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Principles for positive impact finance

FINEX Folio

As former Chief Development Officer at the Development Bank of the Philippines, this writer had the privilege of representing the bank, and the country, at the United Nations Environment Program Finance Initiatives or UNEP-FI. It is a partnership between UN Environment and the global finance sector with a mission to promote sustainable finance. Over 200 financial institutions, including banks, work with UN Environment to understand today’s environmental challenges, why they matter to finance and how to actively participate in addressing them. During my stint, DBP was the only active Philippine member included in UNEP-FI activities.

Sometime in April 2020, the Bangko Sentral ng Pilipinas issued the country’s first Sustainable Finance Framework in recognition of climate change and other environmental and social risks that may pose financial stability concerns. Banks are expected “to embed sustainability principles, including those covering environmental and social risks areas, in their corporate governance framework, risk management systems and the strategic objectives consistent with their size, risk profile and complexity of operations.” The BSP set a three-year timeline for compliance per its Circular No. 1085.

Allow me to share the UNEP-FI Principles for Positive Impact Finance which was developed to guide financiers and investors in their efforts to increase their positive impact on the economy, society, and the environment. The principles are to help make connection between the estimated $5-7 trillion a year needed to fund the Sustainable Development Goals (SDG) until 2030 and the implementors. The principles are applicable to all forms of financial institutions and financial instruments.

Principle One is the definition. Positive Impact Finance is that which serve to finance Positive Impact Business. Its intention is to deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental, and social), once any potential negative inputs to any of the pillars have been duly identified and mitigated.

Principle Two is framework. To promote the delivery of Positive Impact Finance, entities (financial or nonfinancial) need adequate processes, methodologies, and tools, to identify and monitor the positive impact of the activities, projects, programs and/or entities to be financed or invested on.

Principle Three tackles transparency. Entities (financial or nonfinancial) providing Positive Impact Finance should provide transparency and disclosure on: (1) the activities, projects, programs and/or entities financed intended positive impact; (2) the processes they have in place to determine eligibility, and to monitor and verify impacts; and (3) the impacts achieved.

Principle Four is assessment. The assessment should be based on actual impacts achieved. The delivery is reliant on the integration of impact analysis in the financial institutions’ existing business processes. These processes can be the object of external assessments leading to qualified third-party certification.

These principles are designed to help shift business and finance away from harmful activity and create more positive impact, as opposed to just identifying and communicating existing impact. A roadmap will be developed that will focus on solution–building and business model development. The principles provide flexibility for market dynamics to develop and white at the same time they carry the necessary checks and balances to ensure that they serve the end goals for the attainments of SDGs.

Framers of the Principles assert that financial returns will not be compromised. Their proposition is that sustainability objectives and the business constraints on risk and return need not be opposition. It is based on the view that societies and the planet’s needs can be met within commercial boundaries by developing new business models that are directly based on impacts and thereby create efficiencies and reduce cost to beneficiaries. It is in no way synonymous to concessionary finance and is not positioned in opposition with the quest for good returns.

Competitive advantage will be a function of the capacity and skills of the businesses, leaders and investors to develop and deliver new solutions. Increased transparency and disclosure is not meant to diminish competitiveness. More transparent players are expected to be more competitive in the market.

The local banking community faces a big challenge in addressing the requirements of BSP Circular 1085 by 2023. The UNEP-FI Principles are designed to propose a holistic approach to the sustainability issue by providing a common language to the finance community and for a broader set of stakeholders.

The information shared here is widely disseminated by its presence in various social media platforms. Based on my experience, the UNEP-FI is open to queries and consultations. It has published a number of guidelines and framework useful to practitioners. Interested parties can easily check its website for more details. We need not reinvent our process change.  We should check on published best practices.

 

Benel Dela Paz Lagua was previously Executive Vice-President and Chief Development Officer at the Development Bank of the Philippines.  He is an active FINEX member and an advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.