BSP asks banks to manage environmental and social risks
CENTRAL BANK wants lenders to closely monitor environmental and social (E&S) risks in their credit exposure, in line with the Philippines goal of sustainable financing.
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno signed BSP Circular 1128, which orders banks to adopt procedures that will take into account E&S risks from borrowers and their portfolio. It also instructed banks to set targets and limits to control these exposures and assess the creditworthiness of borrowers.
âBanks need to consider environmental and social risks when defining credit risk appetite. The type, quantity and severity of E&S risks should be assessed taking into account different factors such as the type of loan, the location of the borrower, the project and / or the guarantee, and the sector of activity of the lender. ‘borrower, among others,’ says the circular.
Under the circular, banks should engage in âconstructive dialogueâ with clients who may present significant E&S risks. A bank should perform E&S due diligence on the borrower early on and on an ongoing basis.
The circular says that banks can also require borrowers to provide additional documents such as environmental permits and third-party certifications, especially those involved in natural resource extraction, carbon and gas emissions or toxic substances, and other activities deemed harmful to the environment. .
Lenders should also consider the ability, willingness and track record of borrowers in implementing measures to reduce their E&S risks.
A bank’s board should also set environmental and social targets, which may include âprogressively increasing targets on the proportion of the loan portfolio allocated to sustainable financingâ.
The board must “approve the risk appetite in specific risk areas that the bank is willing and able to manage, the results of stress testing exercises and the assessment of the timing and channels through which the bank is willing and able to manage.” E&S risks may materialize â.
Banks should also annually assess the impact of E&S risks on their operations. This would include assessing a bank’s ability to withstand disruption, resume operations and continue to provide services.
“For example, severe weather events could negatively impact business continuity, including branch networks, offices, infrastructure, processes and staff, which could result in financial losses,” a- he declared.
The Philippine Bankers Association (BAP) is committed to supporting the regulatory framework. BAP CEO Benjamin P. Castillo noted that seven local banks have already issued more than $ 1.15 billion in green, social and sustainable bonds since 2017.
âMainstreaming sustainability is not just about protecting the environment, but it is a key factor in promoting long-term social and economic growth,â Castillo said in an email.
âThis E&S risk management framework will further enhance banking operations and risk management tools, delivering shareholder value and uplifting the communities we serve,â he added.
In April 2020, the BSP launched its sustainable finance framework and gave banks a three-year transition period to adopt its provisions.
The government last week launched an interagency sustainable finance framework to address the country’s policy and regulatory gaps in promoting sustainable investments. – Luz Wendy T. Noble