The Bangko Sentral ng Pilipinas (BSP) will rely more on expanded surveys, studies and industry consultations to identify potential regulatory incentives that banks prefer to increase green lending in the next two to three years.

In the analysis, “Integrating sustainability in the BSP’s loans and credit operations" part of the first BSP Sustainability Report released in July, the central bank said a survey it conducted revealed that local banks have a strong preference for incentives such as reduced rediscount rates and higher collateral and/or loan value as incentives to promote green lending among banks.

Another survey listed at least nine green or sustainable loan categories that banks seem to prefer as green lending.

These include loans for renewable energy which accounted for 89 percent of approved loans as of the third quarter of 2022, based on a BSP survey. Next with a share of 56 percent are loans to sustainable water and wastewater management while energy efficiency and green buildings have 50 percent each as share in the loan portfolio.

Other activities which accounted for 39 percent include projects promoting social welfare, socioeconomic empowerment, affordable infrastructure, access to essential services, and microfinancing in underserved communities.

Meanwhile, other categories which gets the most of green financing include: promoting resource efficiency and circular economy; sustainable or zero-carbon transportation; promoting resilient food systems; pollution prevention and control; and transition activities.

The BSP in the report said it will consider these activities or projects, as well as the Philippine Sustainable Finance Guiding Principles and the Sustainable Finance Taxonomy being developed by the BSP’s Financial Sector Forum (FSF), in establishing a list of eligible and ineligible economic activities or projects to be incentivized through the BSP’s facilities under normal credit operations.

In conducting more surveys, the BSP can collect and analyze more data to integrate environmental, social and governance (ESG) aspects in its credit operations.

“As for additional risk mitigating measures, the BSP will look into such risks in detail to assess the possible impact on credit operations and create appropriate safety nets,” it said.

BSP in considering the physical risks, will do the following: mapping out properties used as collateral for outstanding and past due loans and determining the relative exposure or vulnerability to environmental or climate/physical risks of the location of each collateral property; and performing an in-depth assessment of potential impacts on collaterals through scenario analysis and/or stress-testing.

For associated risks which the BSP identified as greenwashing of projects or activities proposed for financing, it said any incentive schemes will follow the Sustainable Finance Taxonomy being developed by the FSF.

As for reviewing the perks such as rediscounting loans, the BSP said economic activities or projects acceptable under the BSP Rediscounting Facility will be closely monitored and assessed if these are “legitimately sustainable” based on the country’s carbon-reduction commitments and “properly categorized as eligible or ineligible for the incentive.”

Last June 2022, the BSP conducted a survey among selected central banks to find out which approaches have been done in embedding sustainability-linked components in their existing lending facilities.

According to the survey, providing lower interest rates to banks to finance green or sustainable projects and activities at lesser cost is the most common incentive given by central banks.

In another survey which was done in 2022 among big banks in the country, the BSP was able to gather current lending practices for green or sustainable projects and to ask banks if they are interested in availing of BSP credit facilities.

About 75 percent of surveyed banks have financed or approved loans supporting green or sustainable projects amounting to P829.7 billion and $14.35 million as of end-June 2022. This was about seven percent of the total loan portfolio of the banking system at the time.

The BSP’s maiden Sustainability Report has committed to complete the climate stress tests, disclosure guidelines and incentives for sustainability-related projects within the year.

Former BSP Governor Felipe M. Medalla, who was still the BSP chief when the report was released on July 2, said sustainability reporting “is an important lever that allows the BSP and its supervised entities to progressively shift towards adoption of environmentally and socially responsible policies and work practices.”

One of the highlights of the first sustainability report is BSP’s 11 action points and which of these Sustainable Central Banking (SCB) Program which forms part of the 2020-2023 BSP strategy, will be implemented in 2023.

Based on the report, the BSP with the World Bank plans to complete the climate stress testing program first. It said this activity “may be expanded to cover other environment-related exposures such as biodiversity loss.”

The stress testing exercise, meanwhile, will include prudential reports submitted by banks to capture identified data relevant for surveillance of aggregate exposures of the banking system to climate and other environment-related risks, said the BSP.

As reported earlier by the central bank, the potential regulatory incentives are still under review, but they plan to complete sustainable-related perks within the year.