Last April, the Bangko Sentral ng Pilipinas (BSP), or the Philippine Central Bank, signed a Sustainable Finance Framework for all banks in the Philippines. The framework is a gamechanger for local finance. In the next three years, banks in the country will be required to adopt sustainability principles in their operations, including environmental and social risks in annual reports, corporate governance, and risk management frameworks.
The BSP Sustainable Finance Framework runs parallel to the initiatives of the Security and Exchange Commission which released mandatory Sustainability Reporting Guidelines for Philippine Publicly-Listed Companies (PLCs) last year. These guidelines provide that by 2020, companies must disclose their climate-related risks and opportunities in their sustainability reports.
Ripe for change
As with any policy, its impact will lie in its effective implementation. For BSP’s framework to truly take effect, it must translate to tangible change for the marginalized sectors that need it the most.
The BSP’s framework is a soft policy that lays expectations for banks to embed sustainability measures in their operations. The framework is flexible enough for banks to create their monitoring mechanisms, depending on their risk appetites. It comes at a time that local business and financial sector are most ripe for change. With the onset of the COVID-19 pandemic, many businesses are gearing up for the new normal. This is a challenge that requires them to adapt to a new reality after the pandemic. Still, it is also an opportunity for businesses and financial institutions to move towards more sustainable and resilient business models that will better weather market volatility.
Start with farmers and food producers
A good area for banks to start is with agribusiness venture arrangements (AVA) that disadvantage marginalized farmers instead of lifting them from poverty. In Davao de Oro, many banana farmers are tied to skewed contracts that peg their produce at a fixed price of $4.25 per box, regardless of market value, for ten years.
After Typhoon Bopha, known in the Philippines as Typhoon Pablo, ravaged the province in 2012, the Land Bank of the Philippines required agrarian reform beneficiaries (ARB) to enter into tripartite agreements with a corporate partner, the multinational banana export company Sumifru, to secure loans for rehabilitation. The farmers had very limited options – they signed these agreements. Since then, Sumifru has unilaterally set the price for the bananas and required the ARBs to buy fertilizer and other resources that are used in farm production from the company. Our findings show that Land Bank, which does not interfere with internal arrangements between the company and its subsidiaries as a matter of policy, has only a “transactional” relationship with the farmers despite its mandate to serve farmers and fisherfolk.
The case is specific to Davao de Oro farmers but occurs in different permutations around the Philippines. Many smallholders – who have land but no money – have little access to formal credit or traditional collateral. They then turn to AVAs to secure loans from banks but then become buried in debt when they can no longer meet the terms of their contract. Women smallholder farmers are impacted the most as they try to manage the limited resources available while also dealing with disproportionate care work burdens. Some turn to usurious lenders, which then increases their debt.
Spotlighting women smallholder farmers
With the new sustainable finance framework, banks are tasked to be more conscious of the social and environmental impact of the loans they approve – and, subsequently, the conditions attached to it. This means banks like Land Bank must be more selective in their use of AVAs as collateral substitutes for their loans. It can also be a stepping stone for banks and businesses to pay more attention to women farmers who have less access to resources than men and thus have fewer social and economic opportunities.
Women farmers, with proper support, can help boost agricultural output by more than 4%, according to the Food and Agriculture Organization. This is enough to reduce the number of undernourished people in the world by more than 100 million.
Support fair and sustainable contracts
It’s not just farmers who will benefit from this move. Supporting and encouraging fair and sustainable contracts will also profit both banks and companies in the long run. Research shows a positive relationship between responsible business and financial performance.
Based on a 2014 study of 500 companies by the CDP Worldwide group, companies that build sustainability into their strategies outperform their peers. A concrete way for companies to do this is to develop a board-approved transition plan integrating sustainability principles. Such a plan would be valuable to investors, especially those who put a premium on the environmental, social, and governance (ESG) performance of companies.
Sustainable finance – a step in the right direction
Fair Finance Asia, which has lobbied for the integration of ESG guidelines for banks in the Philippines, strongly supports the sustainability framework’s issuance. The framework will not just impact the banking sector; it also aligns with multi-sectoral initiatives such as the Gender Transformative & Responsible Business Investment in South East Asia (GRAISEA) initiative, which works towards sustainable value chains and the empowerment of farmers – especially women— in Southeast Asia. We urge Philippine banks to seriously enforce the framework’s integration within their company policies.
While the sustainable finance framework is a small start towards responsible, conscious, and accountable financing, it is a step in the right direction. With the COVID-19 pandemic pushing us towards a new normal, our new goal must not just be to rebuild our shattered economy, but to build it back better.
Dalabajan, Dante, and Anna Kristina Dinglasan. 2018. “Land But No Freedom: Debt, Poverty and Human Suffering in the Philippine Banana Trade.” : 12.
Gostin, Lawrence O. et al. 2019. “The Legal Determinants of Health: Harnessing the Power of Law for Global Health and Sustainable Development.” The Lancet 393(10183): 1857–1910.
Oxfam in Asia. 2017. “Gender Transformative & Responsible Business Investment in South East Asia (GRAISEA).” (August 24, 2020).
Oxfam Pilipinas. 2018. “‘Brutal Treatment’ of PH Banana Farmers Featured in Global Campaign to Stop Inequality in Supermarket Supply Chains | Oxfam in Philippines.” Oxfam Pilipinas. (August 24, 2020).