SDG and sustainable finance (2)

It is but natural that the BSP wants to ensure that the much-prized stability of the banking system is assured now, as well as in the future

In the Philippines, the call for Sustainable Finance ( ESG) has not gone unheeded. The Bangko Sentral ng Pilipinas (BSP) recently issued Circular 1085 to spell out its requirements on how our banking system is expected to embed ESG principles in its operations. BSP’s approach is two-pronged, namely, risk management and corporate governance.

This year, easily ranked as the worst ever in my memory, has been marked by all forms of environmental and societal (E&S) risks that are so formidable that could keep bankers up at night worrying how these risks could translate eventually to red brackets on their bottom-lines.

Our country has been pummeled with back-to-back-to-back disasters. We had the Taal Volcano eruption at the onset of 2020, followed shortly after by the outbreak of COVID-19, and then barely a few weeks before the end of annus horribilis 2020, we were buffeted and inundated by typhoons “Rolly” and

“Ulysses.” Thousands of lives have been lost, billions in property damage and business values disappearing almost in the blink of an eye.

With such daunting risks for the financial institutions to contend with, it is but natural that the BSP wants to ensure that the much-prized stability of the banking system is assured now, as well as in the future, but at the same time encouraging a strategic redirection of resources to ESG-oriented financing. In this regard, BSP has required the board of directors and senior management of all banks to be responsible for the following:

a) The establ ishment of an enterprise- wide Environmental and Social Risk Management System ( ESRMS) that art iculates the policies, procedures and tools to identify, assess, monitor and mitigate exposures to E&S risks. For example, a red- flag watchlist that flags and limits vulnerable credit exposures that could affect collaterals, such as real estate properties prone to flooding, or fossil-fuel dependent operations, like oil companies, or pollutant cement factories.

b) The compliance with these ESRMS policies and procedures, and the periodic review of the financial impact of these loans on the bank’s capital resources will have to be incorporated in the bank’s audit process and will be regularly reported to the board of directors.

c) Reorienting and retooling the bank organization to be attuned with ESG principles and watchful of opportunities that promote these principles. For example, budgets should incorporate ESG loan targets, such as renewable energy borrowers, on the asset side of the balance sheet, and, on the liabilities side, green bond issuances that concretely signals a bank’s commitment to support ESG-compatible businesses.

The BSP, however, also recognizes that this strategic pivot by the industry cannot happen overnight. Which is why Circular 1085 allows for a transition of three years. Banks in the interim though will be monitored closely through the required annual submission of their progress to the BSP.

Several banks, notwithstanding the transitory relief, have admirably already stepped up and have issued green bonds, namely, RCBC, $742 million; BPI, $300 million, and CHF, 100 million; BDO, $150 million; LandBank, P5 billion and DBP $352 million.

Some readers may wonder what a green bond is. Briefly, a green bond is like any other bond that is issued in the capital market, usually triple A-rated, but probably not widely traded in the secondary market. It is labeled as such because the issuer commits to use the proceeds to invest in long-term projects that are all ESG oriented. In the case of banks, the funds that are raised should be exclusively used for loans to corporate borrowers that require long- term funding for their ESG- related projects.

Green bond issuances are, of course, not limited to banks. There have been limited Philippine corporate green bond issuances already, such as the Ayala Group’s subsidiary, AC Energy for $470 million; and the Po/ Gonzalez-owned real estate firm, Arthaland for P3 billion.

The investor base of these green bond issuances is typically international institutional fund managers that have created ESG-focused mutual funds servicing the long- term investible needs of various foundations and employee pension funds in search of sustainable- oriented outlets in keeping with their Corporate Social Responsibility commitments.

In our domestic market, unfortunately, we still have yet to see a specialized ESG fund that could address the requirements of local peso green bond issuers.

Multilateral development institutions, such as the International Finance Corporation, Asian Development Bank and European Investment Bank, are also significant players in the green bond market. In our domestic market, unfortunately, we still have yet to see a specialized ESG fund that could address the requirements of local peso green bond issuers.

Ideally, the institutions that should be spearheading this effort should be life insurance companies and pension funds and government agencies like SSS, GSIS and Pag-IBIG.

In the light of the terrible disasters that have befallen us in 2020, perhaps it is time for these long-term capital market investors to take heed.

Until next week… One big fight!