ADB Demystifying Green Transition Finance

Question and Answer

Advance questions

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Q: Timeline of implementing Scope 3 GHG and how to capture based on an actual example​

A: Please consider, in the Philippines, disclosure requirements are provided, for instance, via:

the Securities and Exchange Commission (SEC) Memorandum Circular No. 4 series of 2019 (Sustainability Reporting Guidelines for Publicly Listed Companies, PLCs) - and its announced revision (to consider IFRS 1 and 2 and the TCFD recommendations, incl. Scope 3 emissions). Accordingly, PLCs would be required to submit a narrative report, which will be submitted in conjunction with the company’s annual report and provide disclosures on sustainability and climate-related opportunities and risks exposures, cross-industry standard metrics, and industry-specific metrics. The mandatory is needed after the first three years of implementation, i.e. from 2023 (though the SEC has yet to issue a regulation to formalize this).

The Bangko Sentral ng Pilipinas (BSP, the Philipine Central Bank) Circular No. 1085 (Sustainability Finance Framework) is mandatory with a three-year transition period.

For the actual calculation and capturing of data, it is recommended to refer to the PCAF Guidance (https://carbonaccountingfinancials.com/standard) that provides the calculation and capturing methodology for different asset classes. (e.g., business loans).

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Q: How can we influence banks to really contribute to ESG? Most banks do not practice hybrid work set-up which can reduce carbon emissions.​

A: Influencing can start with awareness raising (within the bank) and audits to gain information about the banks’ energy /resource usages and direct emissions that are (partly) controllable by themselves (scope 1 and scope 2 emissions). This can include the use of energy for air conditioning and lighting. Energy usage within buildings can be reduced through different measures. Emissions caused by commuting might be controllable by using shared transport. Commonly, energy audits also provide ideas of where to start with "low hanging fruits" for saving energy and reducing emissions. Eventually, reducing emissions and energy usage can contribute to reducing energy costs.

Identifying scope 3 emissions is even more important due to the exposure of many FIs’ portfolios to sectors that contribute to emissions. Understanding the embedded scope 3 emissions helps with identifying transition risks but also opportunities (for offering green finance solutions).

Other ESG measures may be considered that may occur as a cost first but can be eventually turned into benefits for the organizations.

Next to raising awareness, an encouraging framework (e.g. through the central bank policies and guidance) can also encourage banks to act.

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Q: How can we effectively minimize transition risk​s?

A: One of the essential first steps for managing transition risks is to identify risks and further, prioritize them. For instance, ask which risks are (now or in near future) material for the bank and should and can be addressed first. Addressing the portfolio exposed to high emitting sectors and “low hanging” opportunities may have priority.

Overall, managing transition risks (and opportunities) may be planned and addressed in stages.  Critical steps, for instance, can be discussing with clients of hard to abate sectors the transition risks, but also opportunities to prepare for and implement a transition plan. Addressing low hanging fruits (e.g., low costs, fast gains through increasing efficiency rates) can be a start to gain experience and fast gains. However, replacing outdated technologies might also be needed. But respective mid or long-term investments might come with higher costs and with longer payback periods. Ideally, financial products respond to the different types of investment needs.

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Q: In the next 1-3 years, what incentives does the government plan to roll out to encourage Philippine financial institutions to participate in the just transition to a green economy? ​

A: As emphasized in BSP's Sustainable Central Banking Strategy, BSP considers different policies and incentive schemes for the promotion of green lending by banks. Before setting schemes, BSP is carefully investing potential unintended consequences and risks, such as creating green bubbles, as lending to sustainable areas is not necessarily less risky than conventional lending.

 

Q: Given the high growth in power demand, significant contribution of coal fired power and the condition of grid yet to catch-up, what is the key to success of the green transition in the power sector in SEA region?​

A: Diversifying the power generation sources and increasing the share of renewable energy (RE) generation capacity is key for the national power sector, next to strengthening the transmission and distribution grid, and related policies. The Climate Investment Fund supported "Accelerating Coal Transition Program Investment Plan for the Republic of the Philippines" envisages relevant actions, such as Accelerating Voluntary Retirement and Repurposing of Coal-Fired Power Plants and Replacement of Power and adding RE generation capacities (see also: https://www.cif.org/news/climate-investment-funds-endorses-500m-philippines-coal-transition-plan).

Next to supply, demand side actions will also add value (e.g. by increasing efficiency rates of energy users, like SMEs, etc.), but may require guidance and access to finance.

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Questions from QR Code

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Q: The Philippines is still heavily reliant on coal power plants for our electricity needs. Do we already have a framework and structure to push the industry players to transition to green energy?​

A: Reducing the coal power capacity and diversifying the energy generation sources, the National RE Program will be relevant (https://doe.gov.ph/national-renewable-energy-program), together with the CIF funded "Accelerating Coal Transition Program Investment Plan".

Addressing the transition needs of industry players however, will require additional efforts, such us industry relevant transition guidance/objectives/incentives (e.g., to reduce energy demand). The Green Economy Programme for the Philippines (GEPP) is expected to contribute to the greening of supply chain across sectors.

As we know, the scope 3 emissions includes emissions throughout the value chain, which are not widely reported or disclosed. According to the methodology designed or the framework applied by ADB or any known peers, what can be the proxies to collect or estimate the scope 3 emission from each account?​

To overcome the challenge of lacking /insufficient data (e.g. in case of portfolios of SMEs), PCAF offers a GHG accounting methodology that makes use of public data sources (by applying region- or sector-specific average values) to allow for estimates and proxies and track financed emissions. Average emission factors can be also used when data on the actual energy use is available. (PCAF provides a web-based emission factor database.)

 

Q: [Answered during the session] For BSP:  Does BSP have plans on extending the additional SBL for Sustainable Finance to more than 2 years?  This may be helpful given that project finance for sustainable projects have loan tenors of more than 2 years. ​

Q: [Answered during the session] For BSP: Are there plans to extend or replace the SusFin incentives such as the Circular 1185?​

 

Q For UNEP-FI: Can you recommend an environmental and human rights due diligence checklist or questionnaire that UNEP-FI considers as complete that banks can directly adopt? If not, is UNEP-FI exploring to develop one?

A: A comprehensive guide is available via UNDP that brings together elements of the existing due diligence-related guidelines, frameworks, and assessments. https://www.undp.org/sites/g/files/zskgke326/files/2023-11/undp-unwg_hrdde_guide_draft_0.pdf

 

Q: What frameworks are in place to ensure that minimum green investment thresholds for banks and financial institutions do not inadvertently discourage smaller-scale businesses or SMEs, particularly in developing economies that lack typical collateral requirements by banks and FIs to access necessary capital?

A: When planning for Sustainable Finance policies, Central Banks are carefully assessing potential unintended consequences and risks and balancing socio-economic and environmental impact.

 

Q: How do development institutions like ADB collaborate with banks & FIs to create financing mechanisms that are both flexible and inclusive, ensuring that the transition to green technologies does not disproportionately impact marginalized communities or SMEs?

A: FIs commonly address existing financing gaps and include final beneficiaries that are excluded from access to finance. Considering sustainable finance, ADB for instance, provides financing and capacity building to scale the green portfolio of FIs (with a gender lens) and develop green pipelines.

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Q: What specific, realistic steps can policymakers, banks, financial institutions, and development institutions propose to support SMEs starting from zero in adopting green transition finance, and how can this roadmap be made accessible and practical for businesses with limited financial and technical resources?

A: The transition journey starts with the assessment of data and an understanding of the current situation (e.g., energy use, emissions related to energy use), for instance via energy audits. This helps with identifying, on one hand, low-hanging fruits (ideally with little investment needs and short pay-back periods) and on the other hand, setting more ambitious targets (that may require higher investments). Supporting energy audits or providing sector specific transition guidelines can facilitate the process.

 

Q: Are there any examples in other jurisdictions/regions where there are different and simpler paths to regulatory compliance for smaller financial institutions whose financial and impact materiality is so small as to be negligible? Are there regulatory frameworks that currently provide more equitable transition paths - different for large banks and small rural banks who served the climate vulnerable sectors of smallholder farmers, MSMEs, etc.?

A: For most jurisdictions, the difference is made between regulated and non-regulated institutions when referring to compliance (such as disclosure requirements).

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Q: For financial institutions considering using AI in their ESG assessment, where do you advise they start?

A: In case large clients (such as listed companies) dominate the portfolio, real-time data or ESG rating data may be relevant. However, for portfolios dominated by smaller client groups, AI supported data sources (that build on an amalgamation of different sector-specific sources) can support the process of risk identification. Screening different AI (services) providers and requesting proposals may be one of the first steps.

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Q: What measures can we employ to veer away from greenwashing, especially when capacity is still not at an expert level?

A: We have to accept that we have to start somewhere and without full information/know how. However, testing and applying internationally agreed standards/frameworks/guidance (like the TCFD, TNFD, PCAF) is the right way forward. Earmarking and tracking information, being transparent on applied methodologies for calculating financed or prevented emissions and disclosing applied practice (even though calculations are based on proxies during the first years) contribute to credibility of green practice.