The Bangko Sentral ng Pilipinas (BSP) is aiming high when it comes to its sustainability agenda.
BSP Governor Benjamin E. Diokno said he is pursuing the G.R.E.E.N. strategy to integrate sustainability into all banks and non-banks’ operations and the entire financial system.
In a recent Pilipinas Conference 2021 by Stratbase ADR Institute for Strategic and International Studies, Diokno vowed that the BSP will put G.R.E.E.N. into action through the following: G- guiding the financial system and promoting a conducive backdrop for sustainable finance to flourish; R- raising awareness and building capacity as a continuing task to mainstream sustainable finance and increase appreciation of sustainability principles; E- enabling a regulatory environment through policy issuances; E- engaging all stakeholders; and N- navigating the path toward post-COVID-19 economy and the Philippine financial system that is more stable, resilient, and inclusive.
For Diokno, G.R.E.E.N. encapsulates BSP’s “goal of championing sustainability in the financial system.”
The BSP said the G.R.E.E.N. strategy is implemented through regulatory issuances, which aim to embed sustainability principles, including environmental, social, and governance considerations, in the strategies, corporate governance, risk management, and operations of banks. The strategy also aims to direct the flow of capital toward green and sustainable projects.
Sustainable finance
With typhoons and superstorms always posing dangers to the country, the BSP said the Environmental and Social Risk Management (ESRM) Framework which it has issued is part of ensuring the financial system is prepared for calamities and other environmental disasters.
Under the ESRM framework, which is expected to take effect in 2023, the BSP wants banks to embed environmental and social (E&S) risks into their credit risk strategies and in all phases of the credit risk management system.
Diokno explained that the ESRM framework provides specific expectations on the management of E&S risks “in relation to credit and operational risks, taking into account the size, risk profile and complexity of operations of banks”.
This reform initiative is part of a series of regulations that will be released by the BSP to promote sustainable finance.
“It builds on the Sustainable Finance Framework issued in April 2020, which provides the broad expectations on embedding sustainability principles in the corporate and risk governance frameworks, business strategies and operations of banks,” said Diokno in an online press briefing before the Christmas break.
The ESRM guidelines will have board of directors to set up strategic E&S objectives that may include progressively increasing allocations for financing of green or sustainable projects.
“It is important to consider the economic sector and location of the borrower as well as the collateral for the loan, among others, in assessing the exposures to such risks,” said Diokno.
Banks are also expected to integrate E&S risks in their operational risk management framework; and to conduct a vulnerability assessment of its operations, systems, and offices and branches to physical risks and natural disasters. The results of the assessment should feed into the potential enhancement of business continuity plans of banks.
Subsequent phases of regulations will cover the areas of investment activities of banks, climate stress testing, disclosure requirements, prudential reporting and potential regulatory incentives.
“Aggregated risk data on the impact of environmental and social risk events on the bank’s business model, strategy and operational risk profile, are also expected to be reported to the board,” said Diokno. “Furthermore, banks are expected to adopt an effective system of internal controls, sound framework and plan for managing a crisis from environmental and social risks. This includes a comprehensive communication strategy,” he added.
In the last four years or since 2017, the BSP chief said seven banks have issued $1.15 billion in foreign currency denominated and P85.4 billion in local currency denominated green, social and sustainability bonds.
“Amid the pandemic, two banks have issued social bonds worth approximately P29 billion to finance the needs of eligible micro, small and medium enterprises.
At the regional level, sustainable bond markets in ASEAN+3 continued to expand to $389 billion as of September 2021,” he said.
Some $278.5-billion worth of green bonds dominate the ASEAN+3 sustainable bond market while social and sustainability bonds amounted to $110.2 billion.
“There is a strong momentum in the issuance of such bonds both at the local and regional markets,” said Diokno.