In a win for the sustainable finance movement, the Bangko Sentral ng Pilipinas (Philippine Central Bank) finally signed a Sustainable Finance Framework for all banks in the Philippines last April 2020. This means that in the next three years, banks in the country will be required to adopt sustainability principles in their operations. The framework has been anticipated for months and is a welcome move that signals the financial sector recognizes environmental and social sustainability as a legitimate factor tied to economic growth and stability. Soon, banks will be expected to include environmental and social (E&S) risks in its annual report, corporate governance, and risk management frameworks.

We have slowly learned that businesses should not just aspire for unfettered expansion: it’s longevity and resilience that are important in the long run. In times of the coronavirus, stocks with high environmental, social, and governance (ESG) ratings have proved to better weather market volatility. Having just gone from 2019, one of the most climate change-affected years in recent history, the BSP recognizes that climate change can cause “significant societal, economic, and financial risks” that can affect banks and its stakeholders. Considering that the Philippines is the second most vulnerable country to climate change in the world, compelling banks to assess environmental risks brings necessary foresight that will help safeguard the Philippine financial system.

The BSP’s framework is a soft policy that lays expectations for banks to embed sustainability measures. The framework is largely flexible and gives bank leeway to create their monitoring mechanism, depending on their risk appetites. It gives banks three years to comply with the directive. Under the BSP circular, banks are expected to steadily integrate E&S in its risk monitoring and banks stress tests. In this case, such hazards can include environmental pollution, climate risk, health hazards, and cultural heritage, among others. Most notably, it compels banks to create an environmental and risk management system through which they will set forth policies and mechanisms to identify and address environmental and social risks.

There is still room for improvement within the circular. First, Fair Finance Asia- Philippines suggests a holistic approach to the integration of sustainable finance.  Together with environment risks, other social factors such as land tenure, human rights, and health protection must be given due attention. We also urge the BSP to include the UN Guiding Principles on Business and Human Rights in the Policy Statement as a guiding framework and urge banks to require business partners and clients to adopt sustainability reporting. Any E&S integration done by banks should be strategic and come with strong policy commitment from their board of directors or management.

It’s also imperative agencies watch out for greenwashing. Green finance and green energy is not automatically sustainable finance. Green projects, if involved in governance or social issues such as labor rights violations or corruption in procurement still pose the same financial and reputational volatility for the investor. Lastly, the BSP should note that a soft approach and a “comply or explain” approach should be transitional tools. After the expiry of the 3-year board-approved transition plan, stronger requirements and regulations should be imposed as sustainable finance principles and our financial regulations reach maturity. 

These however, do not undermine the significance of the policy. The circular is not perfect, but it is a step towards the right direction. Moreover, it contradicts notions that sustainability is limited to Western countries, showing that sustainable finance is possible and is gaining traction among developing countries in Southeast Asia.

Fair Finance, which has lobbied for the integration of environmental, social, and governance guidelines for banks in the Philippines, strongly supports the sustainability framework’s issuance and implementation.  We encourage the BSP to continue its multi-stakeholder agreements and keep working with civil society organizations to promote sustainable finance in the region. Feeding into this momentum is crucial to sustaining this progress. Now that guidelines are set forth, it becomes all the more important to convince banks of the benefits of complying with sustainability principles and for watchdogs to conduct checks and balances to secure its implementation.

A blog by Victoria Caranay and Amanda Lingao

Atty. Victoria Caranay is the head of the Fair Finance Asia- Philippines team and programme manager of The Initiatives for Dialogue and Empowerment through Alternative Legal Services’ (IDEALS) Economic Rights Programme. As programme head, Victoria works closely with civil society, the government, and the private sector to forward advocacies for sustainable finance and fair business practices in the Philippines.

Amanda Lingao is a former news writer and current media officer for Fair Finance Asia – Philippines. She reports on social, human rights, and labor issues in the country and handles external communications for Fair Finance Asia in the Philippines.