Operating Context

We live in a complex world. We are experiencing overlapping disruptions, the most immediate being the COVID-19 pandemic, which led to a financial recession. Both are offshoots of ongoing climate change. Beyond this, biodiversity collapse is also being predicted. All of these are brought about by ESG-related vectors, the origin of which is the instability of nature brought about by humanity’s uncontrolled consumption and economic activities.

Our external environment informs the execution of our strategy and business model. In 2021, climate change and its consequences dominated our business setting. To better understand how these factors can affect our strategy, we scanned updates from various global and local developments and assessed their direct and indirect impacts on the company. The three major external factors stemming from ongoing environmental, social, and economic issues influence our strategy as summarized in the following table.

ACCELERATING CLIMATE CHANGE

The widespread, rapid, and intensifying climate change cited in the UN Assessment Report 6 on climate science in August 2021 stressed the urgency of climate action.3 These led to the following global and local consequences:

Implications on the FPH strategy:

Our urgent need to act on the worsening climate crisis and its related trends will impact FPH in divergent ways:

• As a great deal of effort and resources will be required to meet the country’s NDC commitments, the private sector will be expected to help the government. All sectors will need to fast-track decarbonization to help mitigate adverse climate change impacts. Hence, we must stay on course with the identified carbon reduction pathways for each of our business segments (more on this here).
• While natural gas is the country’s mechanism for energy transition that will enable the penetration of variable RE (such as solar and wind) into the grid, our natural gas segment is already planning its own decarbonization path.
• The demand for forest conservation worldwide and the promotion of carbon forests via local regulations will provide an opportunity for our company to apply its forest expertise of 37 years in developing nature-based carbon removal.

Implications on the FPH strategy:

The increased emphasis on worker’s rights meant the continued improvement of our health protection measures. In general, this demanded strategy, protocols, and procedures to address risks during the outbreak phase; the transition to an endemic COVID-19 scenario; and how to manage future epidemics or pandemics. The company’s programs on pandemic response are discussed in the Human Capital section here.

The prevalence of cybersecurity breaches and data interventions in our time required IT protection, security governance, and related operations to be part of the fundamental elements of the business strategy.

The robust and holistic IT programs in the company have helped prevent such incidents from affecting our operations. More information on this is in the Intellectual Capital section here.

ECONOMIC EFFECTS OF OUR ENVIRONMENTAL AND SOCIAL SETTING

The environmental and social factors have their corresponding economic effects.

Implications on the FPH strategy:

The systemic nature of the impacts of COVID-19 has demanded the integration of ESG into our existing ERM system. Since 2020, ESG has been part of ERM. Thus, when our energy solutions and construction segments were impacted by supply chain issues experienced worldwide, measures were available to minimize these impacts. These are further discussed in the Risks and Opportunities section here.

Because of the importance of TCFD in protecting the enterprise, its prescriptions must be embedded in the company’s governance, strategic planning, ERM, and financial planning.

Recognizing its benefits, we have been implementing the TCFD recommendations since 2020, and, therefore, we can meet the requirements of global investors and interested stakeholders. The details of FPH’s progress on TCFD requirements are found in the Risk and Opportunities section here.

Funding has become increasingly focused on sustainability and climate change to hasten our economic recovery in a safe and viable manner.

Our purpose, which informs our strategy, calls for protecting nature’s integrity as a criterion for responsible investment.

FPH policies and programs are aligned with the requirements of green financing. Our power subsidiary EDC issued its first green bond in June 2021. The other subsidiaries can tap the same option.

Progressing on our mission this year, we adopted the “Double Materiality” approach in identifying our 2021 material ESG issues. This method is consistent with the FPH mission of forging collaborative pathways for a decarbonized and regenerative future that will enable our business and stakeholders to thrive amid disruptions. It also recognizes the interconnectedness of our business with bigger systems, the planet, and society, in which we are nested. Through this emerging approach, we were able to look at our ESG information through two lenses:

• Financial Materiality

  Review of environmental, social, and governance issues that can influence the financial performance of our company; and

• Impact Materiality

  Review of the effects of our company on the planet, people, and the economy and how they influence the sustainable development agenda.

We consider an ESG issue as material to the company if it poses financial risks, hinders our ability to comply with relevant regulations, affects our license to operate in our worksites, and downgrades our reputation that limits our capital access. On the other hand, our business’ impacts are material if our business limits the ability of people to access what they need to thrive and if we alter the environment to a state that interferes with their functions.

While our engagement with our stakeholders indicated minimal changes in the nature of their concerns, we updated our 2021 material ESG issues by combining the results of the comprehensive materiality assessment conducted by the University of Asia and the Pacific - Center for Social Responsibility (UA&P-CSR) in 2019 with the rapid materiality assessment we conducted in 2021. Comprehensive materiality assessment is conducted every three years, and we are set to update this next year.

Below is the summary of our process in determining our 2021 material ESG issues:

1. We scanned all potential ESG issues from the following sources:
   • The feedback of our stakeholders were derived from our interviews of critical departments of all subsidiaries on the issues of their external stakeholders and their resolution. Interviewed were the ESH, CSR, Finance, Marketing, Human Resources, and Investor Relations groups.
   • The reports of credit rating agencies were reviewed to determine our gaps and areas where we can improve.
   • We examined our risk records on our critical issues. The material issues were assessed from the point-of-view of risk owners in the various groups of the subsidiaries assisted by in-house risk professionals and external experts in the case of climate change and cybersecurity risks.
   • The new government regulations and local and international developments in ESG were monitored throughout the year. These included emerging best practices and evolving business risks and opportunities from industry reports, scientific literature, and the news.
2. The universe of ESG issues was then checked as to their potential to create positive or negative financial and sustainability impacts using the following standards and references:
   • For our review of financial materiality, we were guided by the SASB, TCFD, and ESG standards of credit rating agencies and the performance standards of our investors and lenders; and
   • For our review of impact materiality, we were guided by the FPH environmental and social safeguards policies, GRI, UNGP, and the UN SDGs.
3. New ESG issues were added to the existing list from the UA&P-CSR study. These were then validated and ranked with the key groups of all FPH subsidiaries based on the concerns their stakeholders raised during the reporting period.

While the process affirmed our existing material ESG issues, we noted the dynamic nature of some topics. In 2021, there was greater interest in: a) climate change and its regulatory risks, b) understanding the full value of the company (financial and ESG value), and c) how we can continue to uphold the rights of our internal and external stakeholders. These issues are discussed under the section on how we are responding to disruptions. Below are our final material ESG issues for 2021 consisting of four economic, seven environmental, seven social, and three governance themes.

Lastly, a firm basis for selecting our material topics is their potential impact on a business’ ability to create value. These were considered so that timely interventions could be done to preserve the capitals and deliver the planned outcomes.

True to our mission of a regenerative business, we take inspiration from Carol Sanford’s Pentad Stakeholder framework.7 This framework highlights the interconnectedness of five major stakeholder groups: a) our customers, those for whom we deliver our best-inclass offerings; b) our co-creators, those we partner with in delivering value to consumers; c) the Earth, which serves as the source of our raw materials and the place where we conduct our business activities; d) our communities, which guides us in conducting business successfully, and in turn, we safeguard and uplift their lives; and e) our investors, who enable us to continue and exponentially provide value to all of our stakeholders by sharing our mission and advocacies. They all play a critical role in our value creation process as they assist us in achieving our business goals, improving our way-to-play, and providing exponential value to the environment and society.

We regularly communicate with our stakeholders to gather their feedback and insights on our operations, business performance, and sustainability endeavors. In return, we address their concerns by continuously delivering and improving our performance on the six capitals (Financial, Environmental, Manufactured, Social and Relationship, Human Resources, and Intellectual).

Risks and opportunities are integral realities in business. They are also influenced by the external environment. In 2021, these risks were largely influenced by the ongoing pandemic, accelerated impacts from climate change, new technologies, the continuing shift towards digitization, urbanization, and changes in national and local regulations.

Settling into the second year of the pandemic, our central corporate teams (i.e., the Enterprise Risk Management (ERM), Business Continuity Management (BCM) Team, Corporate Sustainability Group (CSG), Environment, Safety and Health (ESH) Team, and Occupational Health (OH) Team) continued to work closely with the corporate organization and our subsidiary companies to lay our systems and processes, guidelines, and programs that stabilized business operations amid continuously evolving challenges. We continue to update these systems and our strategies, learning from each new challenge the pandemic brings.

The pandemic poses more risks and opportunities beyond health. It had far-reaching implications for the organization, concerning human resource management, managing our supply chains and related logistics, and shifts in customer behavior in the market and the national economy at large. In tandem with all the other megatrends, most especially climate change, these set the landscape that the organization needs to dance with and surmount for it to thrive and grow. Hence, the imperative for us to manage appropriately our strategic, operational, and project risks. Likewise, the need to be proactive and deliberate in identifying, assessing, and realizing the opportunities that come along.

The pandemic pushes everyone off the wall to take every measure and protocol to protect and save lives—from wearing masks and face shields, washing hands, social distancing, keeping some critical employees under shelter-in-place (SIP) arrangement, getting everyone vaccinated, among others. Major government responses to the pandemic, such as lockdowns and import and export restrictions heavily impacted the supply chain. Rapid digitization has exponentially increased cybersecurity issues and network security attacks. On the other hand, the same pandemic has hastened the technological revolution for business. Digitization has transformed social and work interactions. It accorded our organization the opportunity to try and prove the effectiveness of new ways of doing things under the “new normal,” such as online meetings and employing work from home (WFH) arrangements.

Finally, the same pandemic scenario ushered in opportunities for us to shift to safer modes of delivering services.

Risk Management

Enterprise Risk Management Framework

FPH advocates a risk management culture throughout the enterprise to ensure that risks and opportunities are effectively managed, thereby protecting and creating value for our stakeholders. The ERM Framework fortifies this risk management culture.

The Board of Directors maintains its oversight role in Enterprise Risk Management through the Board Risk Oversight Committee (BROC). The BROC conducts deep dives into the critical strategic and emerging risks and opportunities, provides guidance, and ensures effective management to support value creation.

The year 2021 saw a refreshed BROC, manned by five new directors armed with collective experience and expertise in the areas of insurance, economics, construction, real estate, healthcare, marketing, public service and law, and environmental protection. The BROC spends significant time with the subsidiary companies to review their respective strategic risks and corresponding risk management strategies and action plans. Likewise, they review all the major related opportunities.

The Chief Risk Officer (CRO) and Senior Management review the critical strategic risks and opportunities before the BROC review.

The CRO and the ERM Team serve as the process champion to ensure that a fully functioning ERM system is in place. The ERM Team provides the framework and supports the respective risk management systems, initiatives, and programs placed in each subsidiary. Within each subsidiary’s risk management system, major risks are identified with the appropriate risk owners.

These risk owners evaluate, monitor, manage, and report their assigned risks, including the mitigation and application of appropriate risk management solutions.

Project risks and opportunities are reviewed by the project teams with support either from their respective risk management champions and/ or the FPH Risk Management Team, as the case may be.

RISK MANAGEMENT PROCESS

The FPH Risk Management process is an integral part of management and is integrated into the structure, operations, and processes of the organization applied across all levels. The process is iterative and goes in a feedback loop, taking into account changes in context, objectives, and the internal and external factors that may impact value protection and value creation.

Central to the process execution is a risk assessment conducted systematically, iteratively, and collaboratively. It includes risk identification, analysis, evaluation, and treatment. These are all captured and documented through the risk register. It ends with oversight via regular monitoring and review done at various levels.

In 2021, we tackled the following group-wide risks and opportunities that impact our value creation objectives and strategy.

The risks mentioned above are the general risks that affect us group-wide. These risks, however, can have specific impacts at the subsidiary level. Additionally, each business segment experiences risks particular to its industry. The following section presents risks at the level of various FPH business segments and their management strategies to address these risks and the potential opportunities that come with them. For more detailed information on the risks, opportunities, and risk management process of the energy segment, more information can be found in the 2021 First Gen Integrated Report uploaded on its website, www.firstgen.com.ph.

Responding to Major Disruptions

We have identified two urgent overarching risks, noting that they are also worldwide concerns: climate change and evolving social issues. Our management strategies are discussed below.

CLIMATE CHANGE AND PROGRESS IN TCFD RECOMMENDATIONS

Out of the several overlapping disruptions described in the section on External Environment, the company has been giving particular attention to climate change for the past two years because of the magnitude of its impacts on our business, stakeholders, the country, and beyond. It is also the mother of disruptions that brought about the pandemic and financial recession being experienced today. Since 2020, we have adopted the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) to aid us in the systematic assessment of our climate risks and opportunities so we can act on them proportionate to their consequences. By doing so, we hope to help our investors and interested stakeholders arrive at decisions based on more reliable information. Our goal is to fully integrate climate parameters into our overall business strategy. Our roadmap to attain this considers a four- to five-year timeline as allowed in the procedures of TCFD.

TCFD CORE ELEMENTS FOR RECOMMENDED DISCLOSURES 8

Below are the identified climate-related risks and opportunities of the group. Each subsidiary is also working on plans to address its specific risks and opportunities. In general, we assessed that there are enough solutions or a combination of measures to address the climate-related risks. Many are already in place or under study in the company. Our past experiences with extreme weather events, the company mission, and the mindset they create across the organization enabled us to plan the climate actions needed for our businesses in the past years.

CLIMATE-RELATED RISKS

* Time frame: Short-term is 1-2 years; Medium-term is 5-10 years; Long-term is > 10 years

CLIMATE-RELATED OPPORTUNITIES

* Time frame: Short-term is 1-2 years; Medium-term is 5-10 years; Long-term is > 10 years

The management approaches identified by the multi-departmental group per subsidiary will be further detailed at the operational level as each subsidiary will have its unique circumstances. In general, the measures available are not limited to the list above. These can be complemented by other initiatives, such as incorporating climate change information into design, screening of climate safe locations for projects, climate impact studies for new facilities or the retrofitting of old ones, increasing process efficiencies, continuous scanning of emerging industry technologies, cost mastery and efficiency program, identification of contractual solutions for flexibility, and insurance.

Further analysis is needed for the opportunities arising from climate change; these will be specific to each industry sector. Hence, discussions will happen at the subsidiary level.

ADDRESSING SOCIAL ISSUES

The social disruptions brought about by the ongoing COVID-19 pandemic and economic recession prompted businesses to re-evaluate their interactions with stakeholders. These raised questions if businesses are still performing responsibly in a socially acceptable manner. As we have been at the forefront of combating climate change due to the nature of our businesses, we ensure that no one is left behind by being champions of our employees, consumers, and local communities.

We identified that adhering to human rights serves as a sound foundation in tackling our pressing societal issues, not only in our company but also elsewhere. To support the safeguarding of our internal and external stakeholders, we conducted a Human Rights Impact Assessment (HRIA) as part of the Human Rights Due Diligence (HRDD) process based on the UN-BHR to identify the potential human rights risks from our business activities and craft solutions to prevent or minimize their impacts. The HRIA covered both internal and external stakeholders.

POTENTIAL IMPACT: FAIR TREATMENT TO CONSUMERS

We ensure that we communicate our products, services, and business practices to protect our consumers.

For our energy segment, we price our products and services competitively and align with government regulations. We conduct technical due diligence for our Real Estate segment and provide clean titles to our newly turned over properties.