The Philippines has been one of the fastest growing economies in the Association of Southeast Asian Nations (ASEAN) and despite the covid-19 crisis, the economic growth is expected to rebound gradually in 2021–2022. However, this recovery from the COVID-19 crisis would need urgent focus on green infrastructure and creating an enabling environment for these investments. The Green Infrastructure Investment Opportunities: Philippines 2020 Report has been prepared by the Climate Bonds Initiative (CBI). This report supported by the ASEAN Catalytic Green Finance Facility, the Asian Development Bank and the Securities and Exchange Commission Philippines highlights the green infrastructure investment opportunities in the Philippines. It explores the green infrastructure and corresponding finance instruments and aims to facilitate greater engagement between various stakeholders. Below is an extract from the report:
Green infrastructure: an opportunity for growth
The Philippines is one of the most vulnerable countries to climate change, due to its high exposure to natural hazards, dependence on climate-sensitive natural resources, and vast coastlines. According to the World Risk Report in 2019, the Philippines ranks as the ninth most vulnerable country to disaster and climate change-related risk among the 180 countries examined. Thus, the significant scaling-up of investment in green infrastructure is critical for the Philippines to meet its climate commitments and build resilience to the impacts of climate change as well as to achieve rapid economic development. As a top priority for the current Philippine administration, infrastructure development is being heavily supported and promoted in the Philippines.
Currently, much of the Philippines’ investment in infrastructure is being carried out through public funding and public– private partnership (PPP) ventures. However, public funding is not sufficient to meet the growing demand for green infrastructure; new channels will be necessary to mobilise private capital. Further, existing funding commitments made by the government may be challenged by the current COVID-19 pandemic and ensuing economic crisis, so looking to the market for additional investment will be key to growing green pipelines.
The first ever green bond from an ASEAN entity was issued in 2016 by Philippine corporate, AP Renewables. The Philippines’ bond market now stands at $2.6 billion and it is growing. Even under the pandemic, the Philippines has been able to maintain its sovereign ratings at well above investment grade (BBB+/BBB/Baa2) and stable outlooks from the three major ratings agencies. This offers an attractive opportunity for investors to meet their demand for additional yield while still being within credit rating constraints.
In order to attract investors looking for green, the Philippines needs to be sure that there is a visible pipeline of infrastructure investment opportunities that align with internationally accepted definitions of green. There is often limited awareness and appreciation among some market participants of ‘what are green investments’ beyond solar and wind energy. The lack of understanding of what are green investments makes it difficult for governments to develop pipelines of commercially viable, green infrastructure investment opportunities that are able to support the nation’s transition to a low carbon economy.
The identification of green infrastructure investment opportunities in the Philippines can help investors understand that there is a sufficiently large pool of financially attractive investments that are also green. Knowledge of a large pool of green investments available means that investors can realise there are viable alternatives to non-green assets and projects, and they can make their preferences for green heard, which will in turn spur the creation of a larger pool of green investments.
At the end of 2019, the Philippines Investment Coordination Committee (ICC) and the Committee on Infrastructure (INFRACOM) jointly identified 100 big-ticket infrastructure projects to be added to the national project pipeline. However, since the pandemic, the list of flagship projects has been revised to reflect COVID-19 response better. The Build, Build, Build (BBB) program now consists of 104 big-ticket infrastructure projects worth PHP4.1 trillion ($84.46 billion), instead of the initial 100 projects prior to the pandemic. In the revised list of projects, 8 projects were replaced by 13 priority projects that are responsive to the pandemic. These additional 13 projects are aimed at the ICT, water, transportation, digital economy and the health care sector.
Despite the setback from the reallocation public infrastructure budget for COVID-19 emergency response in Q1, the total spending for infrastructure is expected to bounce back in 2021 as the National Expenditure Program (NEP) has recently approved an infrastructure budget of PHP 1.107 trillion ($22.8 billion) for FY2021. This total approved budget amounts to 5.4% of the GDP, a significant increase from the public infrastructure budget of 4.6% of the GDP in 2020. In addition, to help attract private investors, the government is accepting more unsolicited public-private partnership (PPP) proposals from the private sector. Based on National Economic and Development Authority (NEDA) estimates, about $25.3 billion (PHP1.23 trillion) could be available via PPPs. Ideally, the government’s infrastructure investment prioritization and its economic reforms will attract greater private investment into the country, despite the COVID crisis.
Green finance trends and opportunities
There is a strong green finance momentum globally and significant further growth potential. Green-labelled products have become globally recognised as an effective means of directing investment capital towards climate change mitigation and climate change resilience and adaptation projects, including green infrastructure. The growing level of interest from investors in green projects has resulted in the development and growth of innovative financial products including green, social, ESG and sustainability bonds and loans, and green index products. In the future, green COVID-19 bonds may find a place in this list of themed green instruments.
Green bonds are currently the most developed segment of thematic instruments, carrying greater recognition from the investor base. To combat the effects of climate change, it is estimated that green bond issuance needs to reach $1 trillion per annum by the early 2020s. A significant amount is expected to finance green infrastructure and assets in emerging markets.
Several foreign entities, including development banks as well as foreign commercial banks, have issued green bonds in local ASEAN currency bonds demonstrating interest in these domestic markets. Other green bond issuers such as BNP Paribas, Société Générale, Bank of America and NAB have issued vanilla bonds in at least one of the local ASEAN currencies. Issuance in local currency allows foreign issuers to tap domestic investors for capital. Interest in ASEAN markets continues to grow.
The Philippines has been increasingly exploring the use of green debt as well as equity instruments and has been expanding credit enhancement mechanisms and risk sharing options. This includes green bonds and green loans, credit guarantees, and guarantee funds, as well as specialty funds for green infrastructure and renewable energy. There has also been some ‘greening’ of the stock exchange and domestic banking.
Greening the stock exchange
The SEC Philippines has been involved in the development of the Sustainability Reporting Guidelines for Publicly Listed Companies (SEC MC. No. 4, s. 2019). This aims to help publicly listed companies assess and manage non-financial performance across economic, environmental, and social aspects of their organisation and to enable them to measure and monitor their contributions toward achieving national policies and programs as well as universal sustainability targets, such as the Sustainable Development Goals. This was part of a wider program for greening the Philippine Stock Exchange (PSE). In May 2019, the PSE affirmed its commitment to sustainability by joining the UN’s Sustainable Stock Exchanges (SSE) Initiative.
The SEC and the PSE continue to actively promote sustainability in the Philippine market: co-organising a sustainable business conference in June 2019 and several roundtables, trainings, and workshops since then. Into the future, one of the new initiatives being explored is the development of an Environmental, Social, and Governance (ESG) index on the exchange.
Banking on sustainability
Beyond the achievements of the regulators, leadership has been shown in the banking sector. Recently, the Bangko Sentral ng Pilipinas (BSP) is looking to ramp up its sustainable finance framework by encouraging banks to issue more green, social, and sustainability bonds. This year, BSP has invested in $200 million of green bonds. BSP has taken into account climate-related weather risk in calculating the inflation trends. BSP acknowledges that the significant impacts from climate change pose a risk to the financial system and affect the credit and operational risk exposure of the banks, which in turn affect profitability and solvency if climate-related risk remains unmitigated.
BSP has issued their Guidelines on Sustainable Finance Framework: requiring the integration of sustainability principles including those covering environmental and social risk areas in the corporate governance and risk management frameworks. According to BSP, Philippine banks and financial institutions are now required to incorporate ESG and sustainability principles into their corporate strategy, risk management and bank operations framework.
Private banks in the Philippines have led on green finance by issuing of green and sustainability bonds to fund and refinance green assets. To date, the Philippine banks that have issued green bonds are the Bank of the Philippine Islands (BPI), RCBC, BDO Unibank, and China Banking Group. Many banks are also providing green loans and other tools for developing green infrastructure and renewable energy. For instance, the Sustainable Energy Finance (SEF) program, pioneered by BPI, provides access to capital and technical support for renewable project owners. This program has successfully deployed private renewable projects in the Philippines. The SEF model has been replicated by other banks such as BDO Unibank. Other banks, such as Development Bank of the Philippines (DBP) has three initiatives for financing green projects and a sustainable bond program.
The Philippines has developed several funds for supporting green infrastructure and renewable energy projects. They are also eligible to access some regional and international green funds. A domestic initiative, led by the Climate Change Commission (CCC), is the People’s Survival Fund (PSF), which was created as an annual fund intended for local government units and accredited local/community organizations to implement climate change adaptation projects that will better equip vulnerable communities to deal with the impacts of climate change.
The Philippine government programmed at least PHP1 billion into the fund, sourced from the national budget, which may be augmented by mobilizing funding sources such as counterpart local government units, the private sector, and individuals who support adaptation initiatives. The PSF is intended for activities including water resources management, land management, and agriculture and fisheries, among others, and serves as guarantee for risk insurance needs for farmers, agricultural workers and other stakeholders.
The Philippines also has Access to Sustainable Energy Programme (ASEP), which is a joint undertaking of the European Union and the Philippine Department of Energy (DOE). Through ASEP, the EU has allocated a grant of over PHP3 billion to assist the Government of the Philippines to meet its rural electrification targets by means of renewable energy, and to promote energy efficiency.
At the regional level, the ASEAN Infrastructure Fund Ltd. (AIF), established in 2012 and owned by the ASEAN member states and ADB is dedicated to fund infrastructure development needs by mobilizing regional savings, including foreign exchange reserves. The AIF has committed an estimated $500 million for nine projects, with a total portfolio size of around $3 billion, including ADB co-financing. These projects are from Indonesia, Vietnam, Myanmar, and the Lao People’s Democratic Republic. In 2019, the AIF launched the ASEAN Catalytic Green Finance Facility (ACGF) to support governments in Southeast Asia to prepare and finance infrastructure projects that promote environmental sustainability and contribute to climate change goals.
There is also the Renewable Energy Asia Fund (REAF I) and REAF II, which invest in small hydro, wind, geothermal, solar, and biomass projects in Asian developing markets, with a primary focus to date in India, the Philippines, and Indonesia. REAF made equity investments in small renewable energy projects such as on-grid solar, wind, waste-to-energy, and hydropower projects of between 5 MW and 100 MW in these three countries.
To date, four domestic banks, the Bank of the Philippine Islands (BPI), Rizal Commercial Banking Corporation (RCBC), China Bank and BDO Unibank, have issued green bonds in three currencies: US Dollar, Philippines Peso and Swiss Franc with issuance in each currency amounting to $600 million, PHP15 billion ($309 million), and CHF100 million ($108.6 million) worth of green bonds. The Development Bank of the Philippines (DBP) also issued a PHP18.12 billion Sustainability bond, in which some proceeds were allocated for green projects.
The Philippines is a leader in the ASEAN green bond market. It issued the very first green bond in the region – the AP Renewables’ $226 million deal in early 2016. To date, only one government entity has issued a green bond. As of August 2020, Philippine entities had issued over $2.6 billion of green bonds, the majority of which were issued in 2019. 2019 was a record year for green bond issuance by Philippine entities, mostly in USD. Most of the proceeds were allocated to renewable energy. The largest issuer of green bonds in the Philippines is AC Energy, with four green bonds outstanding, ranging in size from $75 million to $400 million. In 2020, two more bonds by Arthaland and AC Energy were issued.
In addition to the 13 green bonds, 2 sustainability bonds have also been issued amounting to $796 million. Four banks have issued green bonds in the Philippines, with RCBC and, BBB+- rated, Bank of the Philippine Islands (BPI) – making their debuts in 2019. It was also followed five days later by the issuance of a $300 million senior unsecured five-year green bond. RCBC issued in February 2019 PHP15 billion of 1.5-year green bonds, a three-fold increase from the PHP5 billion, initially planned in response to “overwhelming” demand from investors. The proceeds from the issuance were earmarked for the refinancing of loans and new lending in renewable energy, green buildings, clean transportation, energy efficiency, and pollution prevention and control. Later in the year, it issued its first sustainability bond, a $300 million five-year deal to finance energy, buildings, transport and waste projects.
AC Energy, a subsidiary of Ayala Corporation, first issued a total of $300 million five-year green bond in two tranches in January 2019, and recently in June 2020 issued a $60 million tap issue from the January issuance. The January 2019 issuance was supported by the International Finance Corporation (IFC), acting as an anchor investor ($75 million). Proceeds are allocated to 5 GW of renewable energy projects in East Asia and the Pacific. Following this was a private placement of $110 million with a ten-year term, of which $20 million was invested by ADB. Finally, in 2020, AC Energy also issued a $60 million green bond, with the use-of-proceeds of renewable energy.
Although there has not yet been any issuance of local government green bonds in the Philippines, there may be potential for the future. There is political will, and opportunities for credit enhancement through Philguarantee. Philguarantee is a result of the merger and consolidation of five Philippine guarantee programs and agencies, and it could potentially provide credit enhancement to LGUs. The government could also consider the municipal bond bank model as a tool to increase green local government bonds. These are banks owned and operated by state government agencies, set up with the purpose of aggregating municipal financing needs and lowering the cost of funding. They issue general purpose bonds on the capital markets and redistribute the proceeds to municipalities.
Investors are increasingly confident that, as climate change accelerates, cities will prioritize projects that seek to mitigate the consequences. Some investors consider green investments as more resilient than other types of long-term city projects and may be willing to pay for longer-term municipal bonds certified by the Climate Bonds Initiative compared with similar debt that does not carry that certification.
The complete report can be accessed here