Regino V. Magno, Former Head of Business Risk Group
ENVIRONMENTAL, SOCIAL and GOVERNANCE in PRACTICE:
Challenges and Opportunities
Speech given on the 26th of May 2017 during the Environmental and Social Governance (ESG) and Corporate Governance (CG) Memorandum of Understanding (MOU) Ceremonial Signing and Mini-Forum.
To the honorable Governor of the Bangko Sentral ng Pilipinas, Mr. Amando Tetangco Jr.; Deputy Governor Nestor Espenilla Jr.; Ms. Jane Xu, Country Manager, IFC Philippines; Ms. Mara Warick, Country Director, WB Philippines; ladies and gentlemen, good morning!
Thank you for inviting RCBC and allowing us to share our thoughts and experiences on a very important issue such as the Environmental, Social and Governance Practice among banks.
The concept of Environmental, and Social Governance or ESG, was first introduced during the UN Global Compact’s “Who Cares Wins” initiative last 2004. The aim was to provide a catalyst among mainstream investors and analysts on the role and impact of environment, social and governance issues.
When we talk about ESG issues, these can cover a wide assortment of environmental issues that range from gas emissions, biodiversity loss, pollution and contamination, carbon regulation to renewable energy; social issues that range from labor practices, community displacement, human rights, health and safety and financial inclusion; while governance issues cover the areas of corruption and bribery, reputation and management effectiveness.
You may think that these concepts do not have direct relevance to the financial sector, but it actually has a much bigger impact than what we think. These issues impact our communities, clients, vendors, and employees more than we know, pushing us to take our role in managing these risks very seriously. The role of banks as financial intermediaries and as capital raising agents directly affects the promotion of economic development. And this role needs to include the promotion of sustainable business practices, because without which, the banks will end up facilitating practices that have significant negative environmental and social impacts. Turning our backs on these issues mean missed opportunities in creating new products and services that can allow us to capitalize on ESG issues.
That is why as a responsible financial institution, RCBC is committed to uphold and respect social and environmental responsibility in all its business activities. As one of the universal banks in the country, we recognize that balancing non-financial factors such as environmental and social issues with financial priorities is an essential part of being a good corporate citizen, in addition to being fundamental to risk management and the protection of our investors and shareholders.
When the International Finance Corporation (IFC) became an investor in RCBC in 2012, it shared with us its advocacy on Environmental and Social Governance to which RCBC readily subscribed to. RCBC utilized this advocacy for corporate social responsibility. We implemented a Social and Environmental Management System (SEMS) to safeguard our lending operations from exposure to activities with identified E&S risks. We aim to develop environmental awareness and social responsibility for our lending personnel, and ultimately to our loan clients. We believe that these steps would create long term solutions to environmental and sustainability issues - mitigating negative impacts on the environment and on affected communities and enhance the positive development impacts.
The Environmental Management System Policy (SEMS) is a declaration of our commitment to sustainable development and management of E&S issues by integrating it in the lending process from initiation, evaluation, approval, documentation, implementation and monitoring of loan accounts. It was developed in line with IFC’s thrust on sustainable development to promote its vision to provide people the right opportunity to escape poverty and improve their lives. The provisions of the Policy also took into consideration the rules and guidelines covering environmental management via the Philippines’ Environmental Impact Statement System.
To ensure faithful compliance with the set guidelines, the Bank appointed a SEMS Officer and created a SEMS Unit that oversees the effective implementation of the environmental and social sustainability policy of the Bank.
At present, all credit proposals for loans/other credit accommodations from RCBC need to go through E&S risk and impact assessment. Only activities or projects which pass the E&S risk and impact assessment shall be eligible for financing and are screened using the applicable requirements – the IFC Exclusion List, the National and Local Laws of the country and the IFC Performance Standards.
Generally, the Bank will not finance any activity that is in the Exclusion List. Exception are activities (trading/manufacturing) in alcohol and tobacco industries wherein the Bank has set a limit on its exposure i.e., currently at 4% of the Total Loan Portfolio.
Once a positive review of the business activity or project proposal has been arrived at by EMB which is DENR’s bureau tasked to implement the Philippines’ EIA law, an Environmental Clearance Certificate (ECC) is issued to the proponent. In line with this, RCBC imposed the submission of ECC by all eligible activities. Non-compliance shall mean no loan release to finance the borrower’s activities. Compliance to the conditions of the ECC also forms part of the requirements of the Bank to its borrowers.
Currently, there are 8 Performance Standards to benchmark projects or business activities on:
Assessment and Management of Environmental and Social Risks and Impacts
Labor and Working Conditions
Resource Efficiency and Pollution Prevention
Community Health, Safety, and Security
Land Acquisition and Involuntary Resettlement
Biodiversity Conservation and Sustainable Management of Living Natural Resources
Our lending teams also integrate environmental and social due diligence as part of normal due diligence. Transactions which have potential environmental and social concerns are escalated for higher level review and discussion.
While the environmental and social due diligence policies are in place, challenges do exist in terms of day to day operations. As the first private Bank involved in an E&S program over its total loan portfolio, additional competitive challenges are met by our lending officers. This is in addition to usual competitive issues such as pricing and liquidity. The exclusion list effectively prevents business development efforts in affected industries. A case in point is the Weapons and Munitions industries. The EPZA, and effectively national policy, is encouraging relevant industries to locate in its Export Processing Zones. Yet this industry is disallowed by the Exclusion List.
As a partner in nation building, RCBC has aimed to be at the forefront of the country’s development priorities. Almost 30% of the Bank’s loan portfolio is devoted to the power industry.
While our exposure to the power industry includes renewable sources such as solar, hydro and geothermal, a significant portion is to existing investments in coal- and diesel-fired power plants. In these cases, extra attention is paid to environmental and safety concerns of these plants. Very recently, the Bank participated in funding a purchase of a geothermal plant in Indonesia, another measure following its pursuit of clean energy.
Aside from environmental concerns, social concerns are at the forefront of the Bank’s due diligence activities. For loan exposures which may require relocation of local residents, such as power plants, roads / railway construction, etc., a necessary step is touching base with local residents to ensure they are not unfairly disadvantaged by the project. Due diligence efforts all contain stakeholder interaction as a necessary component.
From the aforementioned challenges and efforts, it is evident that RCBC applies a high standard of care to serving its borrowing clients, and is especially cognizant of potential reputational risks arising from potential E&S failures. While an oil spill or mine tailings are easily imagined, even in non- ERC A-projects, a reputational black eye is hard to live down.
Ensuring shared success with our clients and communities help us to harness the power of capital markets to do good. All of this is based on a strong foundation of disciplined risk management that ensures the business is a good place to work for, invest in and do business with. We believe that this approach defines who we are and best positions our bank for sustainable growth.
At the end of the day, a well managed bank should focus on both the risks and opportunities and finding the right balance. It then creates key leverage points from moving from a business-as-usual state to a sustainable future. Where what was once before considered as nice-to-have has now become a business imperative.
Thank you for your time and enjoy the rest of the day.