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February 22, 2023

Philippine regulator unveils guidelines for SLB issuance

The Philippine’s financial markets regulator has published guidelines for the issuance of sustainability-linked bonds as it bids to boost investment in areas of ‘environmental or social concern’.

The Securities and Exchange Commission of the Philippines published draft guidelines for the issuance of sustainability-linked bonds (SLBs) on February 2, as the regulator looks to boost the country’s fast-growing green finance market.

The proposals are based on the Association of Southeast Asian Nations’ SLB standards, aimed at stimulating the growth of a new asset class across the wider region and attracting investment into areas of “environmental or social concern”.

SLBs are less restrictive than other labelled sustainable finance bonds, in that the proceeds from an issuance can be directed towards general corporate activities. Instead, issuers are required to meet clear but broader sustainability objectives over a pre-set period, such as an emissions target, in accordance with key performance indicators and sustainability performance targets. If these goals are missed, the issuer will pay a higher rate on the bond.

This format is designed to open the door to issuers who may lack explicit green or social investment needs, such as in renewable energy, but it also comes with complexity and the risk of greater costs for the issuer.

According to the SEC’s draft circular, prospective Philippine SLB issuers will face a “trigger event” in the event that a company fails to achieve a KPI, “which may cause a change in the financial and/or structural characteristics of the [bond]”.

For some companies, this can be off-putting in a market environment such as the Philippines with little to no “greenium” on a bond issuance, said Matthew Carpio, head of transaction advisory at Climate Smart Ventures, a consultancy with offices in the Philippines and Singapore.

“It begs the question for issuers: are they going to go through all of this risk of a potential step up in borrowing costs to get the benefit of the SLB? As of now, the greenium is not convincing enough,” he said.

The SEC’s draft guidelines present further hurdles for prospective issuers, including stringent pre and post-transaction obligations, such as the appointment of separate external review providers to monitor compliance with Asean standards and verify that ambitious KPI and SPT objectives have been met. In many cases, lofty sustainability targets could be enough to deter potential issuers.

“It’s going to be hard to incentivise regular companies to use the SLB structure when it comes with a very aspirational emissions target,” Carpio said.

“Why risk it when you can issue a conventional bond and get the same rate, which is usually the case for Philippine peso issuances?”

Even so, the SEC’s proposals are more likely to reflect the regulator’s long-term approach to sustainable finance in the country. In recent years, the commission has initiated a number of changes to deepen the country’s capital markets through the launch of sustainable investment products, with the SLB guidelines being the latest example of these efforts.

So while the latest guidelines are unlikely to move the dial on sustainable finance in the Philippines over the short term, they do underscore a process of regulatory foundation-building.

“I would imagine the SEC is looking at this as a long game,” said CSV managing partner Lawrence Ang.

“I think what the SEC is trying to do is basically diversify the bucket of tools that can be made available to the financial markets locally to spur green investment.”

Photo credit: Krisztian Bocsi/Bloomberg

A service from the Financial Times