The Bangko Sentral ng Pilipinas (BSP) said it has started its close monitoring of banks’ sustainable finance transitioning until 2023 when the new guidelines on sustainable banking are fully implemented.
BSP Governor Benjamin E. Diokno in a statement Friday said banks “are expected to identify and execute specific actions on the implementation of Monetary Board-approved strategies and policies on the integration of sustainability principles into their strategic objectives, corporate governance, risk management systems, and operations.”
“We recognize that the tone at the top is of vital importance in materializing a bank’s sustainability initiatives,” he added.
The BSP is implementing a three-year transitory provision to give banks enough time to comply with the sustainable finance rules and expectations. It expects banks to adopt a transition plan with specific timelines to implement strategies and policies approved by their board of directors.
BSP’s Circular No. 1085 on Sustainable Finance Framework, which it issued April 2020 require banks to establish an environmental and social risk (E&S) management system and to include sustainability initiatives in their annual reports.
In a report this week, Moody’s Investors Service said Philippine banks are one of the more vulnerable sectors to physical climate risks in the region because of the country’s “weak” infrastructure. Local banks also face asset risks from large exposures to sectors susceptible to carbon transition risks, said Moody’s. About 22 percent of gross loans are borrowings of susceptible sectors or carbon-intensive sectors.
The BSP said climate change and other E&S risks have an effect on financial stability such as on a bank’s operation and financial interest. 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.
Diokno, at the time of the circular issuance, said the BSP recognize banks’ “critical role” in a sustainable and resilient growth, and they expect banks to “embed sustainability principles, including those covering environmental and social risk areas, in their corporate governance framework, risk management systems, and strategic objectives consistent with their size, risk profile and complexity of operations.”
The BSP defines sustainable finance as “any form of financial product or service which integrates environmental, social and governance criteria into business decisions that supports economic growth and provides lasting benefit for both clients and society while reducing pressures on the environment.”
This covers green finance which funds green economic activities and climate change mitigation and adaptation projects, said the BSP.
E&S risks, in the meantime, are those deemed as “potential financial, legal, and/or reputational negative effect of environmental and social issues” on banks. E&S issues include environmental pollution, climate risk both physical and transition risks, hazards to human health, safety and security, and threats to community, biodiversity and cultural heritage, among others.
Diokno said last week that BSP will issue “second-phase regulation” as part of banks’ transitioning to a low-carbon economy including climate change scenarios for “stranded asset risk”.