance, and risk management when setting clear targets and supporting sustainability disclosures. Firms should also invest in ESG training for key personnel.Adoption of open finance and cross-border payment integrationSeveral jurisdictions are developing open finance frameworks, such as the European Union, Australia, Hong- Kong, Indonesia, Philippines, and Brazil. Additionally, they have adopted a regulatory-driven approach for open finance. As such, a global standard may be necessary to avoid regulatory fragmentation. Open Finance regulation will require firms to set up multi-year strategic, operational, and technological transformation programs.In the Philippines, the Bangko Sentral ng Pilipinas launched its Open Finance Pilot project in 2023 and updated its Open Finance roadmap. More and more jurisdictions worldwide are expected to adopt and expand their Open Finance frameworks to facilitate seamless cross-border transactions. One example of a recent model for collaboration in the financial sector is the linkage of Singapore’s PayNow with India’s UPI and Thailand’s PromptPay.Persistence of financial crime and fraudAddressing financial crimes remains a priority for regulators. The increase in scam payments requires new tools and regulatory compliance mechanisms. Firms may need to consider using more sophisticated technologies, such as AI-powered solutions, to enhance digital transaction security and anti-money laundering (AML) efforts.Given the global nature of financial crimes, various regulators and governments are working together to expand AML measures. In 2023, various firms faced supervisory scrutiny over AML violations as authorities intensified economic sanctions and re-evaluated the oversight of politically exposed persons.While technology is creating new types of threats, it also offers new tools in the fight against financial crime. Fraud and investment scams, especially at the retail level, are pushing customers toward risk-taking behavior. Bank transfers account for most scam payments, requiring critical monitoring and analysis. Crypto crime prevention and regulatory scrutiny will continue to surge, and firms in other industries will need to adopt data and AI solutions for financial crime compliance. Board and management oversightSeveral regulators released post-mortem analyses on 2023’s bank failures, highlighting the need for timely and comprehensive resolutions—a goal some banks failed to achieve. Consequently, boards must possess a thorough understanding of their policies, systems, and controls to identify and address risk management challenges and oversight weaknesses. Firms must consider whether their performance and incentive structures work and whether they are aligned with stakeholder goals and the firms’ fiduciary duties. Furthermore, they should also consider board and management oversight issues from a new perspective, instead of relying on established practices. Navigating the regulatory environmentGiven the ever-evolving nature of the financial landscape, firms will need to prioritize consumer impact, ESG, digitalization, financial crime, and operational resilience. By focusing on people, processes, and technology, firms can maneuver and leverage the tumultuous—but opportunistic—regulatory environment.Next week, we will discuss critical areas that financial services firms need to prioritize in the age of digitalization and AI. Christian G. Lauron is the Financial Services Organization (FSO) Leader and Janeth T. Nuñez-Javier is the Banking and Capital Markets (BCM) Sector Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

25 March 2024

Marie Stephanie C. Tan-Hamed and Katrina F. Francisco

Multipolarity and de-risking: Navigating geopolitical uncertainties (Second Part)

Second of two partsFaced with the prospect of an increasingly uncertain future, the world faces an era of unprecedented change. Rising geopolitical tensions and major shifts in the global market may propel organizations to adapt and rethink their strategies, with two critical concepts coming to the fore: multipolarity and de-risking.The EY Geostrategic Outlook is an annual report by the EY Geostrategic Business Group (GBG) that selects the top geopolitical developments for the year by analyzing the global political risk environment. The GBG first conducts a crowdsourced horizon scanning exercise with subject matter resources to identify potential risks, then conducts an impact assessment to narrow down the top geopolitical developments that are both highly impactful and highly probable for companies worldwide.In the first part of this article, we discussed the evolving multipolarity in geopolitics, specifically tackling the developments surrounding the geopolitical multiverse, AI, the oceans, and competition for essential commodities. These underscore the need for economic diversification and resilient supply chains due to increased geopolitical disruptions. However, it also aggravates global policy coordination challenges, escalating potential transnational uncertainties.The second theme is de-risking, with governments increasingly combining economic policy with national security to stimulate domestic production of critical products in sectors such as semiconductors, telecommunications, renewable energy, electric vehicles, and biotechnologies. This trend, more prevalent in 2024, indicates a shift in policy focus towards national security over pure economic considerations, possibly fueling inflation and hindering global innovation due to increased government intervention in supply chains and investments.Global elections supercycle With a wave of elections happening in geopolitically significant markets representing more than half of the global population and the global GDP, this global elections supercycle will generate policy and regulatory uncertainty. This in turn has long-term implications for industrial strategies, ongoing military conflicts, and climate policies. The outcome of Taiwan’s presidential election, which concluded last 13 January, may affect political and economic relations with Mainland China as well as broader geopolitical dynamics. Later this year, campaign dynamics from the US elections could increase volatility for businesses, while election outcomes can result in far-reaching shifts on domestic and foreign policy issues on global alliances, regulations, and climate change. Economic securityRecent global developments have increased geopolitical rivalries and heightened the neo-statism (a new cross-party consensus about needing a more interventionist state) trend, leading to a greater focus on economic self-sufficiency and increased intervention in supply chains. In 2024, de-risking global interdependencies is expected to be a critical tool in geostrategic competition, with policies targeting reduced reliance on geopolitical competitors, promoting domestic industry competitiveness, and enhancing sociopolitical stability. The White House readout on the meeting between PBBM and VP Harris on the sidelines of the November 2023 APEC meetings in San Francisco states that VP Harris announced a “new partnership with the Government of the Philippines to grow and diversify the global semiconductor ecosystem under the International Technology Security and Innovation (ITSI) Fund, created by the CHIPS Act of 2022. This partnership will help create a more resilient, secure, and sustainable global semiconductor value chain.”Particularly impacted will be sectors like aerospace, defense, and advanced digital technologies, where stringent economic security policies will be enforced. Traditional strategic sectors, like energy and critical infrastructure, will see regulations and incentives used to protect or promote domestic production. Emerging strategic sectors, such as healthcare and agriculture, will come into greater focus with regulations aimed at increasing resilience to supply chain disruptions. Value chain diversification According to the July 2023 EY CEO Outlook Pulse survey, 99% of CEOs plan strategic changes in response to geopolitical challenges such as government tensions and policies encouraging value chain diversification. This creates political risks for companies entering or expanding in alternative markets in 2024. Despite ongoing investment in developed markets, geopolitical swing states are expected to be key to diversification efforts. Country-level political risks, infrastructure quality, labor dynamics, global interest rates, and government incentives will influence these decisions.Sustainability considerations, including carbon taxes and emissions reporting requirements, will further shape the diversification agenda. The 2024 election supercycle intensifies policy uncertainties in several markets affecting labor laws, infrastructure investments, and industry policies, adding another layer of complexity to diversification and investment decisions.Sustainability Currently, some countries are prioritizing economic growth and energy security over emissions reductions, leading to inconsistent sustainability regulations. Some governments are boosting their domestic green economy while potentially slowing the implementation of sustainability regulations to meet short-term economic goals. Green policies could face opposition if they are viewed as protectionist or discriminatory. For example, the EU’s Carbon Border Adjustment Mechanism (CBAM), a tariff on carbon-intensive products, may trigger global trade tensions as impacted countries may retaliate with their own tariffs on European goods. However, it can also act as a key driver for developments in international carbon pricing policy, as several countries are now seen either exploring or creating their own CBAM or are revisiting their current carbon taxation levels. For the Philippines, understanding how CBAM may impact direct exporters to EU of scoped-in industries, including looking at those industries where the raw materials of scoped-in industries are coming from the country, should be prioritized. This is aside from the legislative actions within the country exploring the implementation of an emissions trading scheme or the imposition of a carbon tax on the industries that contribute most to our country’s emissions. Consequently, geopolitical tensions could grow between countries advocating for ambitious climate action and those perceived as impeding this progression. Despite these tensions, geopolitical competition could increase green investments in emerging markets, with major players like China, the US, and the EU targeting geopolitical swing states.Climate adaptationWhile the United Nations Framework Convention on Climate Change (UNFCCC) initially focused on reducing greenhouse emissions, in 2024, about 80% of its parties have established a national adaptation plan, policy or strategy due to increasing global temperatures. For instance, the National Framework Strategy on Climate Change highlights that the Philippines’ approach on climate change identifies climate change adaptation as its anchor strategy, with climate change mitigation as a function of adaptation. This is mainly a result of the country’s less than 1% contribution to global emissions and the various studies highlighting the vulnerability of the Philippines to the impacts of climate change, with the February 2024 Swiss Re publication, Changing Climates: The Heat is (Still) On, indicating that the country suffers the most significant economic losses as a percentage of GDP mainly resulting from flooding and tropical cyclones. It is because of the heightening risk and accelerating climate change impacts experienced globally that the urgency for more actions relating to adaptation have increased. Combined with the more modest growth in adaptation finance flows, the global adaptation funding gap is widening, with developing countries needing about USD212 billion per year up to 2030 and around USD239 billion per year from 2030 to 2050, based on the 2023 Global Landscape of Climate Finance, issued by the Climate Policy Initiative. Geopolitics and adaptation funding for developing nations have previously been at the forefront of climate negotiations. This will only continue, as central to the politics of adaptation funding is the fact that countries such as the Philippines have contributed almost nothing to making climate change happen, and yet are the ones experiencing the first and worst impacts as a result. C-level considerations to navigate geopolitical uncertaintiesThe evolving geopolitical landscape calls for a thorough recalibration of business strategies for organizations to navigate through uncertainties effectively. By embracing multipolarity and de-risking strategies, organizations can foster resilience and agility amid heightened geopolitical competition.While juggling these challenges, sustainability remains critical. Conflicting interests may lead to inconsistent regulations in the short-term, but moving toward a greener economy remains paramount. Therefore, organizations must prioritize green investments and climate adaptation measures in their strategic planning.Navigating the geopolitical uncertainties of 2024 and beyond requires proactively anticipating the shifts in economic policies, regulations, and global relations. The exact path may still be uncharted, but understanding and responding to these developments will help boards remain competitive in the global market and future-proof their organizations. Marie Stephanie C. Tan-Hamed is a Strategy and Transactions (SaT) Partner and the PH Government and Public Sector leader of SGV & Co, and Katrina F. Francisco is a Partner from the Climate Change and Sustainability Services of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

18 March 2024

Noel P. Rabaja

Multipolarity and de-risking: Navigating geopolitical uncertainties (First Part)

First of two partsThe world faces an era of unprecedented change, and the geopolitical landscape is anticipated to be volatile and unstable in 2024. These major shifts in the global market along with rising geopolitical tensions may propel organizations to adapt and rethink their strategies. According to the EY 2024 Geostrategic Outlook, organizations will need to consider two critical concepts as they plan for geopolitical disruptions: multipolarity and de-risking.The EY Geostrategic Outlook is an annual report by the EY Geostrategic Business Group (GBG) that analyzes the global political risk environment and selects the top geopolitical developments for the year. The GBG conducts a crowdsourced horizon scanning exercise with subject matter resources to identify potential risks. The scan encompasses the four categories of political risk in the geostrategy framework — geopolitical, country, regulatory and societal — throughout all regions of the world. The GBG then conducts an impact assessment to narrow down the top geopolitical developments that are both highly impactful and highly probable for global companies.In this first part of the article, we discuss the evolving multipolarity in geopolitics, where a greater number of powerful actors shape an increasingly complex global system. Uncertain relationships between powers like the US, EU, and China, and growing influences of smaller states and actors highlight this theme. It underscores the need for economic diversification and resilient supply chains due to increased geopolitical disruptions.The geopolitical multiverseAccording to the report, the growing influence of players seeking to change the status quo will create a more complex geopolitical multiverse. On top of tensions from US, EU and China influencing global dynamics, actions by geopolitical swing states (meaning countries that are not specifically aligned with any major power) will play more important roles in driving geopolitics this 2024. In particular, countries with resources across the energy value chain, such as Saudi Arabia, the UAE, and Brazil, are expected to play key roles in their respective regions.In 2023 alone, even as the Ukraine war persisted, the BRICS (Brazil, Russia, India, China, and South Africa) and G20 (Group of Twenty) welcomed significant new members, hoping to expand their influence in global affairs. In Northeast Asia, Japan and South Korea restored bilateral diplomacy. These developments and others discussed in greater detail in the report show that geopolitics has become a multiverse of increasingly complicated mixes of alliances and rivalries, with overlapping bilateral, regional and various other institutions and grouping. AIThe 2023 EY CEO Outlook Pulse study shares that nearly all their CEO respondents (99%) plan to invest in artificial intelligence (AI). On the other hand, governments have been grappling with how best to regulate AI as technological advances increase its significance to national security and geopolitical competition. This 2024, the dual race to innovate and regulate AI will see an accelerated shift toward geopolitical blocs. Domestically, governments want to foster innovation to compete geopolitically, simultaneously seeking to regulate it before the technology outpaces policymakers. While seeking to capture the promises of the technology, such as advancements in national security, improved healthcare outcomes, and enhanced economic productivity, governments will also try to design AI regulations to reduce the likelihood of macro risks. These risks include increases in political instability due to misinformation campaigns, the potential for social and economic dislocations as AI takes on more job functions, heightened national security, and cybersecurity risks. While AI will not necessarily reshape the global balance of power in the year ahead, it will increasingly become a significant arena of geopolitical competition. Domestic challenges in the US and ChinaThe US and China, the two biggest economies in the world, are facing major domestic challenges of their own for various reasons. These challenges will continue to raise political risks within each market, will have significant implications for geopolitics, and pose downside risks to the global economy this year. Such downside risks to the global economy will likely have significant implications for emerging economies such as the Philippines.The 2024 US election will heighten societal tensions and policy uncertainty. With the partisan divide in American trust in various news sources, there is a potential increase in risk of some population segments questioning the legitimacy of the election, in turn possibly perpetuating policymaking challenges. On the other hand, China faces a challenge stemming from whether their official policy mix will effectively address potential financial and macroeconomic weaknesses that may come about. Cyclical challenges in their real estate market and their high municipal government debt levels will likely persist, and may result in policymakers introducing periodic, targeted actions to reduce the risk of financial crisis.OceansRecent events such as the destruction of the Nord Stream 2 pipeline and more frequent freedom of navigation exercises highlight growing geopolitical tensions. With almost half the global population living within 100 miles of the sea, competition over access to and control of the world’s oceans will intensify in 2024, with implications for data flows, food supplies, supply chains, and energy security. As much as 90% of global goods trade is shipped through maritime routes, and many of the busiest maritime transit paths are at risk of political disruption. At least 95% of global data flows through undersea cables. The Luzon Strait is strategically located between Luzon and Taiwan, connecting the South China Sea and the Western Pacific, and as such, is important for global commerce and cable communications.Competition for essential commoditiesThe war in Ukraine, climate change, and the energy transition are shifting global supply and demand dynamics for various essential commodities. This leads to more intense geopolitical competition in 2024 to secure supplies of three key commodities in particular: critical minerals, food, and water. The most visible area of commodity competition will be for minerals that power EV batteries and the broad energy transition. Food instability and insecurity remains a top concern from the 2023 Geostrategic Outlook, with climate change continuing to affect food production and crop yields. Lastly, water may become a subject of commodity competition due to significant changes in precipitation levels, potentially escalating tensions in water-stressed regions. In the second part of this article, we will discuss the theme of de-risking, with governments increasingly combining economic policy with national security to stimulate domestic production of critical products in sectors such as semiconductors, telecommunications, renewable energy, electric vehicles, and biotechnologies. This trend, more prevalent in 2024, indicates a shift in policy focus towards national security over pure economic considerations, possibly fueling inflation and hindering global innovation due to increased government intervention in supply chains and investments. Noel P. Rabaja the Strategy and Transactions (SaT) Service Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

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Climate resilience: Innovations in Philippine businesses

Achieving transfer pricing certainty

How can shifting dynamics help revitalize your workforce

Charting a resilient future: A business imperative for the Philippines

Securing a competitive advantage in the insurance industry

Priorities for financial services firms in the digital age

Financial institutions trends in 2024

Multipolarity and de-risking: Navigating geopolitical uncertainties (Second Part)

Multipolarity and de-risking: Navigating geopolitical uncertainties (First Part)

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