Global warming, extreme weather, new diseases, social inequalities and biases, corporate scandals, and bad working conditions are just some of the issues disrupting the way we live. There’s a worldwide call to radically address these and one of the first to respond was the financial sector led by banks, the money makers.
How can lenders address these issues, which are far from their usual duties of making money?
Banks have been incorporating environmental, social, and governance (ESG) metrics in how they make money as early as the 2000s. These were only underscored, however, when ESG issues grew bigger than initially imagined. In the Philippines, ESG metrics are relatively new and were only formalized in 2019 when the Securities and Exchange Commission required publicly listed companies (PLCs) to submit annual sustainability reports.
Banks are not environmentalists nor conservationists but as innovative institutions have crafted financial products with environmental goals. Local banks have been issuing green and sustainability bonds since 2017. These bonds are earmarked for funding environmental and sustainability projects involving renewable energy, sustainable agriculture and fisheries, clean transportation, sustainable water management, and cultivation of environmentally friendly technologies, among others, and also strengthen the capacity of ESG projects to be more impactful.
As pressure from climate activists escalate, banks are now slowly departing from funding coal-fired power projects. In 2020, Rizal Commercial Banking Corp. became the first in the Philippines to phase out funding for new coal-fired power projects. In April 2021, meanwhile, the Bank of the Philippine Islands announced its bid to move away from coal-fired power project financing in five years.
Overseas, in Europe and in the US, there’s an increasing type of borrowing called sustainability-linked loans. According to recent Bloomberg Green data, sustainability-linked loans jumped to US$52 billion in volume in 2021 through May 21, a 292-percent increase compared with 2020 data. A sustainability-linked loan is a debt agreement with standard finance criteria but interest pricing is linked to key performance indicators (KPIs) that include various sustainability goals. If the borrower achieves agreed KPIs on water use management and energy efficiency, for example, the interest rates that the borrower needs to pay will go down. Otherwise, penalties may be levied or interest rates go up.
In contrast to green and sustainability bonds, sustainability-linked loans have no restriction on the usage of funds and hence is more inclusive to accommodate all kinds of borrowers. Unfortunately, this type of loan is not yet […]
