THE Bangko Sentral ng Pilipinas (BSP) has recognized the important role of micro, small and medium enterprises (MSMEs) in the economy, also stressing the need to fund its climate change mitigation or adaptation efforts.

After the Monetary Board approved the adoption of the Philippine Sustainable Finance Taxonomy Guidelines (SFTG) for banks in its meeting held on Feb. 14, 2024, the central bank highlighted its potential as a tool to channel funds toward climate change initiatives for MSMEs.

"Initiatives to promote sustainable finance and efforts to address climate change should be inclusive and should not result in unintended consequences at the disadvantage of the vulnerable sector, which includes the MSMEs," the BSP said.

According to the central bank, MSMEs constitute 65.1 percent of the total employment in the Philippines, signifying a significant potential to enhance the country's resilience to climate change.

However, due to the limited scale of MSMEs in the country, they require assistance to fully realize the endeavors aimed at making their businesses climate-smart and environmentally friendly.

The BSP mentioned that through the SFTG, banks can help fund MSMEs' efforts in climate change mitigation.

This involves MSMEs transitioning to renewable energies, adopting green technology for sustainable production, and contributing to a low-carbon value chain.

"Given the diversity of MSMEs, this SFTG intends to provide a simplified approach for the assessment of their activities or projects," the BSP said. "The approach shall be periodically reviewed and updated to reflect developments in the sustainable finance space."

The BSP stated that the activity should not be regarded as an "excluded" activity and must adhere to national laws. Additionally, the financing activity should align with the appropriate Use of Proceeds (UOP) standards.

"If an appropriate UOP cannot be identified, the activity should be assessed following the "traffic light" classification system," the BSP said.

The SFTG employs a traffic light system — Green, Amber or Red — to categorize activities.

Green signifies full alignment with SFTG; Amber indicates partial alignment, including activities in transition to address harm or support climate goals. Meanwhile, Red means the activity falls short of SFTG ambitions, but it may still qualify for "unlabeled" financing.

The BSP stated that an MSME's activity can meet green or social standards assessed by an independent third party.

International certifications like Rainforest Alliance, Forest Stewardship Council, Fairtrade, Sustainable Rice Platform, and others, assure that the MSME's processes align with environmental goals. National or local government clearances also count.

However, the BSP said that the bank or finance provider should use judgment, assess evidence, and check for environmental impact. This may involve reviewing data on environmental violations, conducting interviews, and adopting additional questions as needed.

The BSP allows banks an observation period until the end of 2024 to enhance their familiarity with the SFTG principles.

A pilot testing exercise, conducted in collaboration with industry, will take place during this period. The exercise results will guide the development of further guidance on using taxonomy.

The initial edition of the SFTG concentrates on two environmental objectives, which are climate change mitigation and climate change adaptation. Upcoming versions, the BSP said, will include biodiversity and the circular economy.

"The issuance of a taxonomy is a crucial step in our sustainability journey. It provides high-level guidance in determining the greenness of an investment," BSP Governor Eli Remolona Jr. said.

"But this is just the first step to what I expect will be a long iterative process of calibrating the document to fully capture the conditions of the Philippine economy," he added.

The SFTG adheres to the country's national policies and strategies and aligns with the Asean Taxonomy for Sustainable Finance. Asean is the Association of Southeast Asian Nations.

It puts into operation a recommendation from the Philippine Sustainable Finance Roadmap, issued in October 2021 by the Inter-agency Technical Working Group on Sustainable Finance, also known as the Green Force.