BSP Sets Guidelines on the Integration of Sustainability Principles in Investment Activities of Banks

The Monetary Board, in its Resolution No.1180 dated 11 August 2022, approved the supervisory expectations on the integration of sustainability principles in the investment activities of banks. Thus, Circular No. 1149, series of 2022 (“Circular”) was issued by the Bangko Sentral ng Pilipinas (“BSP”) which covers banks’ investments in the banking book. 

Under the said Circular, Section 614 of the Manual of Regulations for Banks (“MORB”) was amended to specifically cover the investment activities of the banks instead of BSP Supervised Financial Institutions (“BSFI”) in general.

Board and senior management oversight

The board of directors’ additional duty under the Circular includes the overseeing of the integration of sustainability principles and objectives in the bank’s investment activities and monitoring the progress in attaining such objectives through the relevant committee it designated pursuant to Sec. 153. It was also explained that the portfolio objectives to be set by the senior management should likewise provide how the investment activities will be aligned with the sustainability objectives of the bank.

Policies, Procedures, and Limits

As provided in the Circular, the due diligence review shall additionally cover the assessment of material environmental and social (“E&S”) risk exposures of the investment as well as the issuing company. In this regard, the analysis of assumed and actual investment exit strategies should also include those found to have high E&S risks, apart from securities that are illiquid and not readily marketable. 

It was also added in the Circular that policies and procedures should provide the bank’s approach for implementing the sustainability objectives of investment strategies. For this purpose, a bank may adopt any or a combination of the following approaches:

1. lntegration – This approach involves an explicit and systematic inclusion of material E&S factors in investment analysis and decisions to better manage risks and improve returns. This approach does not require ex-ante criteria for inclusion or exclusion.
   
   
2. Screening- This approach involves the application of filters to lists of potential investments to rule companies in or out of contention for investment, based on the bank’s risk profile or appetite, preferences, values, or ethics. Screening can be categorized as follows:
   
   
   1. Exclusionary screening – refers to avoiding securities of companies or countries based on traditional moral values or standards and norms.
   2. Best-in-class selection – refers to preferring companies or countries with better or improving E&S performance relative to sector peers.
      
   
   
   
3. Thematic approach- refers to investing that is based on trends, such as social, industrial, and demographic trends. This approach seeks to combine attractive risk return profiles with an intention to contribute to a specific environmental or social outcome. It likewise includes impact investing. For this purpose, impact investing refers to investing with the disclosed intention to generate and measure social and environmental benefits alongside a financial return. 

It was provided that the bank may adopt other approaches and global best practices it deems appropriate depending on its investment policy and sustainability objectives and goals, the nature of its investments, volume of transactions, and existing risk management system and resources so long as the related sustainability risk factors are sufficiently captured. 

Further, the bank shall 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.

For this purpose, greenwashing refers to the deceptive marketing used to persuade the public that an organization’s products, aims, and policies are environmentally friendly. The term also covers the dissemination of misleading information, whether intentional or not, regarding a company’s environmental strategies, goals, motivations, and actions that can induce false positive perception of a company’s E&S performance. The term greenwashing is often used in the broader sustainability context.

Issuance of Bonds and Commercial Papers

Section 246 of the MORB on the Issuance of Bonds and Commercial Papers is amended as well to include that in the case of issuance of green, social, or sustainability bonds, including other sustainable bonds falling within their acceptable definition, the issuing bank shall comply with the pertinent guidelines of the SEC as well as the disclosure requirements in Section 153. In addition, the issuing bank shall not engage in “greenwashing” as defined in Section 614.