The Bangko Sentral ng Pilipinas (BSP) has approved the country’s first version of its sustainable finance taxonomy guidelines (SFTG) that banks will adopt for its sustainable funding activity and hopefully raise about $168 billion in green investments in the next seven to 10 years.

The SFTG is basically a simplified classification tool to identify if an economic activity is environmentally and socially sustainable, as in the case of micro, small and medium enterprises (MSMEs), as well as larger businesses.

The BSP’s policy making arm, the Monetary Board, approved BSP Circular No. 1187 on Feb. 14, 2024, or the “Philippine Sustainable Finance Taxonomy Guidelines.”

The first version of the SFTG focuses on two environmental objectives: climate change mitigation and climate change adaptation. The next iterations will cover biodiversity and circular economy.

BSP Governor Eli M. Remolona Jr. said Friday, Feb. 23, that “the issuance of a taxonomy is a crucial step in our sustainability journey.”

“It provides high level guidance in determining the greenness of an investment.  But this is just the first step to what I expect will be a long iterative process of calibrating the document to fully capture the conditions of the Philippine economy,” he said.

The BSP will have an observation period until the end of 2024. This is to give banks “ample time to increase familiarity and understanding of the SFTG principles.”

“During this period, a pilot testing exercise will be conducted in partnership with the industry. The results of the exercise will also inform the development of additional guidance on the use of the taxonomy,” said the BSP.

The SFTG, according to the circular, will “direct, accelerate and increase capital flows to economic activities that promote sustainability objectives, including reduction of greenhouse gas (GHG) emissions and building climate resilience.”

It likewise promotes transparency and credibility by minimizing the risk of greenwashing and supports a just transition to a sustainable economy. Greenwashing is deceptive marketing to persuade the public that an organization’s products, aims and policies are environmentally friendly.

To simplify the process, the SFTG uses the traffic light system such as “green,” “amber,” or “red” in classifying an activity.

When it is green, it means it is an SFTG-aligned activity. Amber is for partially aligned, and red is for not aligned at all.

The BSP said an amber classification includes activities that are in transition to remedy an actual or potential harm done. “This also includes activities that are considered enablers of climate change mitigation and adaptation objectives,” it said.

The red classification means that the activity does not meet the higher ambitions of the SFTG, but these activities may still be eligible for “unlabeled” financing, said the BSP.

Since the taxonomy provides a simplified approach in assessing the economic activities of MSMEs, the BSP said it “recognizes the important role of MSMEs in the economy and aims to promote financing to the sector.”

The BSP first proposed SFTG in September 2023. It was developed under the BSP-led Financial Sector Forum (FSF) following the recommendations in the Philippine Sustainable Finance Roadmap by the inter-agency Technical Working Group for Sustainable Finance or the Green Force in October 2021.

The Philippines has conditionally committed to a 75 percent reduction in greenhouse gas emissions by 2030.

The FSF said last year that the amount of financing needed to meet the country’s climate goals is “colossal” between 2020 and 2030.

The FSF noted that climate investments between 2017 and 2021 was only one percent of total cross border investment. This was “substantially below” other regional peers. It is then “strategic” and “imperative” to expand the domestic financial sector’s capacity to support and accelerate the Low Carbon and Climate Resilient transition, which will require multiple sources of finance.

This is where the SFTG comes in. However, for now it will focus on climate change.

The BSP released a consultation paper on the SFTG last year. After the consultation, the first phase taxonomy document was then produced and formalized into regulatory instruments.

The SFTG in its current form will focus on climate change mitigation and adaptation. In future iterations, biodiversity, circular economy, and social objectives will be considered. Other environmental and social considerations are proposed to be considered through additional screening based on the “do no significant harm” principle, and minimum social safeguards appropriate to the Philippine context, said the BSP.