Benjamin E Diokno: Sustainable finance towards a climate-resilient
Philippine economy
Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the 2nd Annual National Business Climate Action Summit, Pasay City,
21 November 2019.
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Secretary Emmanuel de Guzman of the Climate Change Commission, Ms. Ma. Alegria Limjoco,
President, Philippine Chamber of Commerce and Industry, Mr. Titon Mitra, Resident
Representative of the United Nations Development Programme (UNDP) Philippines, colleagues
from the other government agencies, fellow speakers, friends from the banking industry,
development partners, sustainability advocates, esteemed guests, a pleasant morning to all of
you!
First, let me congratulate the Climate Change Commission, the PCCI, the Philippine Business
for the Environment, and the UNDP for organizing this 2nd Annual National Business Climate
Action Summit. I am honored to join you in this important gathering as we exchange views on
sustainable finance and firm up our commitment in pursuing a low-carbon, climate-resilient, and
sustainable development pathway for the Philippines.
According to a study made by Climate Central and published on the Nature Communications
journal, the impacts of sea-level rise and coastal flooding is seen to become more extensive that
could erase coastal cities by 2050. The Philippines is one of the countries identified to be in
danger and the National Capital Region could likely be submerged due to climate change.
Then, last 8 November 2019, we commemorated the 6th year anniversary of Typhoon Yolanda
which is considered to be the strongest typhoon that struck the country in 2013. Lastly, three
major earthquakes hit North Cotabato and surrounding provinces in October 2019 alone.
Thousands of families were affected and scores of houses and infrastructures were damaged.
After what happened, we cannot help but ask ourselves if we are ready to withstand any other
form of calamity that may befall on us? If we are uncertain with our answers, all these headlines
should serve as a strong wakeup call.
We should prepare for threats or risks that may happen any time especially those that have
prolonged significant impact such as those resulting from environmental degradation or climate
change risk.
Several climate vulnerability reports have consistently positioned the Philippines at the top as one
of the countries exposed and vulnerable to natural disasters or climate change hazards. These
facts provide a strong impetus and sense of urgency for all stakeholders to work together to
address environmental issues including climate change.
In light of this urgent call for action, global leaders and financial regulators embarked on a
mission to understand and manage the potential impact of climate and environment-related risks
to the local and global economy.
The National Government, on its part, has deployed a number of initiatives which aim to address
climate change risks. Through the years, several special laws have been enacted and
implemented. These include the Clean Air Act, Clean Water Act, Solid Waste Management Act,
Renewable Energy Act, Climate Change Act, among others.
The Philippine Development Plan of 2017-2022 outlines the government's climate-related and
other environmental priorities.
Some of the strategies included in the PDP are as follows: (i) promotion of green technology
innovations; (ii) institution of appropriate incentives to intensify the use of more energy efficient
technologies; (iii) further development and use of renewable energy; (iv) promotion of
climatesmart infrastructures and designs; (v) promotion of low-carbon, energy-efficient and
environment-friendly urban transport systems; and (vi) promotion of sustainable consumption
and production.
We understand that the Climate Change Commission has a huge task to coordinate, monitor
and evaluate the programs and action plans of the Government to ensure that climate change is
mainstreamed into the national and local development plans and programs.
With the growing sustainability considerations, a crucial question is what is the role of financial
authorities and supervisors? Indeed, central banks can shape their response to climate and
environment-related risks in line with their mandates.
At the BSP, we have remained steadfast in the pursuit of our core mandates with the end goal of
achieving a more globally competitive Philippine economy, and a safe, sound and stable financial
system. The BSP's mandates on price and financial stability and efficient payments system have
been strengthened with the amendments to the BSP Charter in February 2019. So, how do we
address the effects of climate change?
On monetary policy, data on natural disasters, including the damage to the agriculture sector and
other industries essentially feed into the BSP's policy analysis.
The potential impact of climate patterns such as La Nina and El Nino episodes and natural
disasters are used by the BSP in quantifying the potential impact of adverse weather conditions
on the agriculture sector and in turn, inflation trends.
On financial stability, the BSP knows the potentially significant impact of climate change and
other environmental-related risks to the financial system. In particular, this may affect the credit
and operational risk exposures of banks that would, in turn, translate into profitability and
solvency concerns.
We also recognize that the BSP has a role to play in the process. In line with this, we have rolled
out a two-pronged approach in promoting environmental, social and governance (ESG)
principles. First, through capacity building and awareness campaign, and second by
mainstreaming ESG principles through the issuance of enabling regulations. We deem that this
approach will increase the BSP and the banks' understanding of the risks posed by environment
degradation and climate change on the financial sector, enhance capacity to manage these
risks, and increase banks' awareness on the investment opportunities for green or sustainable
projects before issuing regulatory expectations on sustainable finance.
Meanwhile, operationally, the BSP is already undertaking pockets of activities related to green
practices. Just recently, the BSP participated in the open-ended green bond fund launched by
the Bank for International Settlements as part of sustainable investing in reserve management.
The BSP also implemented the MB Paperlite Facility that resulted in the significant reduction of
paper usage during MB meetings, and installed energy-efficient mechanisms such as solar
panels and inverter technology in air-conditioning systems. Lastly, the BSP will be issuing
ESGrelated regulations in phases. All of these are part of our commitment to adopt a culture that
embodies sustainability.
Earlier I mentioned the two-pronged approach for sustainable finance. As we build institutional
capacity, we argue that sustainable finance is ultimately a public good. When done right,
sustainable finance can translate into profitable investments, while at the same time attain
environmental and social objectives.
We also subscribe to the idea that financial regulation can be a useful tool to contribute to the
achievement of national and international environmental and social objectives. In this regard, the
BSP has been actively involved in global and local conversations on sustainability though our
membership in the Sustainable Banking Network, Alliance for Financial Inclusion and ASEAN.
We also participated on a study on banks' perceptions on sustainable finance as well as
engaged in capacity building initiatives for both internal and external stakeholders in partnership
with both local and international development partners.
On the regulatory pathway, the BSP believes that the optimal approach remains to be one that is
"enabling" - one that provides ample flexibility, sensitive to risk-appetite and business models,
and proportionate to the banks' size, structure and complexity of their operations. This approach
aims to shift perspectives from a myopic compliance exercise to a forward looking stance that
puts greater weight on the long term financial interest and sustainability of the organization.
Following this approach, the BSP will be issuing ESG related regulations in phases. The first
phase will provide high level principles and broad expectations on the integration of ESG and
sustainability principles in the corporate and risk governance frameworks as well as in the
business strategies and operations of banks.
The second phase will provide more granular expectations in managing climate change and
other environment-related risks in relation to credit, market, liquidity, and operational risks. The
third phase may cover potential regulatory incentives.
Complementary to the policy issuances is our own research on the impact of natural disasters
on the Philippine banking performance. Using existing regional data, we found that episodes of
extreme weather conditions have negative impact on financial intermediation (deposits, loans,
NPL, provision for NPL, profitability). However, the impact is short-lived given the sound financial
position of banks. The damage tapers off after a year or so.
It is important, however, to underscore that we are not starting from scratch. The BSP's existing
corporate and risk governance standards serve as the underpinning regulations for our ESG
issuance. In particular, since 2012, we have established the accountabilities of the board and
senior management in promoting good governance and in adopting effective risk management
systems in banks. The BSP regulations also emphasize the adoption of appropriate credit and
operational risk management systems, including stress testing framework.
This is to ensure that various risks including environmental issues and climate change risks are
considered in the banks' decision-making process and stress testing exercises. The results of
the stress testing should feed in the capital planning and business continuity arrangements of
banks.
Moreover, with the geographical location of the Philippines, banks are prone to physical risks
from severe weather condition. It is in this light that the BSP adopted a policy that provides
temporary regulatory relief to banks which are located in areas affected by natural calamities.
The regulatory relief aims to assist affected banks in their recovery and allow them to resume
normal operations.
This refers to the risks resulting from climate change which can be event-driven (acute) or
longer-term shifts in climate patterns (chronic) that may cause direct damage to assets or
indirectly through the disruption of supply chain. Acute physical risks include floods, typhoons,
droughts, wildfires, earthquake. Chronic physical risks include changes in precipitation and
extreme weather variability, rising sea levels and chronic heat waves.
Ladies and gentlemen, there is a sound business case for sustainable finance and this is
gradually gaining traction.
At present, Philippine banks are getting more involved into green finance, issuing green or
sustainability bonds in order to fund and refinance renewable energy and energy efficiency
projects, green buildings and other green assets.
Some banks adopted sustainability as part of their corporate social responsibility (CSR)
initiatives while others have gone farther to integrate ESG principles and adopt Environment and
Social Risk Management (ESRM) into their business operations.
There are banks that have adopted voluntary reporting of sustainability performance and
established partnerships with international experts to assess and address climate change risks.
Some banks even walked an extra mile by providing technical assistance to their clients so they
themselves could imbibe sustainability practices.
The BSP is just a piece of the puzzle that will advance the country's climate and sustainability
development goals.
Aware of the magnitude of multi-faceted challenges surrounding sustainable financing, the BSP
is supporting the "whole-of-country" approach in this important undertaking. In this respect, the
BSP along with key agencies in the government have collaborated and created an inter-agency
group that will institutionalize and facilitate the implementation of a roadmap for sustainable
finance.
The group is looking forward to adopting enabling policies that will promote sustainable finance. It
also aims to facilitate investments in public infrastructure and mobilize funds to finance green or
sustainable projects.
Apart from the public sector, there is, likewise, a need to increase awareness of the private
sector, business enterprises and part of the households on the impact of climate and
environment-related risks hopefully with the unceasing support by the development partners and
academe. Hence, a 'whole-of-country approach' should be adopted in promoting sustainability
across the country.
All said, let me leave you with some key takeaways:
Climate change and environmental challenges can pose risks on the stability of the financial
system. A whole-of-country approach is basic and necessary to address such risk and scale up
promotion of green/sustainable finance.
Initiatives to inclusive green/sustainable finance is yet to pick up. The BSP's support to
sustainable finance is crucial, especially in promoting and signaling with stakeholders.
Nevertheless, private sector response is gaining some ground.
In closing, I emphasize that sustainability is more than just a buzzword - it is a way of right living
and existence. Sustainable finance is a tool to foster environment and social-friendly businesses
and communities towards a climate-resilient Philippine economy.
Thank you and good morning!