BANGKO SENTRAL NG PILIPINASOFFICE OFTHE GOVERNORCIRCULAR NO.

Series of 2OZ2

Subject: Guidelines on the Integration of Sustainability Principles
in Investment Activities of Banks
The Monetary Board, in its Flesolution No.ll80 dated ll August 2022, approved
the supervisory expectations on the integration of sustainability principles in theinvestment activities of banks.
This regulatory issuance covers banks' investments in the banking book. TheGuidelines on the Integration of Sustainability Principles in Investment Activities ofBanks is part of the series of guidelines implementing the Sustainable Finance
Framework issued in April 2O2O.

Section L Section 153 of the Manual of Regulations for Banks (MORB), as
amended by Circular No.1128 dated 26 October 2o.21is hereby amended as follows:
I53 SUSTAINABLE FINANCE FRAMEWORKxxx

Environmental and Social Risk Management System (ESPMS} The ESRMS
shall be articulated in a separate document solely relating to the management ofE&S risk or embedded in existing documents related to the management of specificrisk areas, (e.9., credit risk management system). xxx:
XXX

Credit Risk Management System. Banks shall consider environmental andsocial (E&S)risks in defining credit risk appetite. xxx
xxx

lnvestment Activities of Banks. The requirements governing the integrationof sustainability principles in the investment activities of banks are provided underSec.614.

Investments in equities of allied or non-allied undertakings are provided
under Sec. 371 to 376-4, Banks shall take into account their sustainability objectives
and risk appetite in their investment activities as well as ensure that such investment
does not contribute to sectors considered to have harmful effects to theenvironment or society.
Operational Risk Management System. E&S risk events, in the context ofoperational risk, can cause severe disruption to a bank's operations. xxxXXXSection 2. Section 614 of the MORB on lnvestment Activities of BSPSupervised Financial Institutions is hereby amended as follows:
614 INVESTM ENT ACTIVITIES OF BANKS

Policy statement. The Bangko Sentral recognizes that the effective
management of risks associated with a bank's investment activities is essential inensuring its continued safety and soundness. The Bangko Sentral likewise recognizes
the potential of banks' investment activities to contribute to the pursuit ofsustainable and resilient growth of the Philippines. These guidelines set expectations
on the prudent conduct of investment activities and the minimum practices that abank should establish for the management and control of risks associated withinvestments. These guidelines likewise set expectations on the integration ofsustainability principles in investment processes of banks.
Scope of Application. These guidelines cover all of a bank's investments inthe trading and banking books.' These guidelines do not apply to bank's(a)investments that grant control over an enterprise and are accounted for using theequity method, (b) transactions in derivatives involving stand-alone contracts, and(c) receivables arising from repurchase agreements.
Risk Management Framework. A bank shall have systems to manage therisks arising from its investment activities. xxx

a. Board2 and senior management oversightAs investment activities comprise a major area of a bank's operations, theboard of directors shall perform the following, in accordance with Sec. 132(Specific duties and responsibilities of the board of directors).

(l) Approve portfolio objectives, overall investment strategies, generalinvestment policies, and limits that are consistent with the bank's
financial condition and risk tolerance. xxx(2) xxx(3) xxx(4) Oversee the integration of sustainability principles and objectives in the
bank's investment activities and monitor the progress in attaining suchobjectives through the relevant committee it designated pursuant to Sec.
153.

As senior management is responsible for implementing board-approved
strategic objectives, it shall therefore:(l) Develop portfolio objectives that set out the acceptable instruments,expected business returns, desired asset allocation and diversification
parameters, and other elements of sound investment management. The
portfolio objectives should likewise provide how the investment activities
will be aligned with the sustainability objectives of the bank. Portfolios
managed for the purpose of generating short term profits must be
The provisions applicable to the integration of sustainability principles shall only apply to investmentsin the banking book.
Or its equivalent body in the case of branches of foreign banks
Page 2 of8distinct from those utilized to maintain ample balance sheet liquidity,generate accrual income or modiff and manage risk profiles.
(2) xxxb. Policies, Procedures, and Limits
A bank shall institute policies, procedures, and limits that provide aframework for managing inveCtment activities. The framework shall beconsistent with the organization's broader business strategies, including its
sustainability objectives pursuant to Sec. 153; capital adequacy; technicalexpertise;and risk tolerance. In setting policies, procedures, and limits, a bankshall be guided by the following:(l) Policies and procedures should clearly articulate guidelines for theacquisition and accounting of investments. Xxx(2) Policies should promote the development of a comprehensive
understanding of the risks associated with investments prior toacquisition and on an ongoing basis. In particular, these should require
the following:(a) xxx;(b) xxx;(c) the due diligence review to cover:(i) an analysis of the risks and cash flow characteristic of thespecific investments, especially for products that have unusual,leveraged, or highly variable cash flows;ll (ii) xxx
li tiiil the assessment of material- E&S risk exposures of theinvestment as well as the issuing company;(iv) an analysis of assumed and actual investment exit strategies,
particularly for securities that are illiquid, not readilymarketable, or those found to have high E&S risks, and theresulting effect on earnings; and(v)the identification of appropriate methodologies for theallocation of capital based on the risk inherent in the bank'sinvestment activities, and the identification of all material risks,
and their potential impact on the safety and soundness of theinstitution;(d) xxx;(e) the due diligence and ongoing reviews to be performed by qualified
personnel or a unit independent from the risk-taking function. Any
third-party analysis independent of the seller or counterparty (e.9.,reports prepared by investment managers, credit rating agencies,
ESG rating organizations or external review providers) may only beused to complement a bank's own evaluation. The bank should only
rely on third-party organizations with recognized expertise for theirPage 3 of8analysis. Notwithstanding any responsibility, legal or otherwise,
assumed by a dealer, counterparty, or financial advisor regarding atransaction, the investing bank is ultimately responsible forunderstanding and managing the risks of the transaction; andtfl xxx
The conduct of due diligence reviews for new plain vanilla instrumentsxxx.

(3) Policies and procedures should provide the bank's approach for
implementing the sustainability objectives of investment strategies. For
this purpose, a bank may adopt any or a combination of the following
approaches:(a) lntegration - This approach involves an explicit and systematic

inclusion of material E&S factors in investment analysis and decisions
to better manage risks and improve returns. This approach does not
require ex-ante criteria for inclusion or exclusion.

(b) Screening- This approach involves the application of filters to lists ofpotential investments to rule companies in or out of contention forinvestment, based on the bank's risk profile or appetite, preferences,values, or ethics. Screening can be categorized as follows:(i) Exclusiona4t screening - refers to avoiding securities ofcompanies or countries based on traditional moral values (e.9.,issuers belonging to the gambling or military weaponsindustries) or standards and norms (e.9., those pertaining tohuman and animal rights, working conditions; or environmentalprotection). The exclusionary screening may include filters oncompanies whose economic activities do not comply with
Philippine laws, including environmental laws and regulations.

(ii) Best-in-class selection - refers to preferring companies orcountries with better or improving E&S performance relative tosector peers. This is also referred to as positive selection orpositive alignment. This approach may be implemented oneither the level of E&S performance or the change in E&Sperformance. A bank that adopts this approach is expected to
conduct due diligence on E&S concerns involving the company
or country to avoid potentially misleading claims.

(c) Thematic approacl> refers to investing that is based on trends, suchas social, industrial, and demographic trends. This approach seeks to

combine attractive risk return profiles with an intention tocontribute to a specific environmental or social outcome. lt likewise
includes impact investing. For this purpose, impact investing refers
to investing with the disclosed intention to generate and measuresocial and environmental benefits alongside a financial return.

The bank may adopt other approaches and global best practices it
deems appropriate depending on its investment policy and sustainability
objectives and goals, the nature of its investments, volume oftransactions, and existing risk management system and resources:

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Provided, That the related sustainability risk factors, including AML/CTF
risk that arise from E&S issues, are sufficiently captured.
The bank shall adopt measures to ensure that investments are channeledto companies that comply with sustainability-related standards, laws
and regulations as well as companies that do not engage ingreenwashing.

For this purpose, greenwashing refers to the deceptive marketing used
to persuade the public that an organization's products, aims, and policies
are environmentally friendly.3 lt also covers the dissemination of

misleading information, whether intentional or not, regarding acompany's environmental strategies, goals, motivations, and actions that
can induce false positive perception of a company's E&S performance.
The term greenwashing is often used in the broader sustainability
context."(4) The limits for investment activities shall be consistent with the bank'sinstitution-wide risk limits. The limit structure may apply at theinstitutional, portfolio, sub-portfolio, or individual instrument levels, or acombination thereof. The bank's determination of the appropriate limit
structure shall be guided by the diversity, complexity, and purpose of its
portfolios (e.9., a bank with substantial holdings of non-resident issued
instruments should establish country risk limits).
(s) The limit structure should reflect the amount of exposure that the bankis willing to accept, taking into consideration the impact of such
exposure to earnings and capital in both normal and stressed conditions.
xxx

Risk Measurement, Monitoring and Management Information systems(Mts)
Given the impact of investments on the risk profile of an institution, banks
shall ensure that they possess the capability to measure and monitor the risks

associated with their investments prior to acquisition and periodicallythereafter. In doing so, a bank shall be guided by the following:0) A bank shall have the capability to value its positions and measure

exposures to each type of risk arising from such positions under bothnormal and stressed market conditions. xxx Banks whose investments
are limited to plain vanilla instruments in the banking book, should, at aminimum, have the capability to periodically mark the positions tomarket or obtain the market values of their positions.

A bank whose investments are exposed to material E&S risks shall adopt
appropriate tools and metrics to assess, measure, and monitor these risks
in accordance with the requirements under Sec. 153.

(2) xxx(5) xxx
3 https://www.imf.orgl-/media/Files/Publications/crsR/2o21loctober/eng
a https://www.bis.org/publ/bppdf/bispapllS.pdf

lish/ch3.ashx
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XXX

d. Internal Controls and Audit
In addition to complying with the superuisory expectations set out inSecs.162 and]63. a bank shall:
(1)

XXX

(2)

XXX

(3)

Ensure the integrity of investment valuations, risk measurement
methodologies, and controls that address model risk. xxx Modelvalidation processes of a bank shall meet the minimum expectations setforth under Sec.144 (Market Risk Managemenf)and Sec.l43 (Credit Risk
Measurement, Validation and Stress Testing)(4) xxxXXXRisks of lnvestment Activities. The management of risks arising from abank's investment activities shall be integrated into the bank's overall risk
management system, as required under Secs. l4'l (Superuision by Risk)143 (CreditRisk Management) 144 (Market Risk Management), 146 (Operational Risk
M a n a ge m e n t ) and 153 (S u sta i n a b I e Fi n a n ce Fra m ewo rk ).

The guidelines below set out the supervisory expectations on themanagement of major risks that are inherent to investment activities. xxx

a. Market Risk
xxx

b. Interest rate risk in the banking bookxxx

c. Credit riskfl) A bank's investment policies and objectives shall be consistent with
its overaf l credit risk strategy, as set out under Sec. 143 (Role of theBoard and Senior Management and Credit Risk Strategy) andSec.l53 (Credit Risk Strategy).
(21(3)n accordance with Sec. 143 (Credit granting and loan
evaluation/analysis process and underwriting standards), which
requires the conduct of a comprehensive assessment of thecreditworthiness of obligors, a bank shall not acquire an investment
without conducting an independent assessment of thecreditworthiness of the issuer. The latter shall form part of the due
diligence review to be conducted in accordance with ltem "b(2)"(Policies, procedures, and limits)of this Section.
fxxx The following are examples of factors that a bank may consider
as part of its credit risk due diligence review:
Page 6 of8((a) xxx(b) xxx"' *l;:'l.:ifi:l i:qi,'''{ff:"1'"":'"ffi1': ::!,:i:',,"#li
unsustainable energy practices; or the analysis of key metrics andtargets that the issuer has set for the management of its key E&Srisks. Where the instrument is used to finance a specific project,
the E&S profile of the project;(d ) The value of an instrument with a prepayment option compared

to a plain vanilla security of similar credit quality;(e) Potential impact to an instrument's value of specific productteatures such as credit-related triggers;and(f) For an investment in a securitization structure, the class ortranche, loss allocation rules, specific definition of default,
support provided by credit and/or liquidity enhancements, andthe impact of collateral deterioration and potential credit losses
under adverse economic cond itions.

(41 xxxxxx

d. Market liquidity riskxxx

e. Operational riskxxx

Application of the guidelines.

a. General rule. These guidelines shall apply to all banks and non-bank financial
institutions performing quasi-banking functions (QBs) and their financial
subsidiaries. The guidelines pertaining to integration of sustainability
principles in investment activities shall apply only to banks, consistent withSec.153.
XXXd. xxx
Su peruiso ry en fo rcemen t actions. xxx

xxx
Section 3. Section 246 of the MORB on the lssuance of Bonds and Commercial
Papers is hereby amended as follows:

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I

246 ISSUANCE OF BONDSAND COMMERCIAL PAPERS
All banks with quasi-banking authority issuing bonds or commercial papers
to counterparties that meet the definition of lenders underSec.241 shallcomplywith
Repubf ic Act No. 8799 or the Securities Regulation Code (SRC)and its lmplementing
Flules and Regulation, and other applicable rules and regulations issued by theSecurities and Exchange Commission (SEC). A bank may issue bonds and/orcommercial papers without prior Bangko Sentral approval: Provided, That it meetsthe prudential criteria as described in Sec.111 (PrudentialCriteria).
Provided, further That bonds issued are enrolled and/or traded in a market
which is organized in accordance with the SEC rules and regulations.
In the case of issuance of green, social, or sustainability bonds, including othersustainable bonds falling within their acceptable definition, the issuing bank shallcomply with the pertinent guidelines of the SEC as well as the disclosure
requirements in Sec. 153. In addition, the issuing bank shall not engage inQreenwashing'i as defined in Sec. 614.

Notice to the Bangko Sentral ng Pilipinas.xxx
xxx

Section 4. This Circular shall take effect fifteen (15)calendar days following its
publication either in the Official Gazette or in a newspaper of general circulation.
FOR THE MONETARY BOARD:

fr,nFELIPE M. MEDALLA

Governor{) august2o22

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