BSP Unveils New Sustainable Finance Framework

The Bangko Sentral ng Pilipinas (BSP) has reaffirmed its commitment to sustainable finance by launching the Philippine Sustainable Finance Taxonomy Guidelines (SFTG).

 

According to the BSP, this initiative aims to advance the financial sector’s understanding and management of climate-related risks, while also growing sustainable finance opportunities. The new guidelines have been built upon the Philippine Sustainable Finance Roadmap which was released in 2021 to facilitate the mainstreaming of sustainable finance in the country and provide principles defining ‘sustainable’ economic activities.

 

The BSP has taken a step further with the new SFTG, providing a more refined criteria to classify whether an economic activity is environmentally and socially sustainable and guide different stakeholders in making informed investment or financing decisions. The SFTG has been crafted primarily for key participants of the financial sector such as the government, financial regulators, banks, insurance companies, and other financial institutions, investors, sustainability bond issuers, MSMEs, and depositors.

 

The Manual of Regulations for Banks (MORB) has been amended to incorporate the SFTG. Section 153 of the MORB states that the SFTG “aims to direct, accelerate, and increase capital flows to economic activities that promote sustainability objectives. including reduction of greenhouse gas (GHG) emissions and building climate resilience”. The same section provides that: “Banks shall use the SFTG when extending credit, making investment decisions, or designing sustainable financial products and services, among others”. Moreover, the same section states that banks, in issuing sustainable bonds, “shall comply with the regulatory requirements articulated in the relevant sustainable bonds standards or guidelines issued by the Securities and Exchange Commission”, and may “voluntarily apply the principles under the respective components of the SFTG to assess if such bond issuance is aligned with the Taxonomy”.

 

The SFTG has outlined the steps in classifying whether an economic activity is environmentally and socially sustainable, and financing thereof can be labelled as SFTG-aligned:

 

a. Determine that the activity to be financed is not included in the enumeration of “Excluded Activity” under the SFTG and is compliant with Philippine laws. […]

 

b. Select the relevant Environmental Objective (EO) of the activity. In assessing the primary objective of the activity, the following factors may be considered: (i) activity relevance and strategic alignment; (ii) investors/financial institutions’ priority; and (iii) government and industry guidance. Banks shall refer to the guidance on substantial contribution as well as to the guiding questions for climate change mitigation (EO1) and climate change adaptation EO2) under the SFTG to determine which EO is relevant to the activity being assessed.

 

c. Assess whether the activity significantly harms the other EO. An activity contributing to one EO should not cause significant harm to another EO. Banks shall refer to the general guiding questions for the Do No Significant Harm (DNSH) to focus assessment on the potential or actual harm to another EO.

 

d. If there is harm, verify that the same has been remediated or will be remediated within the required defined period. If an activity does cause significant harm to another EO, it is possible that it may still be SFTG-aligned, provided remedial measures to transition (RMT) are taken. Any RMT should be fulfilled within a five (5)-year timeframe without independent verification from the assessment date. If the remediation is longer than five (5) years but not exceeding ten (10) years, this must be supported by an independent external verification lending credibility to the longer RMT timeframe.”

 

The SFTG has adopted a ‘traffic light’ system in classifying an economic activity: ‘Green’ for an SFTG-aligned activity, ‘Amber’ for partially aligned, and ‘Red’ for not aligned. An ‘Amber’ classification includes activities that are in transition to remedy an actual or potential harm done, as well as activities considered as enablers of climate change mitigation and adaptation objectives. A ‘Red’ classification does not automatically imply that an activity is unsustainable, rather, it connotes that the activity fails to meet the minimum standards of the SFTG and may still be eligible for ‘unlabeled’ financing. An activity is considered outside of scope of the SFTG when it is illegal under Philippine laws or is in breach of environmental laws and regulations.

 

SFTG’s initial environmental objectives include climate change mitigation or climate change adaptation. Future iterations of the guidelines will address ecosystems and biodiversity and the circular economy, as well as a potential social component.

 

The BSP provides an observation period until end-December 2024 to give banks the opportunity to understand and familiarize themselves on the application of the SFTG. In 2025, the BSP shall collect information on the use of the SFTG.

 

The full copy of the SFTG can be accessed here.

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