Banking Lending Philippines Various

BSP to Incentivise Sustainable Green Financing in the Philippines

by Johanan Devanesan June 22, 2023

The Bangko Sentral ng Pilipinas (BSP) intends to introduce further incentives to promote sustainable and green financing in the Philippines. These incentives, including an increased single borrower’s limit (SBL) and a zero reserve requirement rate, are part of the BSP’s Strategy for Sustainable Central Banking.

The BSP initiated the 11-Point Strategy for Sustainable Central Banking (SCB) in December 2022, advocating sustainability principles and practices both within its own remit and the broader financial system of the Philippines.

The central bank of the Philippines has expressed its intention to vigorously promote the adoption of sustainable finance principles within the domestic banking system as part of its dedication to combat environmental degradation as established at the 26th United Nations Climate Change Conference of Parties (COP26).

In relation to COP26, the BSP became part of a united declaration by the Central Banks and Supervisors’ Network for Greening the Financial System (NGFS) along with its members, and pledged to advocate the sustainability agenda in the financial system through the implementation of initiatives under the SCB scheme to cultivate environmentally responsible and sustainable policies and practices.

The SCB strategy encapsulates the integral roles of the BSP as an “enabler, mobiliser, and doer” with respect to endorsing sustainability principles in the financial system. The BSP will also establish a facilitative regulatory environment to support banks in managing risks related to climate change, the environment, and society. At the same time, it will help unlock financing to economic activities.

Source: Sustainable Finance Framework

Sweetening financing for green or sustainable projects

Recently, BSP Governor Felipe Medalla stated that the BSP is considering granting an additional SBL of 15 percent on loans, credit accommodations, and guarantees for financing green or sustainable projects. This includes supporting transition activities towards decarbonisation. Moreover, the BSP plans to reduce the reserve requirement rate to zero percent for sustainable bonds issued by banks, both existing and new ones.

These proposed incentives are outlined in a draft circular that seeks to amend the regulations on credit exposure limits and required reserves for single borrowers as specified in the Manual of Regulations for Banks (MORB), Sections 362 and 251.

The Strategy for Sustainable Central Banking

To promote sustainability principles and practices, the BSP launched the 11-Point roadmap of SCB at the end of 2022 to support the Sustainable Finance Framework previously released by the Securities and Exchange Commission (SEC). 

The Strategy for Sustainable Central Banking outlines the following 11 action points to integrating sustainability principles in its key operations and functions:

1. Conduct a comprehensive vulnerability assessment of the Philippine economy and financial system, accounting for physical and transition risks and other environmental risks
2. Enhance mandatory disclosures of climate-related financial risks by all banks in the Philippines, building on the Task Force on Climate-related Financial Disclosures (TCFD) recommendations
3. Issue guidance on mandatory climate stress testing for banks
4. Integrate environmental and social risks into prudential practices
5. Incorporate macroeconomic effects of climate change into monetary policy analysis
6. Consider the incentive schemes for the promotion of green lending by banks
7. Include sustainability considerations in portfolio management and risk management of BSP and sign the UN Principles for Responsible Investment (UN PRI)
8. Develop a task force for inclusive green finance
9. Include climate-related financial disclosures in the Annual Report of BSP
10. Adopt sustainable practices for own facilities and operations of BSP
11. Roll out a capacity-building program for all staff in relevant areas

Governor Medalla emphasised that these measures aim to facilitate the financing of green and sustainable projects, including activities aligned with the national government’s climate commitments and sustainable development goals. These commitments are detailed in the Philippine Development Plan and Nationally Determined Contributions.

The new proposed incentives likely fall under the sixth action point of the SCB:

Source: Sustainable Central Banking Strategy

Sustainable implications for financing in the Philippines

Under the proposed changes, the BSP would grant an additional SBL of 15 percent for loans, credit accommodations, and guarantees supporting green or sustainable projects, including those related to decarbonisation. 

These projects must be included in the national government’s Sustainable Finance Framework, Tier II of the Strategic Investment Priority Plan on Green Ecosystems, health security-related activities, food security-related activities, Philippine Sustainable Finance Guiding Principles, ASEAN Taxonomy for Sustainable Finance, and upcoming Philippine Sustainable Finance Taxonomy Guidelines.

The lending bank must ensure that the project or activity complies with Philippine laws, including environmental regulations that have socio-economic implications. Additionally, prudential controls that protect creditors’ interests, such as negative pledge covenants or a lien on shares, must be in place.

Furthermore, the lending bank should require the borrower to assign all proceeds from insurance policies covering the green or sustainable project, including decarbonisation activities, as collateral to secure the loan or credit facility.

The BSP also advises banks to consider the credit risk concentration arising from total exposures to all borrowers related to eligible green or sustainable projects, when assessing their internal capital adequacy relative to overall risk profiles and operating environments.

Looking ahead

Beginning in January 2031, any new loan, credit accommodation, or guarantee should not exceed the prescribed single borrower’s limit of 25 percent. However, existing loans, credit accommodations, or guarantees granted using the additional SBL of 15 percent as of the end of December 2030 may be maintained, and the lending bank must honour the loan terms until maturity.

In addition, the BSP intends to reduce the required reserves against deposits and deposit substitute liabilities to zero percent, down from three percent, for universal and commercial banks, digital banks, and thrift banks. This reduction applies to existing and new issuances of green, social, sustainability, and other sustainable bonds until the end of 2025.