By Lourdes O. Pilar, Researcher
SUSTAINABLE FINANCE or green finance has been gaining traction across the financial value chain due to its economic benefits with environmental, social and governance considerations. Due to its appeal of bringing both sustainability-positive outcomes and investible returns, it is perceived as one of the tools mobilizing capital from the private sector, thereby, filling financing gaps that government funds and development assistance may not be able to fully provide.
“Funds can be mobilized towards projects in the areas of renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of living natural resources and land use, clean transportation, climate change adaptation, or green buildings that meet the national or international standards or certifications,” said Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonancier in an e-mail to BusinessWorld.
Ms. Fonacier likened green financial products to traditional ones in terms of structuring and pricing, noting the growing interest of corporations and individuals to invest in environment-friendly financial products would likely affect their competitiveness.
Moreover, Ms. Fonacier said these products intend to address some of the deficiencies in the market. Citing the Asian Development Bank’s “Development Asia” series, the BSP official noted these deficiencies include the costs and benefits of economic activities that are not accounted for in the pricing system such as environment-related externalities, the lack of willingness of some lenders to grant long-term loans for sustainable infrastructure projects, the lack of information regarding sustainable investment opportunities, and the lack of tools necessary to assess green investments on the part of the investor.
Green financing is seen to bridge the gap between desired environment-related outcomes by traditional or innovative financing. Despite these benefits, investors were initially skeptical.
“BDO’s green financing has been practiced since 2010 and is considered one of the pioneers to have catalyzed sustainable finance in banking industry in the Philippines. Ten years ago, green financing faced various challenges. At that time, few people were aware or understood the concept of green projects, saying it is fancy and can be risky. Corporations often considered it as more of a Corporate Social Responsibility (CSR) and that it has no much economic value. However, BDO would like to explore newly coming green industry and its business opportunities,” BDO Unibank, Inc.’s (BDO) Chief Advisor and Head of Sustainable Finance and Multilaterals/ Export Credit Agencies (ECA) Desk Eunjoo Park-Minc told BusinessWorld.
“In most green projects, 70% of the project cost is financed by the bank because most of green projects financed by bank is structured as project finance. This means bank’s success of green financing is highly affected by the projects’ viability. Thus, before financing, the bank should thoroughly understand the project and its technology very well. Full understanding of the project technology is critical for the success of green financing of BDO,” she said.
By partnering with World Bank’s private sector investment arm International Finance Corp. (IFC), BDO marked its first venture in green financing through the establishment of its Sustainable Energy Finance Project (SEFP) in December 2010. SEFP was a joint loan program tailored specifically to firms undertaking energy efficiency projects.
In the same year, BDO came out with its Social, Environmental and Management policy to provide green financing parameters in its lending operations. This include an exclusion list, which identifies projects that goes against environmental benefits, she added.
“[While the bank] mobilized its own capital to finance the projects under SEFP…IFC provided us the technical advisory services on green projects,” said Ms. Park-Minc.
Ms. Park-Minc noted that capacity building became one of the key factors in growing the demand in BDO’s green financing, recounting that they started working with smaller projects to strengthen its confidence level and have a track record in green financing.
“To understand green projects, the bank must establish internal capacity building, from top management who approves the loan to its staff who processes the credit. Therefore…the bank established its [bank-wide] SEF desk…a centralized team in charge of assessing green projects, as well as training its personnel and clients (borrowers),” she said.
Since then, BDO and IFC’s partnership developed in three stages. In 2010 -2013, the bank and IFC focused on capacity building to understand green financing fully. In 2013-2015, BDO was already able to confidently finance various renewable energy projects. In 2016-2018, BDO focused on the promotion and acceleration of projects involved in solar farm as well as rooftop and green building.
After these three partnerships, BDO has heightened its confidence level to finance green projects and proudly operates its SEF desk on its own.
In addition to SEFP, BDO has partnered with Japan Bank for International Cooperation to relend the latter’s $50 million green facility to environment-related projects focusing on renewable energy in the Philippines in August 2016. This has provided the bank an additional financial product that can support their clients’ prospective green projects.
BDO’s ten years of green financing practice has become its “solid” platform to establish its Sustainable Finance Framework, which provides parameters and guidelines of green and social impact financing.
Green financing is not limited to energy projects, which can extend in different industries such as agriculture or manufacturing. “Any kind of financing which has positive environmental and social impact can be considered as green financing. [So long as] these projects are verified as eligible green projects under the BDO’s Sustainable Finance Framework,” Ms. Park-Minc said.
Currently, BDO’s green loans account for more than 15% of its total loan portfolio, according to Ms. Park-Minc.
“BDO has contributed significantly to the nation’s clean energy generation by financing 45 renewable energy projects with a total installed capacity of 2.1 gigawatts, including various type of technology such as biomass, geothermal, wind, solar and hydro projects since 2010,” she said.
For government-owned Development Bank of the Philippines (DBP), key to its green financing business is its credibility as a sustainable development advocate, starting from the bank to its clients.
“In 1997, DBP came out with its Environmental Policy Statement which stipulated DBP’s commitment to environmental protection and sustainable development. DBP likewise operationalized its Environmental Management System, earning the Bank the distinction of being the first Philippine Bank to be ISO 14001 certified in 2002,” DBP President and Chief Executive Officer Emmanuel G. Herbosa said in an e-mail.
Mr. Herbosa noted DBP has focused on playing a catalytic role in financing projects for the environment under its Green Financing Program, the Bank’s umbrella program that caters to green investments.
“Through the Bank’s environmental lending programs, local government units and private enterprises were able to comply with environmental laws, regulations and standards,” he said.
DBP’s green credit assistance not only produced environmental benefits, but also social advantages. For instance, its Energy Efficiency Savings (E2SAVE) Financing Program would enable investors to tap new technologies that would reduce their greenhouse gas emissions. Moreover, its Financing Utilities for Sustainable Energy Development (FUSED) Program aimed to support projects that would develop, distribute and transmit renewable energy while another program, PASADA (Program Assistance to Support Alternative Driving) aids public transporters to replace their old vehicles to new, energy-efficient vehicles.
The BSP has already signaled to the industry its plan to mainstream green finance, Ms. Fonacier said.
“Cognizant that embracing sustainability principles will not happen overnight, we will require banks to adopt an action plan with specific timelines and milestones towards this end. We expect that careful study of trade-offs are considered by banks in their action plans,” she said.
“Nonetheless, banks do agree that sustainable finance is ultimately a public good. When done right, this could translate into profitable investments and, at the same time, achieve environmental and social objectives,” she added.
Banks said that achieving both environment and financial returns is possible by ensuring the projects’ adherence to ESG (environment, social and governance) standards.
“First, we check the project viability. We study the feasibility as well as the documents (certifications) pertaining to ESG. Project viability does not only mean assessment of risks on cashflow or default risk, but also that of ESG,” BDO’s Ms. Park-Minc said.
“Since these projects are usually financed long-term, we check our clients yearly if they consistently comply and/or encounter ESG concerns to manage risks and to avoid issues before they arise,” she added.
A technical engineer is also present to do plant visits and detailed checks, as well as recommend improvements.
“This way, capacity building is collaborative, not just with our personnel but also our clients,” BDO Relationship Manager at the Multilateral/ECAs Desk Katrina G. De Castro said in the same interview.
“For the past 10 years, there has been no default from the green projects [we financed],” Ms. De Castro said.
Similarly, DBP’s Mr. Herbosa said potential projects undergo screening “to determine project environmental risk category, potential environmental and social impacts and corresponding mitigation measures, required environmental and social-related permits/ clearances, safeguards and appropriate project performance monitoring indicators.”
Green loans can be riskier compared to other financial instruments, since banks need to offer longer tenors as these projects usually take time to develop, Mr. Herbosa added.
However, beyond financial viability, investors look into the environmental and social impact of a project.
“I think investors are looking into whether the bank is truly walking his talk. Does it really support green projects? What are these projects and do these contribute to the environmental protection of the country? Investors now are also embracing ESG approaches when it comes to project investments” he said.
Aside from ESG-related credit policies, DBP has implemented a strictly no coal-fired power plants financing. “It may have lost the bank some financing opportunities, however, the advancement of environmental protection is one of the responsibilities that DBP takes seriously,” Mr. Herbosa said.
In pursuit of alternative sources of funds, financial regulators and banks have recognized that capital markets would be effective in channeling funds from willing investors to institutions like companies or local government units in need. Another form of green financing is through the issuance of green bonds.
Citibank, N.A. Director for Debt Capital Markets Celine Pastor said in an email that the international and domestic markets for green bonds was active in 2019.
“Green, social and sustainability bonds from Philippine issuers (banks and other corporations) totaled over $3.6 billion equivalent in 2019… while on a global level, it totaled over $282 billion or over 1.5 times the prior year’s volume,” Ms. Pastor said.
“Such instruments are now viewed as a liquid and viable asset class across a wide remit of uses of proceeds, including environmental and social projects…green bonds finance projects with environmental benefit while social bonds finance projects that benefit a target population,” she explained.
“Many investors in debt or equity traditionally have medium- to long-term investment horizons. Green financing promotes sustainable activity and demonstrates overall commitment to sustainability. Many market participants now view this sustainability commitment as being indicative of a more robust investment over time,” she added.
Philippine banks’ green bonds have been “well-accepted,” reflecting increased investor appetite for green investments globally, Ms. Fonacier said.
“For instance, RCBC’s (Rizal Commercial Banking Corp.) foreign-issued sustainable bond was five times oversubscribed while the BPI (Bank of the Philippine Islands) ASEAN green bonds was four times oversubscribed,” she said.
In December 2018, BDO took a bold step by issuing its first green bond. With IFC as its sole investor, BDO was able to raise $150 million. The financing is expected to curb 93,000 tons of carbon emissions per year by 2022 and contribute to the country’s target of reducing carbon emissions of about 70% by 2030.
In the case of DBP’s three-year P50-billion sustainability bond program, the first tranche of issuance made in November last year was also oversubscribed. DBP was able to raise P18.125 billion, compared to the initial P5 billion target.
“The bank expects to fully utilize/earmark these proceeds before the end of this year,” Mr. Herbosa said.
Financial regulators have provided an enabling policy and regulatory environment to make green assets more attractive to investors, particularly, fixed-income securities.
“On the part of the BSP, we have enhanced our regulations on market conduct, price discovery and transparency, and operational efficiency in support of the significant contribution of banks in the capital market,” BSP’s Ms. Fonacier said.
Particular to bond markets, the BSP has solidified banks’ standards on treasury activities, as well as aligned its rules on valuation of financial instruments with the international accounting standards.
An issuing-bank must meet the BSP’s prudential criteria under the Supervisory Policy on Granting of Additional License/Authority and should only trade its bonds in an organized market.
Along with these, the Securities and Exchange Commission has adopted the ASEAN Green Bonds Standards in August 2018, allowing member and non-member issuers to introduce bonds whose proceeds will be used to fund eligible green projects in Southeast Asia.
Despite increased interest on green bonds, Ms. Fonacier cautioned that some investors remained concerned on the viability or feasibility of the projects to be financed.
“Nonetheless, there are controls in place that are unique to green or sustainability bonds issuance. In particular, the green bond issuer has to undergo a third-party certification process wherein part of the conditions is the strict monitoring that the bonds proceeds are utilized only for eligible green projects,” she added.
“The demand for green, social and sustainability bonds is at about $30-$45 trillion… Issuers have seen attractive execution in these markets largely because of the supply-demand imbalance, which we expect to persist in the near to medium term,” Citi’s Ms. Pastor said.
For BSP’s Ms. Fonacier: “The oversubscriptions on the green or sustainability bonds issued by banks reflect successful adoption of green finance in the country. Aside from issuing bonds, banks are likely to increase their allocation of funds to green or sustainable projects commensurate to their risk appetite.”
To promote sustainable and green financing, the BSP will be issuing related regulations in phases.
“The first phase will provide high level principles and broad expectations on the integration of sustainability principles including those covering environmental and social risk areas, in the corporate and risk governance frameworks as well as in the business strategies and operations of banks,” Ms. Fonacier said.
“The second phase will provide more granular expectations in managing climate change and other environment-related risks in relation to other key risk areas such as credit, market, liquidity, and operational risks. The third phase may look into potential regulatory incentives to be granted to banks,” she added.