BSP veers from mandated lending on planned green financing

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is veering away from mandated lending as it pursues voluntary standards that contribute to the promotion of sustainable finance.

BSP Deputy Governor Chuchi Fonacier said in her keynote address at the Sustainable Finance Dialogue Forum organized by the Bankers’ Association of the Philippines, the World Wide Fund for Nature Philippines and the Association of Development Financing Institution in Asia and the Pacific on Tuesday, that the financial system is an important stakeholder in driving investments to activities that promote climate-resilient, green and sustainable growth.

Fonacier said the central bank has adopted a two-pronged approach in introducing Environmental, Social and Governance  principles via capacity building and awareness campaign as well as by mainstreaming ESG through the issuance of enabling regulations.

She explained government-driven, mandatory approaches to sustainable finance may result in immediate changes in the compliance of financial institutions.

She added specific regulations mandating sustainability standards may compel banks to adopt the principles for compliance.

“However, the success of this approach may be short-lived and may even derail our progress in embedding ESG in the financial industry. Some banks may even opt to pay penalties rather than get exposed to uncertain risks,” she said.

Fonacier pointed out the BSP has picked up this important lesson from the existing mandated lending program such as Republic Act 10000 or the Agri-Agra Reform Credit Law that mandates banks to allocate 25 percent of loanable funds for the agriculture and agrarian reform beneficiaries.

According to her, the BSP believes the best regulatory approach remains to be one that is enabling.

“An enabling regulatory environment provides high level principles rather than mandatory requirements and considers the business model as well as the size, structure and complexity of operations of a bank in defining expectations on sustainable finance,” she added.

Fonacier said the BSP’s existing regulations on corporate and risk governance have laid down the foundation for ESG issuance sometime in June.

Since 2012, the regulator has established the accountabilities of the board and senior management in promoting good governance and in adopting effective risk management systems in banks. 

Also, specific credit and operational risk management frameworks already provide guidance to consider various risks including environmental issues and climate change in making business decisions.

The Economic Intelligence Unit estimated the value at risk of six degrees Celsius global warming to the world economy to be at $56.8 trillion. This is equivalent to more than 80 percent of the current market capitalization of the entire global stock market in 2018. 

Moreover, the International Energy Agency estimated a $75-trillion cumulative investment necessary to be directed mostly to renewable energy and low carbon energy technologies as well as energy efficiency measures to keep the global temperature below the two degrees Celsius threshold and avoid the worst effects of global warming.

“These developments, facts and figures provide a strong impetus and sense of urgency for all stakeholders to work together to address environmental issues including climate change,” she said.

The BSP started its sustainable finance journey in 2013 through advocacy and capacity-building activities, emphasizing that sustainable finance is ultimately a public good.