People in Philippines after Typhoon Haiyan that was one of the most intense tropical cyclones on record / Shutterstock

4 June 2021

BSP: Building climate-resilience in the financial system

The Philippines is one of the countries with high exposure to climate change and disaster risks. In the lead up to World Environment Day 2021, Governor Benjamin E. Diokno of Bangko Sentral ng Pilipinas shares insights on how the central bank played a vital role in rebuilding the local economy in the wake of Super Typhoon Yolanda and how the disaster opened the doors to a green and sustainable future for the country.

Benjamin E. Diokno of Bangko Sentral ng Pilipinas

The Philippines has long been named as one of the world’s most vulnerable countries to climate change risks due to its geographical location. Nevertheless, the country was somehow affected only mildly to natural calamities until November 2013, when the Philippines had been shaken by Super Typhoon Haiyan (or locally known as Typhoon Yolanda), particularly the Visayas Region.

Super Typhoon Yolanda experience

During the typhoon, the foremost concerns of the Bangko Sentral ng Pilipinas (BSP) was for affected banks to restore operations so that people could withdraw funds from their accounts or obtain loans to rebuild houses or businesses. Of the 1,084 banks/branches with 1,383 ATMs in the affected areas of Leyte, Samar, Palawan, Cebu, Antique, Capiz, Iloilo and Aklan, 84 percent or 1,051 of banks and 80 percent of the ATMs became operational five days after the typhoon. In the hardest hit area of Leyte, it took about five weeks after Yolanda for 81 percent of bank branches and 51 percent of ATMs to become fully functional.

To support recovery operations, the BSP provided temporary regulatory relief packages to affected banks, including regulatory relief for 27 thrift banks and 300 rural banks. To directly improve the quality of life of calamity victims, particularly bank clients, special relief measures were also granted due to the extensive Yolanda damages. In spite of severe damage, the BSP was encouraged to see that the banking sector in affected areas remained upbeat. The BSP attributes the efficient management of the impact of Yolanda on banks to the long history of reforms rolled out in the banking industry that includes implementation of Business Continuity Management (BCM) regulations.

The BSP as an organization also saw the importance of its own BCM. As its own Tacloban Branch was affected by the Typhoon, the BSP had to bring manpower and resources to service the cash requirement of banks in areas covered by branch. The BSP has then started an advocacy and capacity-building campaign to promote sustainable finance, emphasizing that it is a public good which could translate into profitable banking while also achieving environmental and social objectives.

BSP’s two-pronged approach

The BSP’s advocacy was expanded when it rolled out a two-pronged approach towards promoting sustainable finance and climate resilience in the banking system.

Designed to increase banks’ awareness of the opportunities for green or sustainable projects, the first prong focused on capacity building and awareness aimed at deepening the BSP and banks’ understanding of the environmental and social risks and management The BSP partnered with the financial industry and various international organizations to harmonize its knowledge and skill building initiatives with the developments in the local market and align with existing global best practices. Likewise, the BSP joined the Sustainable Banking Network (SBN) and the Central Banks and Supervisors Network for Greening the Financial System (NGFS) to enhance its strategic approach in adopting sustainability and E&S risk management by collaborating with financial regulators that have more advanced knowledge and experience in terms of managing the impact of climate and environmental risks.

The second prong focused on mainstreaming sustainability principles through the issuance of enabling regulations. In April 2020, the BSP issued the Sustainable Finance Framework that sets out broad expectations on the adoption of high-level sustainability principles and integration of environmental and social risks. This included climate risks considerations, in the corporate governance, risk management frameworks, as well as strategic objectives and operations of banks. The framework encompasses the full spectrum of sustainable finance consistent with the United Nations Environment Programme’s (UNEP) schematic diagram of sustainable development. Hence, it covers not only the environmental or climate aspect but also the governance and socio-economic aspects.

While socio-economic underpins the BSP’s financial inclusion advocacy, governance is a key element in the BSP’s supervisory framework. The framework aims to safeguard the stability of the financial system against the potentially significant and protracted impact of climate change and other environment-related risks. Leveraging on good governance and effective risk management systems, the framework also expects banks to embrace sustainability principles and take strategic, concrete, and progressive actions in response to the climate call.

Following the issuance of the framework, the BSP conducted a preliminary study on the impact of natural disasters on the banking sector’s performance. The study confirms that extreme weather conditions negatively affect the growth of deposits and loans, loan quality, and profitability. While more studies are needed to further measure the impact of climate and environmental risks on the financial system, the rankings and figures about the country’s exposure and vulnerability to climate and other environmental risks are compelling enough for BSP to take steps to manage the potential threats to financial stability.

The BSP will be issuing its second-phase regulation to enable the banking industry to make a safe and sound response to risks arising from the transition to a low-carbon economy. This issuance will provide granular expectations on the integration of climate change and other environmental and social risks in the banks’ credit and operational risk management frameworks.

Central to the climate change mitigation goal is the need to reduce greenhouse gas concentrations by shifting fossil fuels to green, renewable sources. We should, however, note that a successful transition is not just a matter of isolated changes in the energy sector.

Financial regulators and policymakers must consider the potential risks of this transition, given the interplay among economic activities or sectors. A low-carbon transition could trigger a chain reaction that might affect the performance and viability of various loan and investment portfolios, thereby posing risks to the stability of the financial system and the real economy.

In this regard, the BSP advocates a progressive and calibrated approach to transition without compromising sustainability objectives. The Sustainable Finance Framework, for instance, is governed by the overarching principle of proportionality to enable banks to find an optimal low-carbon transition strategy. This strategy takes into consideration their size, nature, complexity of operations, and risk appetite. The BSP also calls for stronger global and multi-stakeholder collaboration to address the multidimensional aspects of climate and environmental action and ensure a “just transition.”

The Inclusive Green Finance workstream is part of the International Climate Initiative (IKI), supported by the German Federal Ministry of the Environment, Nature Conservation and Nuclear Safety (BMU), based on a decision by the German Bundestag.

 


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