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Enterprise Risk Management Report

EMBEDDING THE MINDSET

ENTERPRISE RISK MANAGEMENT IN MANILA WATER

Manila Water operates in a regulated and dynamic business environment where uncertainties, both detrimental and opportune to the Company, abound. The Company is accountable to its regulators, shareholders, employees and customers, among others, even as profitability, sustainable development and corporate social responsibility are expected to be continuously enhanced. In order to achieve its corporate objectives, Manila Water recognized the need for the active management of risks inherent in its business, involving the entire organization.

Manila Water continues to implement its Enterprise Risk Management (ERM) Program based on a globally accepted approach, the ISO 31000:2009. The ERM Program has been cascaded to all Manila Water departments. The same has been rolled out to subsidiaries in Boracay, Cebu, Clark, and Laguna and its affiliates in Vietnam to ensure the attainment of their respective growth objectives. The rollout considered the unique business and risk environments where these subsidiaries / affiliates operate.

The ERM Program operationalizes the Company’s Manual of Corporate Governance, which mandates the Board of Directors to ensure the presence of organizational and procedural controls supported by an effective management information system and risk management reporting system. In addition, the Company’s Board Risk Oversight Committee provides oversight to management functions relating to strategic, financial, operational, compliance, legal, environmental, social and other risks of the Company, which involves periodic disclosure of significant risk exposures and related risk management activities.

The President is the primary risk executive and is ultimately responsible for ERM priorities, strategies, tolerances and policies. He chairs the Risk Management Executive Committee (RMEC) which is composed of senior management and the Chief Risk Officer (CRO). The RMEC provides oversight and inputs to the President and to the Board to enable them to formulate better and informed decisions on matters relating to risks. The RMEC provides direction on the design and implementation of appropriate systems, tools, and methodologies to support the ERM process and other risk management activities, and designates owners of specific risks and enablers of the ERM process (ERM Champions / Partners / Risk Officers).

The CRO is the ultimate champion of ERM at Manila Water. Supporting the CRO is the Enterprise Risk and Insurance Management (ERIM) Department. It is responsible for developing risk management tools, methodologies, and processes and leads the implementation and dissemination of ERM across the Manila Water group. This is done in coordination with the risk owners, the CRO and ERM Champions / Partners / Risk Officers of the business units. ERM has been embedded in strategic, tactical, and execution planning cycles as well as in key decisionmaking processes including insurance management. Manila Water has a risk-based insurance program, wherein coverage considers relevant risks and existing controls. The integration of ERM with insurance management ensures that insurance provisions in contracts are custom-fit to respond to specific project risks.

To aid in the quantification of risks and determine the effectivity of risk management plans, Manila Water utilizes Key Risk Indicators (KRIs) which are regularly monitored and reported to management. The use of the KRIs enhances the analysis of risk levels and risk mitigation strategies. The status of the KRIs is discussed at the RMEC, and is reported to the Board Risk Oversight Committee. In addition, risk tolerance statements have been established for certain applicable processes.

In line with management’s commitment to sustain the ERM Program in Manila Water, the ERM maturity rating continues to be part of the corporate and group targets. Penalties in Total Management System (TMS) are incurred whenever there is noncompliance with ERM requirements. A minimum ERM maturity rating has been set for respective business units across the enterprise.

Manila Water also conducts an annual awards program, the Gawad Iwas-Lunas: Risk Management Excellence Awards to recognize individuals, teams, and departments that have significantly embedded risk management and exhibited outstanding risk culture in the Company. The awards program is consistently judged by a panel composed of industry professionals and experts. The awards program is the first of its kind within the Ayala group of companies.

The risk management system of Manila Water is reviewed and assessed annually by the Internal Audit Department, using a risk maturity assessment framework aligned with global best practices to determine the system’s adequacy, suitability, and effectiveness. Manila Water subjects its ERM system to external assessment from time to time.

2017 ERM ACTIVITIES AND
HIGHLIGHTS

For 2017, the ERIM Department strengthened its core activities and expanded its reach across the enterprise. The following activities were carried out to improve the Risk Management System of the Company:

ERM Course at Manila Water University. ERIM Department, in coordination with the Corporate Human Resources Group, conducted a series of training sessions through the Manila Water University. The ERM course has become a mandatory requirement for all new employees during their onboarding process. At the end of 2017, ERIM has trained more than 1,000 employees across the enterprise.

Enhancement of Communications Program. Manila Water enhanced its ERIM Communications Program and held its second ERIM Week with the theme “I am Riskponsible” where various activities were aimed at increasing awareness of ERM and Insurance Management and its significance in the organization. Some of these were: the “GalleRisk,” an exhibit showcasing the journey of Manila Water on ERM implementation; the “Black Swan” learning session to introduce new risk management concepts and tools to employees; the “RiskQuiz” where employees were given the chance to win a prize by answering the oneday hourly online quiz about general ERM and insurance information; the “Animal Risk Profile Survey” where employees were able to know their attitude towards risk; the “Insurance FAQs” where information on various Manila Water insurance lines was disseminated to employees and the “What’s Your ERM Story” e-mail communications where appointed ERM Partners / Risk Officers from different business units shared their risk management journey in Manila Water.

Enhancement of Risk Management Excellence Awards Program. To increase engagement of stakeholders, Manila Water enhanced its risk management excellence awards program. Business units conducted their respective risk management excellence awards and resulted in the highest participation turnout in the history of the awards program.

ERM Rollout to Vietnam Affiliates. The ERIM Department was instrumental in improving the risk maturity of Manila Water’s Vietnam affiliates, as risk management became part of top management meeting agenda. In addition, risk management exercises were conducted, which included the regular monitoring of risk mitigation strategies.

Resiliency and Business Interruption Study in the Subsidiaries. To improve the risk management and risk transfer strategies of its subsidiaries, Manila Water expanded the scope of its Resiliency and Business Interruption Study to include the non-Manila Concession businesses. The results of the study will be used to optimize the insurance program of the subsidiaries.

Maintenance of Quality Management System for Insurance Management. As an affirmation of adherence to global best practices, ERIM’s Insurance Management Section successfully passed its ISO 9001:2015 surveillance audit with no major nor minor non-conformities.

Manila Water’s “Gawad Iwas-Lunas: Risk Management Excellence Awards” won a Quill Award of Merit in the Communication Management Division for demonstrating the excellent use of communication to achieve business goals. The recognition validates Manila Water’s efforts in raising risk management awareness throughout the enterprise, and top management’s continuing support to risk management initiatives.

Manila Water’s Chief Risk Officer and Deputy Group Treasurer Jocelyn Frances P. Sison shared the risk management journey of Manila Water in establishing and measuring risk culture at the Institute of Enterprise Risk Practitioners Global Conference 2017 in Kuala Lumpur, Malaysia.

Attended by hundreds of risk practitioners from countries across the globe, Ms. Sison discussed how a strong risk culture contributed to the successful transformation of the organization from an East Zone-centric company into an enterprise managing a portfolio of businesses consisting of water, used water, and related assets across the Philippines and the ASEAN region. It was the first time that Manila Water was invited to an international risk management conference to share the Company’s journey in ERM implementation.

As Manila Water sets its sights on further expanding its reach and footprint, it continues to engage its talents in finding more cost-effective and innovative ways to manage risk. With sustained active involvement and appreciation of risk management at all levels of the organization, the Company is able to manage uncertainties in the regulatory, business and physical environment, and is equipped to achieve new business goals and continue its role in protecting the environment and enhancing sustainable development both locally and internationally.

MANAGEMENT OF TOP ENTERPRISE RISKS

The Risk Management Executive Committee (RMEC), composed of Manila Water’s Senior Leadership Team, Manila Water Operations Management Committee and the Chief Risk Officer, determines the most significant risks facing the Enterprise. The management of the top enterprise risks which has been mapped up to the department level, as well as, delegated to the appropriate Risk Owners.

Risk Owners formulate and commit to a risk management plan, monitored by the ERIM Department, which defines specific action items, accountability and timeline. The status of the Top Enterprise Risks is regularly discussed at the RMEC and is reported to the Board Risk Oversight Committee.

REPORT OF THE BOARD RISK OVERSIGHT COMMITTEE TO THE BOARD OF DIRECTORS

For the year ended December 31, 2017

The Board Risk Oversight Committee (“Risk Committee”) was established by the Board of Directors at its August 11, 2015 meeting to provide assistance in fulfilling the Board’s oversight responsibilities in relation to risk governance in Manila Water. The Risk Committee’s roles, responsibilities and authorities are defined in the Risk Committee Charter approved by the Board of Directors during its November 26, 2015 meeting.

In compliance with the Risk Committee Charter, the Committee confirms that:In compliance with the Risk Committee Charter, the Committee confirms that:

• An independent director chairs the Risk Committee. The Committee has three out of four members who are independent directors.
• The Committee had three meetings during the year with the following attendance rate:

• The Committee discussed with Management the adequacy and effectiveness of the Enterprise Risk Management process, including significant risk exposures, the related risk-mitigation efforts and initiatives, and the status of the mitigation plans. The review was undertaken in the context that Management is primarily responsible for the risk management process.
• The Committee has reviewed the Enterprise Risk Management Process in Manila Water Company, Inc. and is satisfied that sufficient risk management systems are in place.
• The Committee conducted a self-assessment of its performance to confirm that the Committee meets the expectations of the Board, Management and shareholders.