Philippine Central Bank Issues Guidelines on Sustainable Finance Framework
The Bangko Sentral ng Pilipinas (“BSP” or the Central Bank of the Philippines) recognises that climate change and other environmental and social risks may pose financial stability concerns. Thus, it has recently approved BSP Circular No. 1085 or the Sustainable Finance Framework (“Circular”) requiring banks to embed sustainability principles, including those covering environmental and social risk areas, in their corporate governance framework, risk management systems, and strategic objectives consistent with their size, risk profile and complexity of operations.
Implications for business in the Philippines
In effect, Philippine banks and financial institutions are now required to incorporate environmental, social and governance (“ESG”) and sustainability principles into their corporate strategy, risk management and bank operations. Banks are given three years to fully comply with the provisions of the Circular and should submit their transition plans with specific implementation timelines approved by their board of directors upon the request of the BSP.
Significant provisions of the Circular
Duty of the board of directors and senior management
The Circular imposes a duty on the board of directors to institutionalise the adoption of sustainability principles, including those covering environmental and social risk areas in the bank, by incorporating the same in the bank’s corporate governance and risk management frameworks, and its strategic objectives and operations. These strategies and policies shall then be implemented by the bank’s senior management. The senior management shall assess periodically the relevance of the approved policies considering the developments in the business environment, facilitate the identification, assessment, monitoring and mitigation of environmental and social risks, and apprise the board of directors on a regular basis on the bank’s exposure to such risks.
Banks must establish an Environmental and Social Risk Management System (“ESRMS”)
The ESRMS refers to policies, procedures and tools to identify, assess, monitor, and mitigate exposures to environmental and social risks. At the minimum, the ESRMS shall:
- define the bank’s level of risk appetite on environmental and social risk
- provide guidance in assessing risks in the bank’s operations, products and services, transactions, activities and operating environment
- identify which sectors or activities have elevated or emerging environmental and social risks or are considered to have harmful effects to the environment or society
- provide tools for monitoring and compliance with laws and rules, and for the assessment of identified risks.
Banks shall disclose the following information in their annual reports:
- its sustainability strategic objectives and risk appetite;
- overview of its ESRMS;
- the products and services aligned with internationally recognised sustainability standards and practices including the issuance of green, social or sustainability bonds’
- the breakdown of environmental and social risk exposures of the bank per industry
- information on existing and emerging environmental and social risks and their impact on the bank; and
- other initiatives to promote adherence to internationally recognised sustainability standards and practices.
The BSP’s approval of the sustainable finance framework recognises the critical role of the financial industry in pursuing sustainable growth by enabling environmentally and socially responsible business decisions. Consequently, the risks arising from climate change could result in significant societal, economic and financial risks which could affect banks and their stakeholders. As a response and a safeguard of financial stability, the BSP deems it best that financial institutions incorporate sustainability principles, including those covering environmental and social risk areas, in their corporate governance framework, risk management systems, and strategic objectives consistent with their size, risk profile and complexity of operations.
This alert is for general information only and is not a substitute for legal advice.