Biodiversity degradation has ‘modest’ impact on banks so far, says BSP

Biodiversity losses only have a “modest” impact on the Philippine banking system, the Bangko Sentral ng Pilipinas (BSP) said in a report that nevertheless showed lenders’ growing interest in offering sustainable finance products.

In its 2023 Sustainability Report released on Friday, the BSP said a preliminary analysis showed that biodiversity depletion tends to reduce bank capital adequacy ratio (CAR) to risk assets by less than 1 percentage point.

The central bank explained that risks to the financial system from biodiversity loss could arise from macroeconomic factors such as supply chain disruptions, productivity changes in the agriculture sector, shifting demand and increased costs.

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These risks, the BSP said, could translate into various financial risks for banks, including risks related to credit, underwriting, market, operations and liquidity. For instance, lending institutions are exposed to both direct and indirect risks associated with biodiversity loss by financing clients engaged in biodiversity-dependent economic activities.

But even with the estimated decline in capital as a result of biodiversity loss, banks would still maintain a CAR above the BSP and Bank for International Settlements thresholds of 10 percent and 8 percent, respectively.

”The impact of biodiversity loss on the banking system is modest,” the BSP said.

More interest

Despite such results, the BSP, citing preliminary findings of its 2023 Banking Sector Outlook Survey, said lenders’ appetite for issuance of “sustainable bonds” is expected to be “sustained.”

The survey revealed that the interest of respondent banks to finance sustainable projects or activities for the years 2024 and 2025 improved to 90.3 percent, from 79.3 percent recorded in the previous survey.

Nonetheless, the BSP said surveyed banks have highlighted some challenges, such as those related to capacity and bankability of sustainable projects.

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Central bank data showed that the total amount of peso-denominated sustainable bonds floated in the first semester of 2024 had increased to P236.5 billion owing to the issuance of an Association of Southeast Asian Nations-labeled sustainability bond by a universal bank.

Meanwhile, the total amount of foreign currency-denominated sustainable bonds floated by local banks in the same period had gone up to $1.6 billion on account of a social bond issuance by a thrift bank, the proceeds of which would be directed to women from low- or lower-middle income groups.

From 2017 to 2023, the BSP said seven Philippine banks had issued P173.2 billion peso-denominated and $1.5 billion foreign-currency denominated sustainable bonds

“A climate-resilient economy and financial stability are mutually reinforcing outcomes,” BSP Governor Eli Remolona Jr. said.

”The BSP is thus committed to supporting the collective effort to unlock finance for adaptation measures that need to be implemented by the public sector, private enterprises and households,” Remolona added.