AT A GLANCE

The Bangko Sentral ng Pilipinas (BSP) circulated the proposed Philippine Sustainable Finance Taxonomy Guidelines (SFTG) of the Financial Sector Forum (FSF) which includes the Securities and Exchange Commission, the Insurance Commission and the Philippine Deposit Insurance Corp.
The consultation paper was released Monday, Sept. 18, with the aim of helping the country raise the estimated $168 billion in green investments in the next seven years or until 2030.
The SFTG is a tool to classify whether an economic activity is environmentally or socially sustainable and it will also guide different stakeholders to make informed investment or financing decisions.
The SFTG in its current form will focus on climate change mitigation and adaptation. In future iterations, biodiversity, circular economy, and social objectives will be considered.

The Bangko Sentral ng Pilipinas (BSP) on Monday, Sept. 18, released the proposed Philippine Sustainable Finance Taxonomy Guidelines (SFTG) that should form both strategic and imperative actions to help the country raise the estimated $168 billion in green investments in the next seven years or so.

The Philippines has conditionally committed to a 75 percent reduction in greenhouse gas emissions by 2030.

The BSP-led Financial Sector Forum (FSF), an inter-agency group that regulates and supervises the financial sector, are the ones that prepared the SFTG. It includes the BSP, the Securities and Exchange Commission, Insurance Commission, and the Philippine Deposit Insurance Corp.

The FSF said the amount of financing needed to meet the country’s climate goals is “colossal” between 2020 and 2030.

The FSF noted that climate investments between 2017 and 2021 was only one percent of total cross border investment. This was “substantially below” other regional peers. It is then “strategic” and “imperative” to expand the domestic financial sector’s capacity to support and accelerate the Low Carbon and Climate Resilient transition, which will require multiple sources of finance.

This is where the SFTG comes in. However for now, it will focus on climate change. The BSP on Monday said banks should submit suggestions and feedback to the central bank by Oct. 6, with regards to the proposed guidelines.

The BSP released a consultation paper on the SFTG. The guidelines basically is a tool to classify whether an economic activity is environmentally or socially sustainable and it will also guide different stakeholders to make informed investment or financing decisions.

After the consultation, the BSP said the next step is the first phase taxonomy document which will then be produced and it “will be formalized into regulatory instruments at the discretion of the respective members of the FSF, in which an appropriate compliance timetable will be provided.”

The SFTG in its current form will focus on climate change mitigation and adaptation. In future iterations, biodiversity, circular economy, and social objectives will be considered. Other environmental and social considerations are proposed to be taken up through additional screening based on the “do no significant harm” principle, and minimum social safeguards appropriate to the Philippines context, said the FSF.

The 64-page paper, as prepared by the FSF, is currently being circulated to the banking industry starting this week.

The proposed SFTG, with World Bank’s technical support, is part of the Philippine Sustainable Finance Roadmap by the Technical Working Group on Sustainable Finance – called the “Green Force” which was released October 2021.

The BSP, SEC and IC, under the auspices of the FSF, was tasked to develop the taxonomy as part of the broader agenda of the Green Force.

Based on the paper, the plan is to have a sustainable finance taxonomy for a variety of users. These are the companies, investors, financial institutions, regulators and consumers. Such guidelines are expected to help industries come up with informed decision to “originate, invest, finance, purchase or monitor an asset, product, project, activity, company or portfolio.”

The aim is that with the appropriate supporting policies and incentives, the FSF said financial flows can be increased and redirected towards environmentally and socially sustainable objectives.

In addition, a taxonomy can also reduce the risk of “greenwashing” which is deceptive marketing to persuade the public that an organization's products, aims, and policies are environmentally-friendly.

Greenwashing by BSP definition also covers the dissemination of misleading information, whether intentional or not, regarding a company's environmental strategies, goals, motivations, and actions that can induce false positive perception of a company's environment and social (E&S) performance.

The paper also proposed that certain “prohibited” activities be excluded from the SFTG.

To do this, the FSF is recommending a traffic light approach that reflects an “Amber” or transition category.

“Two options have been presented regarding what qualifies as ‘Amber’ in this first phase of the taxonomy. Guidance will be sought from stakeholders regarding a preferred approach,” said the FSF.

Meanwhile, a set of guiding questions and decision “trees” have been included to support users of the taxonomy as they undertake a screen of their activities’ compliance with the SFTG, with further user guidance to be released with a final version, it added.

The role of micro, small and medium enterprises (MSMEs) are given particular focus because of the sector’s impact on the economy. “Feedback is sought as to how this segment can benefit from shifting financial flows towards sustainability objectives. Financial inclusion considerations are also critical, ensuring that the impact of a taxonomy can bring along all members of society in its sustainability Journey,” said the FSF.

The importance of the SFTG is that it assesses and applies key design principles of interoperability, prioritization, credibility, usability, good governance, dynamism and inclusivity. It has been patterned after the version 2.0 of the ASEAN Taxonomy’s Foundation Framework.

The FSF, meanwhile, will consider potential regulatory instruments and guidance to “activate” the potential of the taxonomy to increase and shift financial flows.

The members of the FSF agreed to conduct “extensive engagement” on the greening the financial sector. This is to “advance the financial sector’s understanding and management of climate-related risks, while also growing sustainable finance opportunities.”

Developing a taxonomy for the financial sector with a view to mobilizing and scale up sustainable finance is the key goal as far as FSF is concerned.

Late in August, BSP Governor Eli M. Remolona Jr. said the central bank is creating a unique environment of sustainability and financial inclusion where green lending or sustainable finance will not be at the expense of the poor.

Remolona said he is determined that banks will follow this sustainable framework that will be pro-poor.

The Philippines has minimal greenhouse gas emissions compared to other countries, but it is one of the most affected by climate change. For one thing, climate change impacts the extreme weather disturbances in the country, and this will in turn strike food supply which will lead to inflation because of large supply shocks resulting to second order effects.

The BSP has advanced the sustainability agenda in the Philippine financial system, with its plans to integrate sustainability or environmental, social and governance (ESG) considerations in its strategic objectives and functions.

It has issued sustainability-related rules relating to financial supervision, monetary policy and operations such as reserve management and credit operations, and the projects and activities in support operations including risk management, currency production, technology and innovation development, building and maintenance, and procurement.

Remolona said the taxonomy being developed is for the assets of banks and will be “based on what (these) assets finance.”

But for the Philippines, it has a different approach in that it is paying attention to financial inclusion.

“We want to do both at the same time when we do a taxonomy of the assets or loans of the banks. At the end of it, banks will be asked to disclose the taxonomy of their assets. We will give them an overall rating about how they’re doing with regard to both sustainability and financial inclusion. We’re hoping that disclosure alone will change behavior. If it doesn’t work then we’ll do something else. We will do something more influential on the banks. That’s the plan,” said the BSP chief.

The BSP launched its 11-point Sustainable Central Banking (SCB) strategy last December 2022 and it includes climate-related financial disclosures in banks’ annual reports.

Last July, the BSP released its Sustainability Report covering 2022. In the report, it has committed to complete the climate stress tests, disclosure guidelines and incentives for sustainability-related projects within the year.

Source: Fin'l regulators' taxonomy to help raise $168 B ‘green’ funding for PH (mb.com.ph)

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