Philippines Central Bank Extends Green Finance Incentives Through 2028 to Accelerate Climate Transition

The Bangko Sentral ng Pilipinas has reinforced the Philippines’ commitment to sustainable finance by extending critical regulatory incentives designed to encourage banks to expand lending for green and climate-resilient projects. The two-year extension of incentives introduced in December 2023 under BSP Circular No. 1185 took effect on January 6, 2026, under Circular No. 1227, which amended two sections of the Manual of Regulations for Banks and will remain in force until January 6, 2028.

This regulatory extension represents more than routine policy renewal—it signals the central bank’s strategic recognition that climate finance infrastructure requires sustained regulatory support to achieve meaningful scale. As funding needs for climate adaptation continue to rise and the Philippines faces mounting vulnerability to climate-related risks, the BSP is positioning the banking sector as a critical channel for mobilizing capital toward environmental sustainability and economic resilience.

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Strategic Context: Climate Risk and Financial Stability in the Philippines

The Philippines confronts exceptional climate vulnerability that creates both physical risks to economic assets and systemic risks to financial stability. Damages from climate change could impact 7.6% of the country’s total GDP by 2030 according to World Bank projections, while the World Risk Report ranks the Philippines as the country with the highest risk from natural disasters globally.

This extreme exposure makes climate resilience not merely an environmental imperative but a core financial stability concern. The BSP has identified climate change as a systemic risk to the Philippine financial system, recognizing that even currently small impacts could escalate dramatically without proactive risk management and adaptation financing. The central bank’s sustainable finance initiatives therefore serve dual objectives: supporting national climate commitments while protecting the soundness and stability of the financial system itself.

BSP Assistant Governor Pia Bernadette Roman Tayag, who serves as the central bank’s chief sustainability officer, has emphasized that promoting a climate-resilient financial system extends beyond risk management to encompass actively steering capital flows toward sustainable investments. The incentive extensions under Circular No. 1227 operationalize this philosophy by creating concrete regulatory advantages for banks financing climate-positive projects.

Enhanced Credit Exposure Limits for Green Lending

Among the most significant incentives is the increase in single borrower credit limits for green and sustainable project financing. Under the revised rules, banks may exceed the standard 25% single borrower limit by up to an additional 15% of net worth when financing eligible green or sustainable projects, raising the potential exposure ceiling to 40% of a bank’s net worth for qualifying transactions.

This regulatory flexibility addresses a fundamental constraint in green finance: many climate-resilient infrastructure projects—renewable energy installations, sustainable transportation systems, water management facilities—require capital investments that exceed conventional single-borrower prudential limits. By providing regulatory headroom specifically for sustainable projects, the BSP enables banks to finance large-ticket green investments that might otherwise be uneconomical to structure or would require complex syndication arrangements.

The eligible projects encompass a broad range of sustainability objectives, including transitional activities toward decarbonization. This inclusive definition recognizes that climate transition requires not only pure renewable energy projects but also investments that help carbon-intensive industries gradually reduce emissions intensity. Supporting transitional activities prevents premature stranding of existing economic assets while creating pathways for industrial sectors to evolve toward sustainability.

Critically, the BSP maintains prudential guardrails even while extending regulatory flexibility. The central bank specifies that any resulting concentration of credit risk must be reflected in a bank’s internal assessment of capital adequacy, aligned with its overall risk profile and operating environment. This requirement ensures that banks cannot use green lending incentives to evade fundamental risk management disciplines but must instead incorporate expanded exposures into comprehensive capital planning frameworks.

Reserve Requirement Waiver for Sustainable Bonds

The BSP continues its waiver of reserve requirements on green, social, sustainability, and other sustainable bonds issued by banks. Under normal circumstances, banks must maintain reserves of 3% on various funding sources, effectively reducing the amount of capital available for lending. By reducing this requirement to zero for sustainable bonds, the BSP lowers funding costs and expands lending capacity for institutions raising capital through sustainable debt instruments.

This incentive creates multiple beneficial dynamics. First, it improves the economics of sustainable bond issuance for banks by reducing the regulatory burden on these funding sources, making green finance structurally more attractive than conventional lending. Second, it encourages development of the sustainable bond market by creating issuer-side demand that complements investor interest. Third, it channels additional liquidity specifically toward sustainable lending by ensuring that 100% of sustainable bond proceeds can be deployed rather than being partially sterilized through reserve requirements.

The central bank has explicitly clarified that removing reserve requirements for sustainable bonds does not signal any shift in monetary policy stance. Rather, this measure operates purely as a microeconomic tool to promote sustainable finance without affecting macroeconomic monetary conditions. This distinction is important for maintaining credibility in the BSP’s core inflation-targeting framework while pursuing sustainability objectives through complementary regulatory channels.

Compliance Requirements and Anti-Greenwashing Safeguards

The extended incentives come with stringent compliance requirements designed to ensure integrity of sustainable finance designations and prevent greenwashing. Bond issuances must comply with Securities and Exchange Commission rules and with relevant regional or international standards accepted by the market, including those of the International Capital Markets Association or endorsements from the Association of Southeast Asian Nations Capital Markets Forum.

Issuing banks are required to meet disclosure standards under the Sustainable Finance Framework, which establishes expectations for transparency around use of proceeds, project selection criteria, management of proceeds, and reporting on environmental impacts. These disclosure requirements create accountability mechanisms that allow investors and regulators to verify that funds raised through sustainable instruments actually finance qualifying projects rather than serving as generic funding repackaged under sustainability labels.

The BSP explicitly prohibits greenwashing, recognizing that erosion of market confidence through misleading sustainability claims could undermine the entire sustainable finance ecosystem. By establishing clear definitional boundaries, requiring third-party verification for certain designations, and mandating ongoing reporting on use of proceeds, the regulatory framework aims to maintain credibility and investor trust in Philippine sustainable bonds.

This rigorous approach has contributed to the Philippines emerging as a leader in ASEAN sustainable bond markets. As of July 2022, USD 6.77 billion or 26% of total ASEAN green, social, and sustainability bonds issued were by Philippine companies, demonstrating that robust standards can coexist with market development.

Explosive Growth in Sustainable Bond Issuances

Data from the BSP reveals remarkable growth in sustainable debt issuance under the incentive framework. Total green, social, sustainability, and sustainability-linked bond issuances reached an estimated P515.9 billion in the first half of 2025 alone, with sustainability bonds accounting for P385.5 billion of this total.

Based on BSP staff estimates, cumulative issuances by Philippine banks during this period included P89.1 billion in green bonds, P35.6 billion in social bonds, and P5.7 billion in blue bonds (which finance ocean and marine conservation projects). These figures demonstrate substantial and diversified market activity across multiple sustainable finance categories.

Major Philippine banks have been particularly active in sustainable bond markets. BDO Unibank has issued multiple tranches of sustainability bonds including P52.7 billion in January 2022, P63.3 billion in January 2024, and P55.7 billion in July 2024. Bank of the Philippine Islands issued P33.7 billion in Supporting Inclusion, Nature and Growth (SEED) bonds in August 2024, its largest thematic issuance to date. Philippine National Bank raised P15.7 billion through dual-tranche sustainability bonds in December 2025, marking its return to domestic capital markets since 2017.

This issuance volume reflects strong investor demand for sustainability-linked debt, driven by growing awareness of environmental, social, and governance considerations among institutional and retail investors. Bank treasurers have noted that investors are becoming “more aware” about ESG issues, translating into robust demand that frequently allows issuers to upsize offerings beyond initial base amounts due to oversubscription.

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Alignment with Broader Sustainable Central Banking Strategy

The incentive extensions under Circular No. 1227 form part of the BSP’s comprehensive 11-point Sustainable Central Banking Strategy launched in December 2022. This framework advocates integration of sustainability principles and practices both within the BSP’s own operations and throughout the broader Philippine financial system.

BSP Governor Eli Remolona Jr. has emphasized the central bank’s role as a “sustainable finance champion,” stating that the BSP will “continue to play an active, enabling role in fostering the transition towards a sustainable economy.” The Governor has committed to identifying and creating appropriate incentives within the BSP’s mandates to empower the banking system to steer capital flows toward green investments and accelerate development of solutions addressing just transition challenges.

The Sustainable Central Banking Strategy encompasses multiple dimensions beyond lending incentives, including sustainability risk management expectations for supervised institutions, environmental integration in the BSP’s own investment portfolio, and capacity building initiatives to enhance financial sector understanding of climate risks and opportunities.

One innovative proposal under consideration involves allowing lending for green projects to count toward compliance with the Agri-Agra Law, which requires banks to allocate 25% of loanable funds to farmers and fisherfolk. Given historically low compliance with this requirement—many banks preferring to pay penalties rather than meet quotas—allowing green agricultural lending to satisfy these obligations could channel additional capital toward sustainable food systems while addressing a persistent policy challenge.

Capacity Building and Knowledge Development Initiatives

Beyond regulatory incentives, the BSP recognizes that lack of awareness and technical capacity represents a fundamental barrier to scaling green finance. The central bank has therefore invested significantly in capacity building programs designed to enhance financial sector understanding of climate risks and sustainable finance opportunities.

Recent initiatives include climate risk assessment workshops for smaller banks, helping these institutions—which may lack dedicated sustainability staff—understand how to assess climate-related financial risks. The BSP also hosts quarterly meetings on key sustainable finance issues, creating platforms for knowledge exchange among banks, investors, and other stakeholders.

Assistant Governor Tayag has identified challenges around “reliably assessing the pricing, financial instruments and investment products for various green projects,” largely attributable to knowledge gaps and data limitations. These analytical challenges can lead to missed opportunities as financial institutions struggle to properly evaluate and price climate-positive investments.

To address these gaps, the BSP is working to make data more accessible to banks and to develop methodological guidance that can standardize green project assessment. By reducing information asymmetries and building analytical capabilities across the financial sector, these capacity building efforts complement regulatory incentives in creating conditions for sustainable finance to scale.

International Recognition and Regional Leadership

The Philippines’ sustainable finance framework has garnered international recognition for its comprehensiveness and effectiveness. The country stood out in the first East and Southeast Asia Green Central Banking Scorecard, reflecting the BSP’s leadership in integrating sustainability considerations into central banking operations and financial supervision.

Philippine entities have been particularly active in the ASEAN sustainable bond market, with most Philippine green and sustainability bonds carrying ASEAN Green or Sustainability labels accompanied by second-party opinions from recognized providers such as Sustainalytics and Vigeo-Eiris. This alignment with regional standards facilitates investor confidence and cross-border capital flows.

The Philippines’ first labeled green bond—a nearly USD 300 million geothermal transaction in 2016—predated implementation of ASEAN standards, demonstrating early mover advantage in the region. Subsequent issuances have built on this foundation, creating depth and diversity in the Philippine sustainable bond market that distinguishes it from other emerging markets where sovereign borrowers have played more prominent first-mover roles.

Global recognition came through awards like Bank of the Philippine Islands winning the Sustainable Finance Award for 2025, highlighting the bank’s SEED bond program and commitment to financing renewable energy, pollution prevention, sustainable agriculture, and socioeconomic development activities.

Challenges and Future Directions

Despite impressive progress, challenges remain in scaling sustainable finance to levels commensurate with the Philippines’ climate financing needs. Data gaps continue to constrain accurate assessment of project environmental impacts and climate risk exposure. Methodological limitations in pricing transition risk and valuing environmental benefits create uncertainty that can deter investment in otherwise viable projects.

The BSP has indicated that the extended incentives—set to expire at the end of 2027—will be evaluated to assess impact and determine whether renewal or enhancement is warranted. This evaluation will examine metrics including volume of green lending facilitated by expanded borrower limits, sustainable bond issuance trends, portfolio composition shifts toward climate-positive sectors, and evidence of environmental impacts from financed projects.

Future policy development may incorporate lessons from international experience with sustainable finance incentives, evolving scientific understanding of climate risks and impacts, and feedback from financial institutions navigating practical implementation challenges. The BSP has demonstrated willingness to iterate and refine its approach based on evidence and stakeholder input, suggesting that the regulatory framework will continue evolving to address emerging needs and opportunities.

Implications for Banks and Borrowers

For Philippine banks, the extended incentives create concrete business case rationale for expanding sustainable lending portfolios. The ability to exceed normal single-borrower limits for green projects enables financing of large-scale renewable energy installations, sustainable infrastructure, and climate adaptation projects that would otherwise require complex syndication or exceed risk appetite constraints.

The reserve requirement waiver for sustainable bonds improves economics of raising funding through these instruments, creating preferential economics compared to conventional debt issuance. Banks with strong sustainable finance franchises can therefore achieve lower overall funding costs while simultaneously building market positioning as sustainability leaders.

For borrowers seeking to finance green or climate-resilient projects, the BSP’s incentive framework expands available capital and potentially improves financing terms. Banks with regulatory headroom to increase exposures may offer larger facilities or more competitive pricing for qualifying sustainable projects, translating regulatory advantage into tangible financial benefits for environmentally positive investments.

The compliance requirements—while creating some additional documentation burden—ultimately benefit serious sustainable borrowers by differentiating genuine green projects from greenwashing attempts. Rigorous verification and disclosure requirements create market discipline that should, over time, reduce cost of capital for high-quality sustainable projects as investors gain confidence in the integrity of labeled instruments.

Conclusion

Circular No. 1227’s extension of green banking incentives through January 2028 demonstrates the BSP’s commitment to sustainable finance as a strategic priority rather than a temporary policy experiment. By providing regulatory certainty through a multi-year extension, the central bank enables financial institutions to make long-term investments in sustainable finance capabilities, build specialized expertise, and develop sustainable lending portfolios with confidence in continued regulatory support.

The Philippines’ approach—combining regulatory incentives with robust anti-greenwashing safeguards, capacity building initiatives, and alignment with international standards—offers a model for emerging market central banks seeking to mobilize financial systems toward climate objectives while maintaining prudential soundness and market integrity.

As climate risks intensify and financing needs escalate, the effectiveness of these incentives in channeling capital toward climate resilience and environmental sustainability will prove increasingly critical not only to the Philippines’ climate commitments but to the long-term stability and prosperity of its economy and financial system.

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By: Montel Kamau

Serrari Financial Analyst

12th January, 2026