Sustainable finance is more than simply issuing green, social, and sustainability bonds. More broadly, it refers to a process of taking environmental, social, and governance (ESG) considerations into business decisions — particularly on investment and lending. Environmental considerations usually refer to climate change, deforestation, and natural resource use. Social considerations, on the other hand, refer to human rights and labor issues, human capital development, inequality, community relations, and health and safety. Governance considerations refer to a company’s corporate structure and board oversight, its code of business ethics and values, transparency and reporting.
These sustainability and ESG considerations also apply to the value chain of an organization — including business practices, supply chains, and employees. This allows financial institutions to manage environmental and social risks that may impact other financial risk categories — credit, operational, reputation, and market risks.
BPI’s own sustainability journey formally started in 2008 when we signed up with the International Finance Corp. (IFC) to participate in their Sustainable Energy Finance Program. Since 2014, we have adopted the concept of shared value where we promote products and services that help solve social and environmental problems and at the same time create economic value. We identified three focus areas: Financial Inclusion and Wellness — widening our reach to underserved segments of society through our microfinance business, Scaling Up Enterprises — supporting SME businesses to help them grow, and Financing Sustainable Development — financing projects that support the UN Sustainable Development Goals. All of these are underpinned by prudent risk management and supported by the bank’s delivery infrastructure.
This year, we are not only enhancing our shared value framework but are working to align this with the BSP Circular 1085 on Sustainable Finance Framework issued in April 2020. The circular mandates banks to integrate sustainability principles, including those covering environmental and social risk areas, in their corporate governance framework, risk management systems, and strategic objectives suitable for their size, risk profile, and consistency of operation. The circular provides banks a transition period of three years to fully comply and put in place the policies, systems, and management oversight for sustainability and environment and social risks.
CHANGING THE FACE OF BANKING
The past six months of this global health crisis has revealed the financial and economic implications of social risks — reinforcing the urgency of managing environment and social risks. Thus, the issuance of the central bank’s Sustainable Finance Framework Circular has come at an opportune time as financial institutions are recalibrating their strategies to ensure survival and business continuity, taking into account the long-term social and economic effects of the pandemic.
The banking industry’s response to the pandemic has shown the importance of integrating sustainability in all aspects of the business. At the start of the quarantine, our main focus was to ensure the health and safety of our employees and to continue to provide banking services to clients. Despite limited mobility and health regulations, we kept our branches open on a rotational basis. We provided work tools to employees to allow them to effectively work from home. All this to reduce the health risk exposure of our people.
Our strategy to focus on digital transformation a few years ago has allowed us to provide clients with access to their accounts through robust online and mobile platforms. During the ECQ, we saw a significant increase not only in banking transactions through the digital channels, but a four-fold increase in digital enrollments from clients who previously would only transact in the branches. COVID-19 has reinforced this trend which is likely to continue once the crisis has passed, leading to the strategic rationalization of the bank’s brick and mortar channels, allowing for reduced carbon footprint and less exposure to health risks. And for more complex financial services and for enhanced customer experience, hybrid digital and in-branch solutions are being explored.
With a higher volume of digital transactions, we also saw the increased importance of creating awareness on cybersecurity, requiring us to ramp up client communication on how to spot scams and safeguard their account information.
The challenges presented by the COVID-19 pandemic also opened opportunities to tap the debt capital markets to refinance the bank’s MSME loan portfolio. The COVID Action Response Bonds or CARE Bonds, issued under the ASEAN Social Bond Framework, generated strong investor demand, with total subscriptions reaching P21.5 billion.
For the financial sector, the current crisis has accelerated trends that were already underway: digitalization — online services becoming an integral part of retail banking; focus on cybersecurity — privacy and data protection; resilience of sustainable investments; and the importance of addressing social issues — inequality, access to finance, healthcare, employment. This far-reaching crisis of course will require a coordinated response from all sectors of society. The local banking industry is in a unique position to play a vital role in the post-pandemic economic recovery by providing access to financing to the hardest-hit sectors, and also in transitioning to financing practices that encourage businesses to take sustainability into account. Regulators and investors have recognized that sustainable finance has economic as well as environmental and social benefits, which is why it continues to gain traction.
This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.
Maria Theresa Marcial is a member of MAP, Chief Finance Officer of Bank of the Philippine Islands, and Trustee and Treasurer of WWF Philippines.