BSP is working with the World Bank and the World Wide Fund for Nature Philippines in conducting vulnerability assessment and stress testing exercises that will estimate the potential impact of climate risks on the banking system.
By Benjamin E. Diokno
Governor, Bangko Sentral ng Pilipinas
(Speech at the Stratbase ADR Institute for Strategic and International Studies (ADRi) Pilipinas Conference 2021, Nov. 24, 2021)
Members of Stratbase ADR Institute for Strategic and International Studies—led by its President, Professor Dindo Manhit—fellow speakers, guests, ladies and gentlemen, good morning.
I am happy to share financial sector updates, milestones, and forthcoming initiatives of the Bangko Sentral ng Pilipinas (BSP) on sustainable finance for today’s “Pilipinas Conference 2021”.
“Sustainability” has been a burning topic in local, regional, and global discussions.
The COP26 summit in Glasgow concluded last November 12 called for accelerated action toward the goals of the Paris Agreement and the UN Framework Convention on Climate Change.
BSP at forefront of sustainable finance
In the Philippines, the BSP is at the forefront of promoting sustainable finance in the country and actively participates in international discussions and initiatives on sustainability.
My speech will be as follows:
First, I will share highlights of the latest performance of the Philippine economy and the banking system to provide a backdrop for our sustainability agenda.
Second, I will share BSP’s milestones and initiatives in sustainable finance.
Lastly, I will cap with key takeaways.
On the latest performance of the Philippine economy…
Following the 12.05% expansion in the second quarter, the Philippine economy sustained the positive momentum by growing by 7.1% in the third quarter.
Inflation eased to 4.6% in October from 4.8% in September, bringing the year- to-date inflation to 4.5%. This exceeds the target range of 2 to 4%. However, we project that inflation will slow toward the midpoint of the target range next year and in 2023.
Reserves at $108 billion
In terms of external liquidity buffer, the country’s gross international reserves are hefty at $108 billion as of end-October 2021. This level is equivalent to 10.8 months’ worth of imports of goods and payments of services and primary income.
Remittances from overseas Filipinos grew by 5.6% year-on-year to $23.12 billion from January to September 2021.
The Philippine banking system remains resilient.
The country’s banking system sustains its solid footing, with steady growth in assets, deposits, and net profit; sufficient capital and liquidity buffers; and ample loan loss reserves.
The capital adequacy ratio of universal and commercial banks stood at 17.6% on consolidated basis as of end-June 2021. This was better than BSP’s regulatory requirement of 10% and 8% set by the Bank for International Settlements.
Banks’ liquidity coverage
The liquidity coverage ratio of universal and commercial banks remained stable at 197.5% on solo basis as of end-August 2021. Meanwhile, the minimum liquidity ratios of stand-alone thrift, rural, and cooperative banks surpassed the 20% minimum.
The banking system’s total resources grew by 7.2%, year-on-year, to P20.1 trillion as of end-September.
The expansion in assets and deposits is seen facilitating higher economic activity as lockdown restrictions ease. Banks’ loan portfolio grew by 2.6% year-on-year to P10.9 trillion over the same period.
The non-performing loan ratio settled at 4.4% as of end-September 2021, up from 3.5% in the same period last year, but still within manageable levels. The NPL coverage ratio remained high at 84.4% over the same period.
BSP’s sustainability agenda
Now on our sustainability agenda…We are keen to see sustainability principles integrated in the operations of our supervised entities and the entire financial system.
As a member of the inter-agency Financial Sector Forum (FSF), the BSP contributes to establishing common standards and harmonizing regulatory expectations, including sustainability principles, across the financial sector.
BSP co-chairs with the Department of Finance the interagency body called the “Green Force,” which is tasked to set and harmonize policies to address environment-related risks.
Moreover, BSP is active in regional and global initiatives on sustainability through its participation in the Network for Greening the Financial System, the Sustainable Banking and Finance Network, the Executives’ Meeting of East Asia-Pacific Central Banks Working Group on Banking Supervision, and the Interest Group on Sustainable Finance, to name a few.
BSP’s sustainable banking program
Internally, BSP launched the Sustainable Central Banking Program in 2019, which is a testament of our commitment to “lead by example.”
The Program embodies the role of the BSP as enabler, mobilizer, and doer in spearheading sustainability in the financial system.
As an enabler, BSP aims to promote a policy environment conducive to the adoption and growth of sustainable finance.
As a mobilizer, BSP invested in the Green Bond Fund launched by the Bank for International Settlements. This is our way of setting an example to our supervised financial institutions and encourage them to make green investment decisions.
Lastly, as a doer, BSP adheres to the sustainability agenda by practicing simple acts of environmental preservation and protection in the workplace.
Simple acts at the work place
The Sustainable Central Banking Program is complemented by the BSP’s two-pronged approach to sustainable finance.
First is capacity building and awareness initiatives. BSP is working with multilateral development partners and interest groups to craft programs or initiatives that will increase the understanding and build the capacity of both the supervisors and supervised financial institutions.
Climate risks and banking
For instance, BSP is working with the World Bank and the World Wide Fund for Nature Philippines in conducting vulnerability assessment and stress testing exercises that will estimate the potential impact of climate risks on the banking system.
The results of this exercise will inform BSP’s policy development and data gathering activities.
Second is mainstreaming sustainable finance through the issuance of enabling regulations. BSP has already issued the first two regulations on Sustainable Finance and Environmental and Social Risk Management Frameworks.
Meanwhile, future regulations are directed in potential areas of investment activities of banks, climate stress testing, prudential reporting, and potential regulatory incentives.
Incentives for sustainable finance
On incentives, BSP has proposed the recognition of sustainable finance as one of the allowable forms of compliance with the required credit to the agriculture sector. We hope to achieve two things with the passage of bills amending the Agri-Agra Law: first, mainstreaming sustainable finance and second, mitigating climate change impact in the agriculture sector.
Allow me to highlight two regulations released by the BSP…
First is the Sustainable Finance Framework issued in April 2020, which provides high-level supervisory expectations on the integration of sustainability principles including ESG considerations in the corporate and risk governance frameworks, business strategies, and operations of banks.
Areas of sustainable finance framework
The Framework covers three key areas:
First, the responsibilities of the board of directors and senior management in leading and institutionalizing the sustainability principles across the organization;
Second, the adoption of the environmental and social risk management system, which should include policies, procedures, and tools to identify, assess, monitor, and mitigate exposures to environmental and social risks; and
Third, the disclosure requirements, which will enhance market discipline and promote transparency by requiring disclosure of several elements of the banks’ sustainability agenda in their Annual Reports.
Banks are given a three-year transitory period to fully comply with the expectations under the said issuance.
Circular on banks’ environmental and social objectives
Second is BSP Circular No. 1128 issued last month. This provides detailed expectations on the board to set strategic environmental and social objectives for the bank’s credit operations and to ensure that material environmental and social risks are captured in the banks’ internal capital planning process.
Moreover, banks are expected to progressively increase their targets on the proportion of the loan portfolio allocated for sustainable finance, and to consider environmental and social risks factors in credit underwriting and determining allowance for credit losses.
On the operational risk perspective, banks are expected to integrate environmental and social risks in their operational risk management framework.
Banks are expected to conduct vulnerability assessment of their operations, systems, and offices/branches to physical risks and other natural disaster events. The results of the assessment should feed into the potential enhancement of business continuity plans of banks.
Banks must identify environmental and social risks
Moreover, banks should also identify environmental and social risks that may affect the performance of key personnel and officers as a potential operational risk trigger.
We view that banks can fully heed to the call for action only when they have clear and comprehensive understanding of the impact of environmental and social risks in their operations and business viability.
BSP’s sustainability agenda will become more meaningful if done in partnership with supervised financial institutions, other government agencies, and key stakeholders.
Green Force initiatives
This is made possible through the “Green Force” initiatives, namely, the Sustainable Finance Roadmap and the Guiding Principles.
The Philippine Sustainable Finance Roadmap sets the high-level strategic action plans of the government to promote sustainable finance.
The Roadmap is supported by three mutually reinforcing pillars:
First, the Policy Pillar, which recognizes the importance of creating a conducive environment by developing or strengthening policies related to sustainable finance;
Second, the Financing Pillar, which aims to mainstream sustainable finance through incentives, leveraging on available financing and establishing insurance mechanism; and
Third, the Investment Pillar, which aims to develop a sustainable finance pipeline database for public and private sector projects that contribute to the greening of the financial system and the attainment of the Sustainable Development Goals (SDGs), Philippine Development Plan, and Nationally Determined Contributions targets.
Meanwhile, the Guiding Principles will help identify if economic activities are in line with climate change mitigation and adaptation and sustainable development of the Philippines.
ASEAN and sustainable finance
The ASEAN financial sector bodies recently released Version 1 of the ASEAN Taxonomy for Sustainable Finance, which is aligned with the Guiding Principles.
The Version 1 of the ASEAN Taxonomy signifies cooperation among ASEAN member states in having a common language and overarching guide for financing sustainable economic activities.
These two documents will facilitate a frame for discussions and alignment of regulatory expectations across the financial sector.
In closing, I wish to summarize my presentation with the word “GREEN. ”
As part of our efforts to go G.R.E.E.N., the BSP remains committed to the following:
G – Guide the financial system and promote a conducive backdrop for sustainable finance to flourish;
R – Raise awareness and build capacity as a continuing task to mainstream sustainable finance and increase appreciation of the principles of sustainability;
E – Enable a regulatory environment through policy issuances.
E – Engage all stakeholders. We recognize that environmental and social risks are not just business risks but risks that affect everyone and the future generations to come; and
N – Navigate the path toward the post-COVID 19 Economy and Philippine financial system that is more stable, resilient, and inclusive.
Thank you very much for your attention. I wish everyone an insightful and productive conference.