The Bangko Sentral ng Pilipinas is moving toward regulation that will encourage financial institutions to adopt “green strategies” by rewarding lending to undertakings that are environmentally sustainable while penalizing those that are not.
Thus explained the country’s chief financial regulator speaking in the recent 2nd Annual National Business Climate Action Summit in Pasay City, where the role of the financial community in achieving a climate-resilient Philippine economy was highlighted.
“The BSP has a role to play in the process,” Governor Benjamin Diokno said in his speech. “We have rolled out a two-pronged approach in promoting environmental, social and governance principles.”
The first is through capacity building and awareness campaign, and second is by mainstreaming these environmental principles through the issuance of enabling regulations.
“We deem that this approach will increase the BSP’s and the banks’ understanding of the risks posed by environment degradation and climate change on the financial sector, enhance capacity to manage these risks, and increase banks’ awareness on the investment opportunities for green or sustainable projects before issuing regulatory expectations on sustainable finance,” he said.
Operationally, the BSP is already undertaking pockets of activities related to green practices. It recently participated in the open-ended green bond fund launched by the Bank for International Settlements as part of sustainable investing in reserve management.
On the regulatory pathway, Diokno said the BSP believed that the optimal approach remained to be one that was “enabling”—one that would provide ample flexibility, sensitive to risk-appetite and business models, and proportionate to the banks’ size, structure and complexity of their operations.
“This approach aims to shift perspectives from a myopic compliance exercise to a forward looking stance that puts greater weight on the long term financial interest and sustainability of the organization,” he said.
Following this approach, the BSP will be issuing environmental-related regulations in phases. The first phase will provide high level principles and broad expectations on the integration of environmental and sustainability principles in the corporate and risk governance frameworks as well as in the business strategies and operations of banks.
The second phase will provide more granular expectations in managing climate change and other environment-related risks in relation to credit, market, liquidity, and operational risks. The third phase may cover potential regulatory incentives.
“Climate change and environmental challenges can pose risks on the stability of the financial system,” Diokno said.
“A whole-of-country approach is basic and necessary to address such risk and scale up promotion of green or sustainable finance.”