Banks are to manage sustainability risks, and what if they don’t?
So many exciting things going on this week, despite the long weekend holiday: an Econ data dump including trade, IHS Markit, PMI, employment, a Fed Meeting over in the US, at least 10 blue chip stocks to report third quarter earnings and many pivotal decisions on reopening the economy, including public transport now moving up to 70% capacity, and the possibility that with a lowering of the capital’s COVID-19 restrictions to Alert Level 2 we may truly be on our way back to a normal life. But there is also the COP26 happening right now, which reminds us that not only is our time here on earth finite, but soon enough we may not have any earth to live in, largely swallowing all the little wins. And this event has also brought to light the different initiatives of countries and governments to pitch in to mitigate the damage. Interestingly, it is also during these weeks, surrounding this event that the Sustainable Finance Roadmap by the Department of Finance is in the spotlight, whereas the Bangko Sentral is now telling banks to manage environmental and social risks in their credit exposure.
On Oct. 20, the government launched a 99-page inter-agency sustainable finance roadmap, together with the UK, which it is now showcasing in the COP26 in Glasgow. The idea of the roadmap, according to Finance Secretary Carlos Dominguez, is to raise the capital and investments needed in reducing the country’s greenhouse gas emissions while still increasing its economic output. A week later, Bangko Sentral ng Pilipinas (BSP) Circular No. 1128 was released, which directs banks to adopt procedures that will take into account environmental and social issues related to both borrowers and their portfolio. This can be seen as the implementation of the BSP’s sustainable finance framework which it launched in April 2020. Essentially, banks are not only to identify whether those they lend to are credit worthy from a financial perspective and set aside provisions in the event they are less than so, but also whether they are doing good things with the money being lent and spent, or, at minimum, not harming society and/or the planet with their businesses. They are to engage in a constructive dialogue with clients with red flags to evaluate on an ongoing basis. Theoretically, these companies should already have within their internal Sustainability teams, their own explicit goals for how to become better. But then again, it’s the Pandemic, it’s an economy on its knees, already MSMEs are struggling to get reprieve from delayed debt repayments, can they afford to be “good” in the tough times too?
To make people act, it must matter to them; for what gets measured gets done. Thus, setting goals does have a way of turning into action assuming such goals are feasible. The Philippines has committed to a projected greenhouse gas emission reduction and avoidance of 75% from 2020 to 2030 for the agriculture, wastes, industry, transport, and energy sectors. According to the roadmap, Finance policies will enable a shift from carbon-intensive to renewable power sources. They will enable greener habitat and transport systems as well as more resilient agricultural practices. It all sounds sensible and it all sounds like a dream. What kinds of companies will be looked at? The low-hanging fruit are those that extract, like mining, those that are in non-renewable energy sources, and those whose activities are largely linked to carbon emissions.
However, in the latest earnings reports of our energy-related companies, it is obvious that baseload power is what is causing surging profits, with prices of coal at record highs, providing a windfall of dividends to those invested, confusing market participants as to whether cutting non-renewable sources would make economic sense from both a bottom-line and portfolio perspective. These earnings, at the onset of an economy reopening and energy being scarce, only illustrates that if we do not produce more power, wherever these sources come from, the consequences of energy security are dire, and moreover, the prices of electricity will soar, something consumers as well as firms on shaky financial ground simply cannot afford at the moment.
There is also talk on impact investing, given that farmers, fisherfolk, and those living in coastal communities bear the brunt of the consequences of climate change in the Philippines. And agricultural resilience has been touted; but these have been counter to the polices of lowering tariffs on imported products, specifically pork and other meats that then discourage farming altogether. Further, there are the supply chain difficulties that widen the gap between farmgate and retail and hinder the possibility of the sector thriving. We have a pending ban on single-use plastics, but we need much more than this. We need education on waste management, and technologies to turn waste products into energy or other circular goods.
In October last year, Department of Energy Secretary Alfonso Cusi declared a moratorium on endorsements for greenfield coal power plants to be able to build a more flexible and sustainable power supply mix, but it now appears that a ban on open pit mining may be lifted in order to collect more government revenues to finance our ballooning double-deficit to fund the country’s pandemic response.
This leaves financiers with a conundrum: they need more sustainable projects to actually fund rather than a refocus of the funding. These sustainable projects are few and far between. According to the BSP, at least seven local Philippine banks have already issued a total of $1.15 billion and P85.4 billion in green, social, and sustainability bonds since 2017. This is great in a sense that there is money going around (although this is a drop in the bucket of the trillions in total loans and assets of our commercial banks) but is there a consistent stance on policies across all government units? Are unsustainable companies and practices really suffering? Until that is clear, banks will not budge, even if they wanted to.
Daniela “Danie” Luz Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IESEG School of Management in Paris and maintains teaching affiliations at IESEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.