What is Sustainable Finance?
BSP Circular No. 1085 defines "sustainable
finance" as any form of financial product or service which
integrates environmental, social and governance
("ESG") criteria into business decisions
that supports economic growth and provides lasting benefit for both
clients and society while reducing pressures on the environment.
This also covers green finance which is designed to facilitate the
flow of funds towards green economic activities and climate change
mitigation and adaptation projects.
What is an E&S Risk?
BSP Circular No. 1085 defines "E&S risk" as potential
financial, legal, and/or reputational negative effect of
environmental and social issues on the bank. E&S issues may
include climate risk (both physical and transition risks),
environmental pollution, hazards to human health, safety and
security, and threats to community, biodiversity, and cultural
heritage, among others. These risks are inherent and can directly
or indirectly affect banks. BSP Memorandum No. M-2022-042 (Guidance on
the Implementation of the Environmental and Social Risk Management
(ESRM) System; September 29, 2022) shows a number of reports
and studies that describe how E&S risks translate into
financial risks.
What is an ESRM system?
Under BSP Circular No. 1085, the Environmental and Social Risk
Management ("ESRM") system refers to
policies, procedures, and tools to identify, assess, monitor, and
mitigate exposures to E&S risks.
What minimum supervisory expectations did the BSP
set for the development of an ESRM System?
As set out in its Memorandum No. M-2022-042, the BSP expects that
banks' ESRM systems should comply with the following:
a. The Board of Directors and Senior Management shall
institutionalize and oversee the adoption and implementation of
sustainability principles, including those covering E&S risk
areas, in the corporate governance and risk management frameworks
as well as in the strategic objectives and operations of the
bank.
A bank's ESRM system should define its level of E&S risk
appetite. The scope and complexity of the ESRM system shall be
commensurate with the level of E&S risk associated with the
bank's portfolio.
b. The system should provide clear guidance in assessing E&S
risks in the bank's operations, products and services,
transaction, activities, and operating environment. The ESRM system
shall also identify which sectors or activities have elevated or
emerging E&S risks or are considered to have harmful effects to
the environment or society.
c. The system should provide the tools for monitoring E&S risks
as well as the compliance of the bank and its counterparties with
sustainability-related standards, laws and regulations. Provide
tools for assessing identified E&S risks and for considering
the same in the aggregate exposures of the bank.
d. The system should identify the measures that are to be taken in
case of breaches in limits or thresholds or non-compliance with
sustainability-related standards, laws and regulations.
e. E&S risks should be integrated in stress testing exercises
covering both short-term and long-term horizons. The results of the
stress testing shall feed into banks' capital and liquidity
planning and management exercises as well as in the business
continuity and disaster recovery plans.
f. The system should identify the unit or personnel responsible for
overseeing the management of E&S risks. The bank may establish
a new unit to perform such function or integrate the same in the
functions of existing risk management units. The ESRMS shall set
out the duties and responsibilities of all personnel in the
organization in managing E&S risks.
What are the additional obligations of banks and
non-bank financial institutions performing quasi-banking functions
with respect to building a sustainable finance
framework?
Under BSP Circular No. 1149, series of 2022
(Guidelines on the Integration of the Sustainability Principles
of Investment Activities of Banks; August 23, 2022), these
additional obligations are:
a. The ESRM System must be articulated in a separate document
solely relating to the management of E&S risk or embedded in
existing documents related to the management of specific risk areas
(e.g., credit risk management system).
b. Banks are required to consider E&S risks in defining their
credit risk appetite.
c. Banks must take into account their sustainability objectives and
risk appetite in their investment activities and ensure that such
investments do not contribute to sectors considered to have harmful
effects upon the environment or society.
What are the additional obligations of banks with
respect to ensuring sustainability in investment
activities?
Under BSP Circular No. 1149, these additional obligations
are:
a. Risk Management Framework – A bank shall have systems to
manage risks arising from its investment activities.
i. Board and Senior Management Oversight
* The board of directors must (i) approve portfolio objectives,
overall investment strategies, general investment policies, and
limits that are consistent with the bank's financial condition
and risk tolerance, and (ii) oversee the integration of
sustainability principles and objectives in the bank's
investment activities and monitor the progress in attaining such
objectives through the relevant committee it designated pursuant to
Section 153 of the Manual of Regulations for Banks.
* The senior management must develop portfolio objectives that set
out the acceptable instruments, expected business returns, desired
asset allocation and diversification parameters, and other elements
of sound investment management.
ii. Policies, Procedures, and Limits – A bank shall institute
policies, procedures and limits that provide a framework for
managing investment activities, which shall be consistent with its
sustainability objectives.
* Policies and procedures should clearly articulate guidelines for
the acquisition and accounting of investments.
* Policies should promote the development of a comprehensive
understanding of the risks associated with investments prior to
acquisition and on an ongoing basis.
* Policies and procedures should provide the bank's approach
for implementing the sustainability objectives of investment
strategies.
* The limits for investment activities shall be consistent with the
bank's institution-wide risk limits.
* The limit structure should reflect the amount of exposure that
the bank is willing to accept, taking into consideration the impact
of such exposure to earnings and capital in both normal and
stressed conditions.
iii. Risk Measurement, Monitoring and Management Information
Systems – A bank shall ensure that it possesses the
capability to measure and monitor the risks associated with its
investments prior to acquisition and periodically thereafter.
iv. Internal Controls and Audit – A bank shall ensure the
integrity of investment valuations, risk measurement methodologies,
and controls that address model risk.
b. Risks of Investment Activities – The management of risks
arising from a bank's investment activities shall be integrated
into the bank's overall risk management system. As to credit
risk, (i) a bank's investment policies and objectives shall be
consistent with its overall credit risk strategy; (ii) a bank shall
not acquire an investment without conducting an independent
assessment of the creditworthiness of the issuer; and (iii) a bank
may consider certain factors as part of its credit risk due
diligence review, such as material E&S risks.
What are the additional obligations of banks with
respect to issuing bonds and commercial papers?
Under BSP Circular No. 1149, in the case of issuance of green,
social, or sustainability bonds, including other sustainable bonds
falling within their acceptable definition, the issuing bank shall
(i) comply with the pertinent guidelines of the Securities and
Exchange Commission as well as the disclosure requirements in
Section 153 of the Manual of Regulations for Banks, and (ii) not
engage in greenwashing (i.e., the deceptive marketing used
to persuade the public that an organization's products, aims,
and policies are environmentally friendly.)
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