Last October 2021, the Bangko Sentral ng Pilipinas (BSPs) launched the Philippine Sustainable Finance Guiding Principles, another formative document for the country’s budding sustainable finance movement. The principles, a guidepost for sustainable economic activities in the Philippines, was launched just a year after the Central Bank outlined intentions to mainstream sustainable finance in the Philippines by 2023.
The document is part of the second phase of the BSP’s Sustainable Finance Framework and establishes “a common understanding… of the economic activities in the Philippines that can be considered to be “sustainable.” Together with the Philippine Sustainable Finance Roadmap, the three are pivotal in setting the trajectory for sustainable banking in the Philippines.
Why define sustainability?
Sustainability is a broad concept that lends itself to various interpretations by different sectors. The Guiding Principles address this by presenting a taxonomy -a standardized guide to sustainability that puts stakeholders on the same page on what can be considered “sustainable” for the finance sector.
Through outlining a broad set of examples and principles that constitute this, sustainable finance, policy makers, banks, regulators, and investors are given a blueprint for future sustainability initiatives. This taxonomy can play a part not only in laying out regulations and incentives for financial institutions that seek to enter sustainable finance, but also in helping banks determine what to invest in. From a regulatory standpoint, the taxonomy complements the sustainability risk reporting requirements set by the Bangko Sentral for Philippine banks in 2020, ahead of the end of the regulation’s transitory period for banks in 2023. For investors, it sets parameters for what activities can be considered as green investments— potentially driving growth in these businesses among stakeholders who are interested in supporting sustainable sectors.
Pros and cons of a principles-based taxonomy
There are seven guiding principles outlined in the Sustainable Finance Guiding Principles, each of which are given a brief description of their objectives and examples of economic activities that fall under them. Guiding Principles 1 and 2 are reserved for climate issues, specifically Climate change mitigation and adaptation, and Promoting transition to a low carbon economy, respectively. Principle 3 covers Resilient Food Systems, while Principles 4 and 5 highlight Sustainable Cities and Resilient Infrastructures for Inclusive Growth and Poverty Reduction. Principle 6 tackles Environmental Management and Conservation. Lastly, Principle 7 outlines prohibitions and activities that do not fall under the guiding principles.
A key feature of the Guiding Principles is that it applies a principle-based rather than prescriptive approach that focuses on intent instead of setting specific descriptions for each concept. This choice allows banks to adapt the principles to their operations, in whatever manner is fit for them. In doing so, it becomes easier to bring attention and encourage financial flows to economic activities that can be considered as “sustainable.”
The BSP’s adoption of a principles-based taxonomy has both benefits and limitations. On a positive note, such a taxonomy enables more flexibility, which supposedly allows banks to focus on impact, encourages financing of activities stated in the taxonomy, and makes them less “prone” to creative compliance practices where banks comply with rules in a way that fulfills requirements but goes around the actual purpose of the policy.
Being less prescriptive, principles-based are also said to be more “future-proof” and supposedly require less updating than rules-based approaches, which are influenced heavily by the context they are made in. On the other hand, the open nature of principles-based regulations’ makes it harder to guarantee that the taxonomy will achieve its desired impact, as overly vague principles can prevent a thorough assessment of the activity’s contribution to sustainable finance goals, and whether or not targets are being reached.
Principles-based regulations also present challenges in operationalizing and verifying whether institutions truly meet the principles they claim to adapt. To avoid this, regulators must thoroughly monitor compliance and look out for cases of “greenwashing” wherein companies, to keep up with growing clamor for environmentally responsible business practices, present themselves as more “green” or environmentally friendly than they really are, potentially diminishing investors’ trust in the taxonomy’s soundness.
Covering all bases
Aside from general features of a principle-based taxonomy, there are some gaps in the Guiding Principles that are worth looking into.
Sustainable Finance expert Dr. Felipe Calderon, who heads the Asian Institute of Management Gov. Jose B. Fernandez, Jr. Center for Sustainable Finance, points out that the Guiding Principles have a “limited” gender lens. While it mentions Gender Equality in line with Sustainable Development Goal 5 in Section 1.6 Applicability of Sustainable Development Goals (SDGs) to the Guiding Principles, the taxonomy can be strengthened by expanding its gender lens to include the LGBTQIA+ community.
It is also important to note that despite climate change concerns being a major driver for adopting sustainability practices in the Philippines, there is no strict mention of prohibiting the financing of fossil fuels in the principles. Guiding Principle 7, which gives a list of prohibited activities does not include it in its examples. In general, civil society and sustainability advocates across the globe have pushed to define and ban the financing of harmful activities with negative environmental and social impacts but have been met with resistance, as these activities still contribute much of the economy and financing. It is worth considering, however, that the creation of a “harmful” taxonomy would allow us to identify and act on sustainability-related risks and potential stranded assets that could hurt the financial stability of a bank or investor.
Neither do the Guiding Principles have a strong “do no harm” emphasis to prevent greenwashing from companies that may fit one sustainability principle but harm others. While it does state under Principle 7 that activities must not “negatively impact the other principles, where applicable,” it does not delve on this more throughout the document.
Going beyond environmental principles, the Guiding Principles can benefit from the integration of more principles that highlight social and governance criteria, which come hand in hand with environmental concerns. “Addressing environmental issues is the less challenging aspect of implementing sustainable finance. The bigger challenge is addressing social issues,” Calderon says. While the BSP has moved towards requiring banks to report sustainability practices and encouraging investments in sustainable economic activities, there are no strict definitions or laws that oblige them to do the latter yet. There is also the question of how the implementation of the Sustainable Finance Roadmap will be monitored and receive input from other stakeholders. Existing guidelines would benefit from a fuller engagement with civil society, which has a strong community base and a deep understanding of how ESG principles are felt on the ground.
The blog is written by Amanda Isabelle R. Lingao, Media and Project Development Officer at Initiatives for Dialogue and Empowerment through Alternative Legal Services (IDEALS Inc.), Philippines. She has written this blog on behalf of Fair Finance Philippines. The views are personal.
For more details on what a taxonomy on sustainable finance entails, please read FFA’s Sustainable Finance Taxonomy: A Guidebook for Civil Society Organizations