Risk governance is influenced by the many dimensions of the need to gain competitive advantage, especially in a volatile and uncertain world. Beyond finance, enterprises today would have to aim for the triple bottom line of profitability, environmental and social responsibility. The business must also ensure it improves the social, environmental and economic conditions in which it operates.
In the language of sustainability, these are the 3 Ps – people, planet and profit. In banking and finance, the best practice is to consider these in the review process. The environment and social governance (ESG) sets the standards for promoting sustainability; while environment, social, government and risk management (ESRM) is a risk management tool that promotes sustainable finance.
In 2015, the Bangko Sentral ng Pilipinas (BSP), with IFC support, completed a scoping study on the extent of banking industry experience and interest in ESRM. The study results showed moderate awareness, very limited experience and mixed perceptions about the business case of ESRM adoption among local banks. Profit maximization through identification of viable opportunities in businesses assisted is the main driver for banks to scale up green investments and influence customers to be more environment-friendly.
In the Philippines, there is a wide spectrum of big and small banks with varied capacities, business models and risk appetites. This means that sustainable finance that integrates ESG criteria into business decisions to benefit environment and society at large remains uneven. The country has a long way to go in this journey.
At the Development Bank of the Philippines (DBP), the ESG initiative was a long process that started in 1989 with the launch of the Industrial Restructuring Project (IRP). The IRP, funded by the World Bank, ushered in the birth of the bank’s journey in environmental management and protection initiatives. A component of the IRP was a technical assistance for environmental protection and management, dubbed as the Environment Management Project. A major element of this assistance is the development of environment management plan for selected industrial subsectors.
Soon after, the bank created, developed and implemented various policy-based credit initiatives with impact on the environment, specifically waste management, pollution control and cleaner production, water supply and sanitation and clean energy generation. In 1999, the DBP developed an environmental due diligence manual and environment performance monitoring manual. These manuals document the procedures undertaken by the bank in exercising uncompromising due diligence to ensure that a proposed project’s environmental risks are taken into consideration.
Then in 2002, the bank achieved ISO 14001 Certification, the first in the local banking industry, for its environmental management system and has consistently been recertified since then. DBP also ensures that all funded projects adhere to Philippine environmental laws and policies.
To report the bank’s environmental performance, DBP started publishing a Corporate Environmental Report in 1998 until 2007, and then shifted to publishing Sustainable Development Report in 2008 to cover the triple bottom line reporting (environmental, social and economic).
In 2004, the DBP Forest program, a corporate social responsibility program was conceptualized right after the Infanta, Quezon tragedy. Today, there are 44 forest projects all over the country. From 2009 to the present, DBP created 10 umbrella programs, including a Green Financing Program to further boost its role in stimulating investments in priority sectors. And in 2016, the bank adopted a Social Safeguards Policy to complement DBP’s Environmental policy.
The BSP is correct in stating that the principles of ESG are constant and universal, but its application must consider the diverse situations and context at the micro level. It is important to deepen knowledge and continue building capacities in this arena. The DBP’s own experience has been long and arduous, but definitely rewarding not only to the institution itself but to the country. We need to continue awareness campaigns and capacity building programs so that more financial institutions can embrace ESRM. Because if we aim to build a future we want, the financing support must be done correctly and in the right manner.
Benel D. Lagua is executive vice president at the Development Bank of the Philippines. He is an active FINEX member and a long-time advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.