BSP strengthening banks’ system vs climate change

by Lawrence Agcaoili – The Philippine Star, 3 Oct 2021

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is further strengthening the risk management system of Philippine banks against climate change as extreme weather events continue to affect the industry’s performance.

In an online forum organized by the International Monetary Fund (IMF), BSP Governor Benjamin Diokno said the central bank, in collaboration with the World Bank and the World Wide Fund for Nature (WWF), is conducting vulnerability assessments and stress testing exercises to boost the banking sector’s resiliency against climate change.

During the virtual forum, Diokno said the results of the study would be used to potentially further enhance the risk management strategy of Philippine banks.

“This will enable the BSP to capture necessary data in climate and other environment- related risks which could be used for surveillance analysis and policy development,” the BSP chief said.

In a study conducted by the Asian Development Bank (ADB), Diokno said the country stands to lose six percent of its gross domestic product (GDP) annually by 2100 if climate change risks are not addressed.

However, the study stated that the Philippines could avert losses of up to four percent of GDP by 2100 if it starts to invest 0.5 percent of GDP for climate change adaptation starting 2020.

“We recognize this. As such the sustainable finance framework emphasizes that banks should study the environmental and climate related risks, which may exacerbate the financial risk exposure of banks,” Diokno said.

Based on the results of the preliminary study on the effect of extreme weather events to bank’s performance, he explained extreme rainfall events translated to a decline in loan growth, contraction in deposits, and weakened loan quality as non-performing loans (NPLs) increased.

“We practice what we preach. So we established a sustainable central banking roadmap, which will provide a framework and milestones in the adaptation of sustainability principles in the key operations of the central bank,” he said.

According to Diokno, the framework highlights the essential roles of the BSP as an “enabler, mobilizer, and doer” in advocating sustainability in the financial system.

In April last year, the regulator released its sustainable finance framework directing banks to adopt sustainability principles through environmental and social risk management systems as well as in their governance frameworks, strategies and operations.