Banks given a year to comply with sustainable finance rules

By: BusinessWorld
Source: businessworld

TBILISI, Georgia—The Bangko Sentral ng Pilipinas (BSP) is not keen on imposing immediate sanctions on banks that will fail to comply to the Sustainable Finance Taxonomy Guidelines (SFTG).

BSP Deputy Governor Chuchi G. Fonacier told reporters at the sidelines of the 57th Asian Development Bank (ADB) Annual Meeting that the guidelines is a living document that can change depending on the needs and capacities of banks.

Fonacier said the idea is to assist banks in their transition plans through the release of the taxonomy guidelines. This is part of the hand-holding efforts of the BSP for financial institutions.

“That’s why we have this entire year to pilot the implementation. Wala munang paluan,” the BSP official said. Fonacier stressed this will also help address concerns on “proportionality” in terms of the capacity development concerns of all banks.

Part of the efforts to increase sustainable and green financing in the country is the creation of the Philippine SFTG for banks that is set to take effect in 2025.

The taxonomy uses a traffic light system — Green, Amber, and Red — will be assigned to financing activities. Green will be the assignment if the activity is aligned; amber, for partially aligned; and red for not aligned.

“We wanted them to craft their own transition plan, taking into account their unique circumstances, their own business models,” Fonacier said.

Nonetheless, Fonacier said almost all Philippine banks are now keen on financing sustainable projects and activities this year and next year.

She said 90.3 percent of banks for the 2024 to 2025 period are open to financing sustainable activities from 79.3 percent in 2021.

Fonacier said since 2017, Philippine banks have issued a total of P173.2 billion peso-denominated financing and $1.5 billion for foreign currency denominated funding such as sustainability bonds.

“We’re also in the process of amending our existing prudential reporting requirement para ma-capture namin yung granular data. This will not only help us in our surveillance analysis, but also para makita namin how much banks really are contributing to climate and sustainable development goals,” Fonacier said.

Given these numbers, Fonacier said the Philippines is “figuring prominently” among ASEAN banks. She said both the awareness and willingness to contribute to achieving climate and sustainability goals are already there among banks.

Efforts to extend incentives could help but, she said, what is important is that banks, not only Philippine banks, have a “buy in” in terms of financing these kinds of projects.

Fonacier said this is the reason the BSP is making sure the top brass of Philippine banks are on board in terms of sustainable and green financing.

“At the onset, when we rolled out the sustainable finance framework, that’s where we wanted to start, with high level principles. Because we really need to get the buy-in of the board. Board talaga ang senior management. Because we don’t want to view this as something like compliance lang,” Fonacier said.

She said it’s not enough for banks to comply to this because of the country’s previous experience with the Agri-Agra Law or Republic Act (RA) 11901. The latter repealed the Agri-Agra Reform Credit Act of 2009 (RA 10000) in 2022. The Agri-Agra law required banking institutions to set aside 15 percent for the agriculture sector and 10 percent for agrarian reform beneficiaries.

Previous studies have cited the high risk associated with lending to the farm sector making it difficult for banks to comply to this provision. As a result, banks merely paid the fines to essentially “comply” with the loan provisions.

Earlier, the BSP explained that an “Amber” classification includes activities that are in transition to remedy an actual or potential harm done. This also includes activities that are considered enablers of climate change mitigation and adaptation objectives.

“If an activity classified as Amber, remedial measures to transition (RMT) will be implement but only within a 5-year timeframe from the assessment date or an independent verification supports a claim that reinediation will take 10 years or less,” read the BSP Circular 1187 issued last February.

“The taxonomy stated that any expected reinediation beyond 5 years without independent verification, or beyond 10 years is not eligible for the ‘Amber’ category and will be classified as ‘Red,’” the circular added.

A “Red” classification means that the activity does not meet the higher ambitions of the SFTG, but these activities may still be eligible for ‘unlabeled’ financing.

The BSP provides an observation period until the end of 2024 to give banks ample time to increase familiarity and understanding of the SFTG principles.

During this period, a pilot testing exercise will be conducted in partnership with the industry. The results of the exercise will also inform the development of additional guidance on the use of the taxonomy.