BSP strengthens framework for environmental, social risks

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is set to direct banks and other financial institutions to integrate climate change and other environmental and social risks in their enterprise-wide risk management frameworks.

The regulator is finalizing the proposed amendments to the Manual of Regulations for Banks (MORB) on the sustainable finance framework which include an environmental and social risk management framework.

Under the proposed circular, the board of directors of banks should ensure the integration of sustainability principles in the risk management system, particularly in the bank’s risk strategy, risk appetite and risk management policies and procedures.

The board is also told to set strategic environmental and social risk objectives covering short, medium, and long term horizons related to the management of specific risk areas.

Banks should also approve the risk appetite on specific risk areas informed by the level of risk exposures that they are willing and capable to manage, results of stress testing exercises, and assessment of the timing and channels through which environmental and social risks may materialize.

Furthermore, environmental and social risks are now required to be included in stress testing exercises and the results thereof are considered in the Internal Capital Adequacy Assessment Process (ICAAP).

The BSP will also require banks and financial institutions to institutionalize a capacity building program for all officers and personnel to equip them in identifying, measuring, monitoring and controlling environmental and social risks.

For senior management, the regulator said banks should ensure activities that expose the bank to environmental and social risks are aligned with the overall environmental and social strategic objectives and targets.

“Senior management shall facilitate assessment of existing environmental and social risks and implementation of plans to attain strategic objectives and targets,” the BSP said.

Likewise, banks will be mandated to adopt methodologies and tools that will effectively identify, and quantify/measure, monitor and control environmental and social risks.

Furthermore, banks should make sure that policies, procedures, and processes are clearly and effectively communicated across the organization.

The central bank’s policy thrusts are fully supportive of sustainable development goals (SDG) embracing the principles of sustainable development and driving investments to activities that will promote climate-resilient, green, and sustainable growth.

In April last year, the BSP issued Circular 1085 or the sustainable financial framework directing banks to integrate sustainability principles including those covering environmental and social risks areas in the corporate government and risk management frameworks as well as strategic objectives and operations.

The regulator is now crafting more granular expectations in managing climate change and other environment-related risks in relation to key financial risks such as credit, market, liquidity and operational risks.