Introduction: A Financial System Prepared for Climate Change
The Philippines faces increasing climate threats—from riverine floods to coastal storm surges. Recognizing that climate change is a systemic risk to the country’s financial stability, the Bangko Sentral ng Pilipinas (BSP) has positioned itself at the forefront of climate resilience. The central bank’s strategy blends risk management with opportunities in green finance and adaptation funding, aiming to safeguard lenders, borrowers, and the real economy alike.
BSP’s Three-Pronged Approach to Climate Risk
Experts at the BSP describe a three-pronged approach that weaves climate considerations into the fabric of monetary policy, supervision, and public finance. First, climate and environmental risks are integrated into price and financial stability frameworks. Second, the central bank embeds sustainability in its own operations and governance. Third, BSP actively mobilizes finance toward green and adaptation projects that reduce vulnerability to climate impacts.
“Central banks are uniquely positioned to address climate issues in the financial system and to support the real economy,” says Pia Bernadette Roman Tayag, BSP assistant governor for strategy, innovation, and sustainability. The goal is not only to shield the financial system from shocks but to seize opportunities in the transition to a low-carbon economy.
Incentives to Accelerate Green Financing
To drive banks toward green lending, BSP has offered concrete incentives. In 2023, the central bank relaxed rules to encourage funding for green and sustainable projects—introducing a 15% top-up on single borrower limits for green loans. This means banks can extend higher exposure to a major borrower if the project is green, up to 30% of the bank’s net worth. In addition, reserve requirements for green and sustainable bonds were slashed from 3% to 0%, reducing the holding costs for green issuance. These measures have boosted financing for renewable energy, water management, waste treatment, energy efficiency, and clean transportation.
Tayag notes that large banks have benefited from these incentives, particularly for large-ticket projects and the issuance of sustainable bonds. The program, set to expire at the end of 2026, is under review to assess its impact and consider renewals or enhancements.
Building Capacity and Knowledge
A key challenge is knowledge gaps around pricing climate risks and structuring green financial instruments. BSP is addressing this through capacity-building initiatives, including climate risk assessment workshops for smaller banks and quarterly forums on sustainable finance opportunities for banks and investors. By expanding access to data and best practices, the central bank aims to standardize risk assessment and reduce information asymmetries that can hinder green investment.
Adaptation Finance: A Critical Gap
Adaptation finance has historically lagged behind mitigation funding. BSP emphasizes the need to unlock capital for adaptation—projects that protect communities from floods, sea-level rise, and extreme weather. Blended finance structures, which combine concessional funds with private capital, are among the tools being explored to attract investors and make risk more palatable for lenders. Understanding data requirements and risk modeling is essential to making these structures work in the Philippine context.
Beyond Finance: Biodiversity and a Megadiverse Philippines
Climate resilience effort intersects with biodiversity protection. The Philippines is one of the world’s 17 megadiverse countries, and the BSP’s framework recognizes that preserving ecosystems can reduce climate risk and create new financial opportunities. The country’s biodiversity strategy targets restoring degraded areas and narrowing the financing gap for conservation. Banks are being urged to incorporate biodiversity-related financial risks into their assessments and to view biodiversity financing as an opportunity rather than a constraint.
Conclusion: Toward a Resilient Financial System
As climate risks escalate, the BSP’s proactive approach shows how central banks can lead the way in building a resilient financial system. By aligning risk management with green finance, expanding adaptation funding, and investing in knowledge, the BSP is not only safeguarding stability but also catalyzing a transition toward sustainable growth for the Philippine economy. The challenges are real—data gaps, pricing difficulties, and the need for scalable adaptation finance—but the pathway is clear: more finance for resilience, better data, and smarter regulation that rewards climate-smart lending.
