Griselda Gay Gloria-Santos l October 6, 2023 l The Manila Times
IN the past two years, Bangko Sentral ng Pilipinas (BSP) has issued a series of enabling policies as part of its Sustainable Central Banking Framework. It was a step in the right direction to instill the critical role that financial institutions have in ensuring the sustainability and resilience of the country.
In March 2020, the Sustainable Finance Framework (Circular 1085) emphasized the duty of the Board and Management to institutionalize the adaption of the sustainability principles and create the culture that promotes environmentally and socially responsible business decisions. Circular 1085 was followed by the Environment and Social Risk Management Framework (Circular 1128) which requires banks to adapt comprehensive policies, processes and procedures to manage operational risk arising from environmental and social risks. In August 2022, the Guidelines on the Integration of Sustainability Principles in Investment Activities of Banks was issued.
As Bangko Sentral ng Pilipinas pursues more sustainable finance initiatives, it has become a race for compliance among the smaller financial institutions that do not know where to start. The challenge to adopt the ESG Framework is global. According to a recent survey by Accion International, “More than 70 percent of the financial institutions surveyed said that it was important or very important now’ to have internal capacity on ESG. However, only 7 percent described the current levels of skills and knowledge inside their organizations as adequate.”
Adapting the principles in one’s operating policies is the easiest part. Going beyond the letter is where the challenge lies. Beyond compliance, it requires a shift in mindset, where financial institutions factor ESG as a basis for its business decisions. From my experience as a fintech and risk professional years back at a multilateral development institution, the business case for ESG can be hard to sell because, as against financial risk and credit risk, operational risk associated with ESG cannot be quantified in a straightforward way to be fully appreciated.
Management and Board should instill among its staff that we are beyond the debate on the benefits of having an ESG focus. In educating staff, it is important to note that ESG is beyond environmental and social risks and impacts per se. For instance, leading development finance organizations like the International Finance Corporation of the World Bank Group also looks into involuntary resettlement, resource efficiency, pollution prevention, biodiversity conservation, among others in its business investment decisions, as part of its ESG framework.
The path to ESG mindset becomes easier with the adoption of a sustainable development goal purpose driven mindset. Educate the staff on sustainable development goals and their meaning. There is a need to embed this mindset in the financial institutions’ project cycle, from business development to the time the loan or investment is booked and beyond. For instance, as early as the project concept, loan application or due diligence, require the staff to articulate the environmental and social impact of potential loan or investment, if any. This discussion should be consistently carried up to the credit committee and board approval, and even as part of the portfolio review. Beyond words, assign an ESG rating as part of the overall credit rating especially for projects that directly impact the environment and have social impact.
For small banks, it is not just about not knowing where to start, it is also about the cost of operationalizing. The right choice of technology/fintech can be an effective means to operationalize an ESG framework. Internally, automated workflows integrating ESG scoring and articulation in a financial institution’s project cycle or credit scoring can streamline and minimize time and touch points. AI can be utilized to capture critical mass of data and provide the analysis for management on ESG reporting. Externally, as part of credit due diligence, AI logarithms have been used to assess creditworthiness, which can also be used to integrate ESG scoring.
Approaching ESG entails a systematic and intentional approach. The road to ESG should be taken both as a challenge and opportunity. It starts with the tone at the top and commitment to press forward. The Board and Management should instill among staff the discipline of looking at potential projects through an ESG lens early on. This can ensure the overall financial sustainability of the project and the opportunity to explore new investments that are clearly aligned with the sustainable development goals. Creating and instilling the ESG culture is the hardest part. Lastly, beyond the cultural change, AI in fintech can be the means to the end of easily and effectively operationalizing the ESG Framework.
*** Griselda Gay Gloria-Santos developed the Operational Risk framework and function at a multilateral financial organization. Currently, she is the Regional Director for Southeast Asia at Water.org, a global NGO co-founded by Matt Damon and Gary White. She holds an MBA degree from the Johns Hopkins University in Baltimore, USA. The opinion expressed herein does not necessarily reflect the views of these
institutions, Water.org and Financial Executives Institute of the Philippines.