The Bangko Sentral ng Pilipinas (“BSP”; the Philippine Central Bank) issued BSP Circular No. 1149, series of 2022 (Guidelines on the Integration of Sustainability Principles in Investment Activities of Banks). The Circular sets expectations on the prudent conduct of investment activities, as well as minimum practices that banks must establish for the management and control of investment-related risks. It amends Section 614 of the Manual of Regulations for Banks regarding the investment activities of BSP-supervised financial institutions, and embeds sustainability-related requirements therein.
Salient amendments include the following:
- Board and senior management oversight. A bank’s board of directors must oversee the integration of sustainability principles and objectives in the bank’s investment activities and monitor the bank’s progress in attaining such objectives. Meanwhile, portfolio objectives developed by senior management pursuant to board-approved strategic objectives must provide how the bank’s investment activities will be aligned with the sustainability objectives of the bank.
- Policies, Procedures and Limits. A bank’s policies, procedures and limits for managing investment management activities must be consistent with the organization’s broader business strategies, including its sustainability objectives. Due diligence review must cover, among others, the assessment of material environmental and social (E&S) risk exposures of the investment as well as the issuing company, and an analysis of exit strategies for securities that are found to have high E&S risks.
- Investment Strategies. A bank may adopt any or a combination of the following approaches to investment: integration approach (which involves an exclusive and systemic inclusion of material E&S factors in investment analysis); screening approach (which involves the application of filters to lists of potential investments to rule companies in and out of contention for investment); or thematic approach (which refers to investing based on trends, such as a social, industrial, or demographic trends). A bank may also adopt other approaches and global best practices. The bank must adopt measures to ensure that investments are channeled to companies that comply with sustainability-related standards, laws and regulations, as well as companies that do not engage in greenwashing.
- Risk Measurement. A bank whose investments are exposed to material E&S risk must adopt appropriate tools and metrics to assess, measure, and monitor these risks.
- Credit Risk Due Diligence. Factors that a bank may consider as part of its credit risk due diligence review include material E&S risks to which the issuer is exposed based on criteria such as the level of greenhouse gas emissions, vulnerability to extreme weather events, or linkages to unsustainable energy practices.
The Circular is part of the BSP’s on-going reforms pursuant to the Sustainable Finance Framework put in place in March 2020. Earlier, in October 2021, the BSP issued BSP Circular No. 1128, series of 2021, which focuses on a bank’s E&S risk management system, including its credit risk management system and operating risk management system.