Referencing the guidelines of TCFD and IFRS-ISSB, there are several items discussed under this core element. Hence, a summary is provided below on the flow of the discussion to assist the readers of the report.
Business strategy and strategic priorities as a parent company
- Three (3) elements of the business strategy
- Strategic priorities to execute the strategy
Sustainability strategy
- Approach to environmental and social risks and opportunities
- Summary of risks and opportunities and risk management strategy
Climate change strategy
- Summary of climate-related risks and opportunities
- Implications of risks and opportunities to business and strategic options
- Implications on resilience of business strategy
Business model
- Way to play
- Implications of risks and opportunities on the business model
In this report, we discuss two dimensions of our strategy: the business strategy for capturing economic benefits, and our sustainability or ESG strategy for sustainability-related and climate-related risks and opportunities that affect the success of our business strategy.
BUSINESS STRATEGY
Elements of the Strategy
The business strategy that we pursue translates our mission to values for the business and our pentad stakeholders. More information on our stakeholders can be found on page 158. Since our strategic initiatives are closely interwoven with our mission, they incorporate both environmental and social considerations into our economic objectives. This creates long-term benefits to the business as well as society and the planet as a whole. The following are components of the three-pronged business strategy of the conglomerate as approved by the Board in February 2023.
SYSTEMIC AND ECOSYSTEM APPROACH
Aligned with the true essence of being regenerative, we seek to develop holistic solutions that address systemic issues through our integrated platforms. Our aim is to maximize environmental and societal benefits while balancing our aspirations for profitable growth. Given these, FPH naturally gravitates toward business models that exhibit the characteristics of ecosystems (an interconnected set of services that form a coherent solution) and flywheels (ecosystems with both substantial demand-side and supply-side economies of scale resulting in positive feedback loops).
TALENT CENTRICITY
Talent and leadership are critical components of our business as people serve as the engine and heart of the business. It is important for FPH to attract, retain, and develop those who believe in the group’s mission to lead across the organization’s businesses at different levels.
Company talents are FPH resources representing capabilities that can be deployed anywhere in the group. Our strategic focus on talent consists of the following initiatives and mechanisms:
Shared Identity. Embed the FPH mission and purpose into the workplace culture.
Leadership Development. Ensure quality and depth of the leadership bench across the group and deliver targeted development initiatives.
Operations Excellence. Centralize and standardize key people operations for seamless and consistent employee service delivery.
Talent Mobility. Broaden development and career opportunities by facilitating inter- and cross-company movements.
Talent Development. Update competency, performance, and skills frameworks and tools as the basis for talent development and movements.
Learning Solutions. Provide access to on demand learning, leadership, and management development training and opportunities for project participation.
Well-being. Champion diversity, equity, and inclusion, flexible working arrangements, and provide access to tools and programs.
ORGANIZATIONAL AGILITY
Our governance, structures and systems allow for the flexibility to adapt to the changing business environment and to create optionality. The organization thinks ahead strategically and distills insights from emerging trends. We use the information to generate our response to various scenarios we may face so that we can better position our business platforms for future growth.
We enhance our parenting capabilities in providing stronger governance and functional support in the basic areas of human resources; ESG management; risk management; legal and regulatory counseling; finance and accounting; and building digital platforms. These services maximize group synergies and enable our subsidiaries to focus on managing their growth and to develop their distinctive capabilities
Strategic Priorities
To support the three-pronged business strategy, we focus on the following strategic priorities*:
Sustainability Strategy
Strategy for Sustainability Risks and Opportunities
FPH incorporates risks and opportunities analysis in its business strategy to aid decision-making for long-term positive impacts. The following are our approaches to sustainability-related risks and opportunities (SRROs):
APPROACHES TO ENVIRONMENTAL RISKS AND OPPORTUNITIES
Our management approach to environmental risks follows a mitigation hierarchy.
- We prevent risks to the planet by complying with all national environmental laws and all relevant international conventions entered into by the Philippine government on natural resources management, land use, biodiversity, waste management, and sustainable development.
- To protect ecosystems, we adopt the Precautionary Principle.
- During operations, we avoid activities that may have potential adverse impacts on the environment.
- If adverse impacts cannot be avoided, we try to minimize the intensity and duration of adverse impacts within the threshold of the relevant laws.
- Adverse impacts on the environment that could not be avoided are further managed by restoration to re-establish the natural system’s composition, structure, and function.
- We offset the adverse impacts of our operations by taking care of nature outside our business fence in a similar natural system to avoid overall net negative results.
- We pursue opportunities to build up natural capital to have nature-positive operations.
APPROACHES TO SOCIAL RISKS AND OPPORTUNITIES
The following are the ways we manage our social risks and opportunities.
Internal stakeholders
Our human capital consists of the knowledge, skills, and experience of the company’s personnel. We address the risks we identify and the concerns of our employees through the following:
- We comply with national labor laws and general labor standards, as well as the international labor conventions entered by our government.
- The company has adopted specific social safeguards policies in the following areas: (a) human rights, (b) gender equality and diversity, c) corporate social responsibility (CSR), and d) responsible asset protection that includes employees as our most important asset. We regularly conduct a risk assessment of our human capital to develop appropriate measures to address the risks with guidance from Management and the Board.
- Every subsidiary conducts a human rights risks analysis and installs a Grievance Redress Mechanism (GRM) to monitor transgressions of employees’ rights and to gather data that may be analyzed to ensure the incidents can be avoided by the company in the future.
- We have embedding programs so that the employees may discover how they can align their interests and values with the corporate purpose to protect planetary and societal health.
External stakeholders
The trust that we build with our external stakeholders facilitates their support for the execution of the company’s plans. For the risks related to our suppliers, partners, and host communities, below are our approaches:
- To avoid social concerns, we issued safeguards policies, specifically the policies on: a) CSR, b) human rights, and c) cultural heritage and indigenous peoples.
- Similar to our internal stakeholders, the subsidiaries conducted a human rights risk analysis across their value chain on potential issues related to our external partners and developed corresponding GRMs.
- Regular engagement is conducted with partners in our activities, which could impact our ability to consistently secure their support throughout the company’s lifespan.
SUSTAINABILITY OPPORTUNITIES
For opportunities, we partner with external stakeholders on the following:
- Our host communities have the most reliable information about the work site which can help address a common problem in the locality that can affect the business.
- We seek the expertise of our corporate partners to develop sustainable practices in our operations.
- To amplify climate action, we engage our suppliers and partners to find ways to reduce the emissions from the value chain.
- We innovate new products and services with inputs from our clients and partners.
- We partner with government agencies and civil society organizations to advocate for climate action.
Guided by the conglomerate’s management approach, our subsidiaries modify their processes based on the peculiarities of their operations.
The figure below summarizes our sustainability strategy based on the foregoing discussion on our approaches to maintaining planetary and people’s health.
Summary of Risks and Opportunities, including sustainability-related and climate-related risks and opportunities
Below are our key risks and opportunities based on macro-economic drivers that generally influence our operating units.
IMPACTS OF RISKS AND OPPORTUNITIES ON BUSINESS STRATEGY AND VALUE CREATION
Below are the impacts of risks and opportunities on business strategy and value creation per business segment.
Market and competition risk
The expiration of First Gen’s contracts in 2024, 2025, and 2027 may expose up to 2,000 MW of our capacity to revenue volatility if they remain uncontracted.
Geopolitical tensions and local regulatory landscape may impact growth projects
Macroeconomic events happen at the global scale as well as national scale potentially impact First Gen’s growth projects
- Global events: Various geopolitical events, including the invasion of Ukraine by Russia and the tension with China, may contribute to supply chain disruptions and price shocks on commodities, leading to higher cost of operations.
- Regulatory challenges: Within the country, the regulatory landscape in the energy industry adds challenges that may affect the timeliness and financial viability of growth projects (e.g. low approved rates)
Climate risk and exposure to natural catastrophes
The effects of climate change, including record high temperatures, may lead to extreme weather events such as drought, super typhoons, and flooding, which may disrupt our operations, affect our customer service, and cause property damage. Similarly, natural catastrophes such as earthquakes may also disrupt operations.
Fuel supply risk
The depletion of the Malampaya gas field and Energy Development Corporation’s (EDC) steam supply challenges may affect First Gen’s production and cash flow. Operations are highly dependent on: the consistent availability of the power plants’ required fuels, the expertise of the natural gas field operator, the existence of a valid Gas Supply Purchase Agreement (GSPA) before the depletion of resources, and the availability of steam as a geothermal resource in commercial quantities.
Constraints from the transmission network
There are currently issues with the capacity and dependability of the local transmission network, which may adversely affect current and projected energy demand from customers, as well as affect the additional supply from new projects, particularly RE projects in the pipeline.
Cybersecurity risk
The modernization and interconnection of First Gen’s assets and Information Technology (IT) infrastructure have increased their operational efficiency, but has also exposed them to cybersecurity risks.
Increasing interest rates
Both the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve System hiked interest rates, making the cost of borrowing more expensive. The average Philippine Peso exchange rate has depreciated by 11.46 percent since 2021.
Plant disruption due to fire
First Philec’s single manufacturing location bears a risk of operation stoppage should a fire incident occur. Hence this has been one of the most important risks to mitigate for the company.
Supply chain interruptions
Various external forces, such as economic, geopolitical, and market factors, can affect the global supply chain in which First Philec relies on materials for its products and services. Securing supply chain resilience and flexibility is particularly important for a manufacturing organization.
Business concentration with one dominant customer
At the moment, a large portion of First Philec’s revenue is dependent on a single customer. This poses a risk with regard to business concentration.
Inflation’s impacts to finances
When inflation rates continue to increase, so do interest rates, which are then projected to decrease the Net Income after Taxes (NIAT) of Rockwell Land. Relatedly, peso depreciation would also negatively impact Rockwell Land’s financials.
Inflation’s impacts to the real estate market
The pressures from inflation and interest rates have slowed down global growth. This in turn continues to affect the real estate market. The real estate industry’s performance in 2023 is still below that of pre-pandemic levels, with vacancy rates still expected to increase in the near future. Additionally, particularly on the side of retail, customer preferences are shifting towards experiential activities.
Portfolio challenges post-pandemic recovery
Rockwell’s different real estate segments are in various stages of recovery from the pandemic. These pose a challenge in balancing their performance as a whole portfolio.
Impacts from increasing commodity prices
Prices of construction materials had an increasing trend in the past five years, with prices of some commodities stabilizing in 2023. Higher costs of materials lead to higher construction costs.
Growing business requires growing talent
Rockwell Land’s growth plans require more skilled talents as well as strengthening the organization and designing it for growth.
Climate impacts to assets and operations
Physical risks related to climate change—such as rising temperatures and extremely dry days, storm surges and sea level rise, and landslides—may adversely impact Rockwell Land’s assets.
Cybersecurity risks
With the transition to a hybrid set-up, Rockwell Land has increased exposure to cybersecurity threats.
Force majeure and natural catastrophic events
Force majeure events and natural catastrophic events such as earthquakes, typhoons, floods, and volcanic eruptions pose a risk to industrial operations within the park and to the First Philippine Industrial Park, Inc. (FPIP) community. FPIP is also within the area of the Taal Volcano, though beyond the Volcanic Eruption Danger Zone.
Market and regulatory challenges to company growth
Aggressive industry promotion campaigns by other Southeast Asian countries combined with less competitive Philippine tax incentives, along with the phenomenon of a global slowdown in the expansion of industries, pose a challenge to FPIP in attracting prospective locators.
Challenges in land consolidation and conversion
The annual appreciation of land as compared to the trend in market lease, along with the lengthy process of preparing land for industrial use, pose cash conversion challenges to FPIP.
Water supply availability and compliance with water quality requirements
FPIP faces an increase in demand for water supply by its locators amidst a decrease in the water yield as experienced in many parts of the country and the world.
Moving up the value chain
The growth of First Balfour, which involves moving up the value chain, presents complex processes and requirements.
First Balfour’s growth through the years has enabled it to be in better positions with regards to the types of contracts and projects they are able to be part of. One of these positions is more actively engaging in joint ventures, which has its own associated risks and opportunities. Complementing these risks and opportunities, in 2022 the Philippine government affirmed the ruling for foreign construction firms to be able to have contractor licenses to operate in the country. This increases the competition that First Balfour experiences for its construction and engineering services.
Availability of and competition for skilled talent
With First Balfour’s growing roster of projects, they anticipate a marked increase in the need for skilled talent in the near future. First Balfour may have challenges in finding and attracting a significant number of specifically skilled talents.
Interest rates and inflation
Inflation rates and their impact on commodity prices, along with increasing interest rates in bank financing, pose a potential impact on First Balfour’s financial strategies.
Limited vendors
The COVID-19 pandemic drove many vendors to close down with those remaining facing several challenges with regard to their operations. This in turn has made it difficult to source vendors that can comply with the requirements of First Balfour.
Legal and contracting risks
Along with First Balfour’s ability to move up the value chain due to the growth of the organization, there may be additional legal and regulatory requirements the organization needs more stringent monitoring on. This creates exposure to legal risks if the organization does not adapt quickly.
Health and safety impacts on reputation
Potential unsafe public behavior exhibited by First Balfour workers may damage the reputation of First Balfour and at worst, lead to legal accountability.
Challenges with talent resources
With a highly specialized line of business, AEI is experiencing difficulties finding talents it needs to support its growth plans.
Data security risks
The nature of AEI’s business requires a significant volume of patient records to be readily accessible digitally to its employee base. Any gap in data security would lead to breaches of sensitive personal information or corporate information.
Stringent regulatory requirements for healthcare
The nature of AEI’s business in healthcare also requires complying with stringent regulatory requirements from several regulatory institutions. Additionally, eye care is not considered a primary healthcare service under the Universal Healthcare Law of the country, which impacts the ease of availing of Philhealth benefits and leads to delays in patient access to eye care services.
Patient Safety
One of AEI’s biggest risks may come from Unexpected Surgical Outcomes (USO) that affect the patient, due to human error or failures in operational systems.
Suspension of operations due to events
Prolonged suspension of operations due to pandemic or catastrophic events (e.g. typhoons, earthquakes) would incur revenue loss.
Strategy for Climate Risks and Opportunities
Our approach to integrating climate risks and opportunities into the strategy is referenced in the TCFD guidelines. In 2020, a Climate Scenario Analysis was conducted for the group by the OML Center for Climate Change Adaptation and Disaster Risk Management (OML Center). The analysis made use of global climate models to assess potential decadal physical threats of climate change on all FPH assets. The physical climate risks assessed were higher temperature, higher rainfall, lower rainfall, sea level rise and cyclones. Our Climate Scenario Analysis was explained in detail on page 84 of 2020 FPH Integrated Report.
Projected impacts to FPH sites by 2050 under the RCP 4.5 and 8.5 scenarios
The physical risk assessment was followed in 2021 by the assessment of transitional risks (policy and legal, market, technology, and reputational risk exposures). A detailed analysis of the physical and transitional risks is found in the 2021 FPH Integrated Report. In 2022, climate options to mitigate the GHG emissions were identified. They can be found on page 80 of the 2022 FPH report. By 2023, climate change was formally integrated into the risk and opportunity dictionary and overall Enterprise Risk Management (ERM) system.
Climate-related Risks and Opportunities
Below is our updated climate risks and opportunities analysis in 2023 and the potential impacts on the business. The major climate disturbances observed in 2023 were tropical cyclones and the start of “global boiling”. The climate impacts that were more pronounced were the heightened water threats and continued supply chain disruptions whose effects overlap with COVID-19 pandemic’s residual impacts during the recovery.
Climate-related Risks of FPH
Adherence to the climate-centric mission offered many opportunities to the company as shown in the table below.
Climate-related Opportunities of FPH
FPH assessed the implications of its climate-related situation on the resilience of its business strategy.
- The FPH mission of decarbonization and regeneration is climate-centric. As such, climate action is embedded in the business strategy of all the subsidiaries. The mission forms a strong foundation to make our operations resilient during the climate transition.
- The diversified nature of FPH businesses will allow capital reallocation to advantageous business segments to generate higher returns. In addition, its assets are well distributed across the country avoiding major losses if an extreme weather event strikes in one location. Also, all the FPH assets were covered in the decadal climate risks and opportunities analysis in 2021 with corresponding measures. More info on our Climate Scenario Analysis is available on page 84 of the 2020 FPH Integrated Report.
- The transitional challenge would result in varying customer risks and needs. Thus, we will have to continuously monitor and adapt to these trends, as we pursue the creation of value for our pentad stakeholders.
- FPH undergoes scenario planning and market modeling efforts to anticipate and prepare for various market and industry conditions.
Business Model
FPH’s Way to Play
Within FPH’s business model are activities that transform our capitals into products and services that create value for the enterprise and our pentad stakeholders. In 2023, there was no major change in our business model as it had been observed to deliver optimal results to our operations. However the organization is continuously working on upgrading its capabilities to ensure stronger alignment with FPH’s chosen way to play.
- Strategic guidance and effective governance: Providing direction to subsidiaries that align with the overall goal of the organization as well as maintaining oversight to ensure successful management of the subsidiaries.
- Maximized synergies and functional excellence: Optimizing coordination among different business functions to achieve the highest level of performance.
- Disciplined investments and optimal resource allocation across the portfolio: Efficiently distributing resources to achieve the best overall results.
- Meaningful collaboration with various stakeholders: Engaging in purposeful relationships with other parties to achieve common goals.
- Agile and high-performing organization: Fostering a culture that can quickly respond to challenges and consistently deliver on its goals and objectives.
Implications of Risks and Opportunities on the Parent‘s Business Model
As a holding company, FPH is well positioned to address its various climate and non-climate risks due to a business model that is both holistic and flexible, giving it the ability to protect its business model in different risk and opportunity settings. In 2023, even as we saw the start of the recovery from COVID-19 in several industries, we remained cautious in our business activities pending the full stabilization of the economy.
The strengthened parenting capabilities of the support groups in the head office enabled the timely interventions that tackled key operational risks in 2023 (see pages 75-87). The head office protocols addressed the risks of talent recruitment difficulties as we build the teams for growth, cybersecurity threats due to the continued hybrid operation, and the still fragile economic recovery. Business processes, systems, and practices were adequately protected by strong governance, focus on risk management, updated skills of all groups, and the prevailing hospitable relationships in the company. These drivers for the resilience of the business model led to an overall positive financial performance again this year.
