BSP sets more rules on climate change integration

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said they are about to issue “second-phase regulation” to make the banking sector more responsive to risks in transitioning to a low-carbon economy including climate change scenarios.

“Banks may gradually consider the future implications of ‘stranded asset risk’ in their credit portfolio,” said Diokno in a recent Investment Forum on Energy Transition.

The International Monetary Fund (IMF), in an April 2020 report, has expressed concern that with climactic trends, financial systems could be underprepared to cope with transition risk from policy, technology, legal, and market changes as they move to a low-carbon economy. These transition risks include “assets becoming stranded” as well as reputational damage, and the fear is that banks could be left with stranded assets due to climate change.

Diokno during the forum announced that the BSP will be issuing its second-phase regulation to “enable the banking industry to make safe and sound response to risks arising from the transition to a low-carbon economy.”

“This supplementary issuance will provide granular expectations on the integration of climate change and other environmental and social risks in banks' credit and operational risk management frameworks,” he said.

Diokno said the energy transition “is a complex issue and comes with both risks and opportunities.”

The BSP released last April 2020 – in the middle of the strictest phase of the pandemic lockdown – the “Sustainable Finance Framework” to encourage green banking and sustainable finance.

“Central to the climate change mitigation goal is the need to reduce greenhouse gas concentrations by shifting fossil fuels to renewable sources,” said Diokno. “We should note, however, that a successful transition is not just a matter of isolated changes in the energy sector. We must also consider the potential risks associated with this transition given the interplay among economic activities.”

The BSP’s sustainable finance policy covers banks’ sustainability principles on environmental and social (E&S) risk areas, corporate governance and risk management.

Risks including physical (floods, typhoons, earthquakes) and transition risks due to climate change “could result in significant societal, economic and financial risks affecting the banks and their stakeholders,” said Diokno last year when they issued its first rules on green banking.

The sustainable finance policy is a recognition of banks’ “critical role” in a “sustainable and resilient growth by enabling environmentally and socially responsible business decisions” according to and consistent with the Philippine Development Plan.

The BSP is implementing a three-year transitory provision to give banks enough time to comply with the sustainable finance rules and expectations.