BSP proposes more climate change rules

Published May 17, 2021, 6:00 AM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) has drafted additional rules to ensure banks continue to so-called “greening” by integrating climate change and environmental and social (E&S) risks in its key strategies and operations.

The proposed guidelines seek to ensure the integration of “sustainability principles in the risk management system particularly in the bank’s risk strategy, risk appetite, and risk management policies and procedures” by setting – among others — E&S objectives covering short, medium, and long term horizons related to the management of specific risk areas.

The BSP also wants banks’ board of directors and management to make sure integration is done by the risk appetite on specific risk areas depending on the level of “risk exposures that the bank is willing and capable to manage” while “results of stress testing exercises, and assessment of the timing and channels through which E&S risks may materialize” should be carefully assessed.

“Ensure (also) that E&S risks are incorporated in stress testing exercises and the results thereof are considered in the Internal Capital Adequacy Assessment Process (or ICAAP),” according to the draft guidelines.

The proposed circular amended BSP’s Sustainable Finance Framework which had earlier institutionalized the adoption of sustainability principles, including those covering E&S risk areas plus corporate governance and risk management frameworks based on a bank’s risk appetite and ability to manage risk.

The draft circular on E&S risk management framework has been circulated among members of the banking industry for comments and other recommendations. They are given until May 31 to submit their inputs.

The proposed integration of climate change and other E&S risks basically laid out the duties and responsibilities of board of directors and senior management that was already in their functions to “promote the long-term financial interest of the bank and ensure that it has beneficial influence on the economy,” said BSP Governor Benjamin E. Diokno in the draft circular.

Specifically for the senior management of banks, the BSP wants board-approved strategies and policies to be assessed regularly for its “effectiveness of implementation and continuing relevance.”

For the identification, assessment, monitoring and mitigation of E&S risks, the BSP said that senior management, in taking a holistic approach in managing these risks, should also do the following: ensure activities that expose the bank to E&S risks are aligned with the overall E&S strategic objectives and targets; that the adoption of methodologies and tools will effectively identify, and quantify/measure, monitor and control E&S risks; and that policies, procedures, and processes are clearly and effectively communicated across the organization.    

Diokno has said that the BSP is one with the international community in its call for climate change and sustainable finance. In fact even as the pandemic was newly declared in April 2020, the BSP issued its Sustainable Finance Framework for banks last year to emphasize the role of the board of directors in the adoption of sustainability principles in their respective corporations.

“We will be issuing more granular expectations covering the interplay of E&S risks and the key risk areas such as credit, market, and operational risks,” said Diokno earlier.

The BSP already has a Green Bond Fund which was launched by the Bank for International Settlements (BIS) as part of sustainable investing in reserve management. About $350 million of the country’s $107 billion foreign assets are green bonds issued by the BIS.

The BSP is also a member of the Network for Greening the Financial System which is a group of central banks organized for the management of climate and other environment-related risks, as well as to mobilize capital for sustainable growth.