BSP eyes climate risk stress testing by banks

MANILA, Philippines — The conduct of climate risk stress testing by banks is one of the initiatives in the pipeline of the Bangko Sentral ng Pilipinas (BSP) as it advocates green and sustainable policies and practices.

BSP Governor Felipe Medalla said the recently launched Sustainable Central Banking Strategy embodies the BSP’s role as enabler, mobilizer, and doer with respect to advocating sustainability in the financial system.

“In closing, climate action is a whole-of-society undertaking. The central bank could only do so much, but it will do what it can do. But because we can only do so much, we’re calling on everyone’s support to help implement the Sustainable Central Banking program and, of course, the rest of society outside central banking must contribute as well. Clearly, what the national government does will dwarf anything that the central bank can do,” Medalla said.

The BSP has adopted a phased approach in introducing sustainability related guidelines with due regard to the principle of proportionality via Circular 1085 or the Sustainable Finance Framework, Circular 1128 or the Environment and Social Risk Management Framework, and Circular 1149 or the Guidelines on the Integration of Sustainability Principles in Investment Activities of Banks.

The BSP is already preparing amendments to the disclosure requirement under Circular 1085 and enhancing prudential reports for data collection and surveillance analysis.

It is also incentivizing lending or financing of green or sustainable projects and developing sustainable finance taxonomy.

The central bank is also working with the World Bank, World Wide Fund for Nature Philippines, the Philippine Institute of Volcanology and Seismology, and volunteer banks in the conduct of climate stress testing and vulnerability assessment to better understand climate and other environmental-related risks and estimate its potential impact on the banking system.

Aside from the issuance of enabling regulations, the central bank is also increasing awareness and capacity building activities.

As a mobilizer, the total investments of the BSP in green bond funds reached $500 million from an initial $150 million in 2019.

The BSP has also developed an 11-point strategy under the Sustainable Central Banking Roadmap that include the conduct of a comprehensive vulnerability assessment of the Philippine economy and financial system, enhancing mandatory disclosures of climate-related financial risks by all banks, issuance of guidance of mandatory climate stress testing for banks, exploration of the integrated of environmental and social risk into prudential practices, and incorporation of macroeconomic effects of climate change into monetary policy analysis.

The regulator is also considering incentive schemes for the promotion of green lending, inclusion of sustainability considerations in its portfolio management, and risk management, as well as sign the UN Principles for Responsible Investment, development of a task force for inclusive green finance, inclusion of climate-related financial disclosure in its annual report, adoption of sustainable practices for its own facilities and operations, as well as the rollout of a capacity-building program for all staff in relevant areas.

For her part, BSP Deputy Governor Chuchi Fonacier said that regulators want banks and financial institutions that are mindful of the environment and pressing issues, and threats of climate change.

“Walking the talk, the BSP is also committed to serve as a role model for our regulated entities. Under the SCB Strategy, the BSP will foster environmentally responsible and sustainable policies and work practices, as well as integrate environmental, social, and governance, or ESG, principles in its key functions and operations,” Fonacier said.

She said the country’s transition to a sustainable and low-carbon economy is a collective responsibility.

“Let us strive to make sustainability principles the norm rather than the exception. I am confident that with your help, our dear partners and stakeholders, seeing sustainability practices becoming a part of the Filipino people’s day-to-day life is well within reach,” Fonacier said.