The Bangko Sentral ng Pilipinas (BSP) has approved the guidelines on banks’ sustainable investments for the effective management of risks associated with green financing.
BSP Governor Felipe M. Medalla, who signed Circular No. 1149 or the “Guidelines on the Integration of Sustainability Principles in Investment Activities of Banks” on Aug. 23, said the new rules address the essentials in sustainable finance: its safety and soundness. This is also the third phase of sustainable finance regulations.
Medalla said the BSP recognizes the potential contribution of banks’ investment activities in the pursuit of a sustainable and resilient growth for the country.
“These guidelines set expectations on the prudent conduct of investment activities and the minimum practices that a bank should establish for the management and control of risks associated with investments,” he said the circular memo.
The circular set expectations on the integration of sustainability principles in investment processes of banks. It covers banks’ investments in the trading and banking books. But the rules do not apply to the following: investments that grant control over an enterprise and are accounted for using the equity method; transactions in derivatives involving stand-alone contracts; and receivables arising from repurchase agreements.
Under the BSP’s risk management framework, banks’ policies and procedures, including limits, should adopt a combination of integration, screening and thematic approach.
The circular is specific on how a bank may adopt other approaches and appropriate global best practices depending on its investment policy and sustainability objectives and goals, the nature of its investments, volume of transactions, and existing risk management system and resources. However, all banks should make sure that the related sustainability risk factors, including anti-money laundering/counter-terrorism financing risk that arise from environmental and social or E&S issues, are sufficiently captured, said the BSP.
The circular also noted the misleading practice called “greenwashing” which is a “deceptive marketing” to persuade the public that an organization's products, aims, and policies are environmentally friendly.
Greenwashing by BSP definition also covers the dissemination of misleading information, whether intentional or not, regarding a company's environmental strategies, goals, motivations, and actions that can induce false positive perception of a company's E&S performance.
The BSP said banks should adopt measures to ensure that investments are channeled to companies that comply with sustainability-related standards, laws and regulations as well as companies that do not engage in greenwashing.
The third phase of sustainable finance regulations is a wider adoption of sustainability principles in the domestic financial system.
The BSP will also issue more guidelines to outline the incentives available for banks to mobilize capital as well as regulatory perks for banks that will shift to sustainable financing such as preferential rediscount rates or provision of higher loan values.
These perks should increase the share of green financing in banks’ loan portfolios. Since 2017, local banks have issued some $1.3 billion worth of sustainable bonds and P152.9 billion in peso-denominated issuances.
Through the BSP’s Sustainable Finance Framework which was first released in April 2020 and the Environmental and Social Risk Management Framework issued in October last year, the BSP has done its first and second phases in sustainable finance regulations by these issuances.
The first and second phases of regulations set out the expectations on the integration of sustainability principles in banks’ core strategies, governance, and risk management frameworks, especially in the areas of credit and operational risks. These rules also embed the principle of proportionality, which takes into consideration a bank’s size, risk profile, and complexity of operations.