BSP issues guidelines on environmental social risk management

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has issued guidelines on the implementation of the environmental and social risk management system (ESRM) for banks and financial institutions.

BSP Deputy Governor Chuchi Fonacier said  the guidance aims to inform banks on the initial steps or approaches that may be considered in developing an ESRM system.

“The BSP recognizes that climate change and environmental hazards could pose significant risks to the safety and soundness of individual financial institutions and the entire financial system,” Fonacier said.

Fonacier said the guidelines under Memorandum Order 2022 – 042 describes the regulators minimum expectations as embodied in the issued circulars and provides information and reference to publications of the Network for Greening the Financial System (NGFS) and the Basel Committee on Banking Supervision (BCBS), among others, to support the development of an ESRM system.

Consistent with the principle of proportionality, the BSP official said   banks should adopt an ESRM system commensurate to their size, risk profile and complexity of operations.

“Banks may employ other approaches which are considered more feasible considering their business model, risk appetite, and operational capacity, provided that these are consistent with the BSP regulations and international standards,” she said.

According to Fonacier, banks are also encouraged to keep abreast with the local and global developments in the sustainability front and strengthen their awareness and capacity in response to the evolving climate, as well as environmental and social risks.

Environmental and social risk is defined as potential financial, legal, and/or reputational negative effect of environmental and social issues on the bank. Issues may include climate risk, both physical and transition risks; environmental pollution; hazards to human health, safety and security; and threats to community, biodiversity, and cultural heritage, among others.

“These risks are inherent and can directly or indirectly affect banks,” Fonacier said.

The central bank recognizes the ongoing efforts of banks to develop or enhance policies and strategies in line with the expectations set out under the circulars on the Sustainable Finance Framework, the ESRM framework and the guidelines on the integration of sustainability principles in investment activities of banks.

Under the guidelines, the board of directors and senior management are expected to institutionalize and oversee the adoption and implementation of sustainability principles, including those covering environmental and social risk areas, in the corporate governance and risk management frameworks, as well as in the strategic objectives and operations of the bank.

Banks are also required to provide clear guidance in assessing environmental and social risks in the bank’s operations, products and services, transaction, activities, and operating environment.

These institutions are also required to provide the tools for monitoring environmental and social risks, as well as the compliance with sustainability-related standards, laws and regulations. Likewise, they are directed to provide tools for assessing identified environmental and social risks and for considering the same in the aggregate exposures of the bank.

Fonacier said BSP-supervised financial institutions should provide measures to be taken in case of breaches in limits or thresholds or non-compliance with sustainability-related standards, laws and regulations.