The Bangko Sentral ng Pilipinas (BSP) has extended a package of regulatory incentives designed to encourage Philippine banks to scale up financing for green, sustainable, and climate-resilient activities—a move that underscores the central bank’s increasingly proactive role in shaping climate finance and transition policy in the country.

Approved by the Monetary Board and effective January 6, 2026, the extension adds another two years to a set of measures first introduced in 2023 under BSP Circular No. 1185. The incentives were conceived during the initial phase of the BSP’s sustainable finance agenda, at a time when regulators across Asia were beginning to grapple with the implications of climate risk on financial stability, investment flows, and regulatory design.

A policy lever to mobilize capital

At the center of the initiative are two key incentives aimed at lowering structural barriers for banks that want to finance sustainable projects. First, banks are allowed to go beyond the standard 25 percent single borrower’s limit (SBL) by an additional 15 percent when lending to eligible activities. This flexibility matters because many climate-aligned projects—particularly in renewable energy, water systems, and resilient infrastructure—have large ticket sizes that often bump up against traditional lending thresholds.

Second, proceeds from banks’ sustainable bond issuances can be fully deployed into lending without being subjected to the central bank’s 3 percent reserve requirement. By reducing the cost of issuance and deployment, BSP aims to strengthen the sustainable bond market and widen participation across issuers and investors, while encouraging the private sector to play a greater role in climate finance.

Taken together, these measures are designed to make capital cheaper, larger, and more scalable for green investments while maintaining prudential oversight.

Part of a longer regulatory trajectory

The extension did not emerge in isolation. It builds on a sequence of regulatory actions introduced over the past several years that gradually integrated sustainability and climate considerations into the Philippine financial system.

In 2020, BSP issued Circular No. 1085, which laid down the Sustainable Finance Framework requiring banks to incorporate environmental and social risks into governance, risk management, and disclosure practices. This framework was foundational: it signaled that climate and environmental exposures were not merely ethical or reputational matters, but financial and operational ones as well.

In 2023, Circular No. 1185 introduced the incentive package now subject to extension. The following year, BSP released the Sustainable Finance Taxonomy Guidelines; an essential tool for defining eligible sustainable activities and reducing ambiguity in reporting and supervision. Additional supervisory guidance is anticipated as data quality and market maturity improve.

Viewed together, these steps reveal a coherent regulatory strategy: build the governance foundation, clarify taxonomy and eligibility, reduce financial barriers, and then revisit prudential calibrations to reflect local risk dynamics.

Responding to a shifting risk landscape

The extension must also be understood through a climate risk lens. Like many Southeast Asian countries, the Philippines faces outsized vulnerability to climate impacts such as heat extremes, cyclones, and coastal flooding. These shocks have increasingly material consequences for infrastructure, agriculture, housing, and macroeconomic stability.

Financial regulators in ASEAN have begun to recognize that climate-related physical risks and transition risks can manifest across balance sheets, portfolios, and cash flows. For central banks, the concern is not environmental activism but financial stability: climate hazards can impair assets, increase defaults, disrupt supply chains, and strain fiscal resources over time.

Governor Eli M. Remolona Jr. highlighted this policy orientation in announcing the extension, describing the incentives as a means to channel more credit toward the country’s transition to a climate-resilient economy while deepening participation in sustainable capital markets. This dual framing—resilience and market development—is increasingly common among peers in the region.

Toward blended finance and risk calibration

Beyond the immediate extension, BSP signaled three forward-looking areas of reform that could shape the next phase of sustainable finance regulation.

The first involves a potential recalibration of risk weights for climate resilience-focused financing. Risk weights determine how much capital banks must set aside for certain exposures and thus influence the cost and willingness to lend. If risk weights overestimate the risk of financing resilient infrastructure, for instance, banks may under-lend relative to what is socially optimal. Conversely, if they underestimate risk, they may expose themselves to future losses. Adjusting these weights to match domestic conditions is therefore a technically complex but potentially powerful policy lever.

The second area is blended finance—an approach that combines public, philanthropic, and private capital to de-risk investments and crowd in financing for projects that are economically valuable but currently not bankable under standard lending models. For climate adaptation in particular, where benefits accrue broadly and over long time horizons, blended finance is often essential.

The third involves a scheduled review of the incentives before they lapse in 2028. The review is expected to assess market utilization, investor participation, prudential outcomes, and the need for refinements as the domestic sustainable finance ecosystem matures.

Linking finance to national climate priorities

The incentives are also aligned with multiple national policy frameworks. Eligible activities map to the Philippines’ National Adaptation Plan (NAP), its Nationally Determined Contributions (NDCs) under the Paris Agreement, and the Philippine Development Plan (PDP). Officials have said that adaptation finance—long the underfunded sibling of mitigation—will play a more prominent role as the government prepares for long-term climate resilience.

The alignment is important because it ensures that regulatory incentives do not operate in a vacuum. Capital flows triggered by financial regulation must ultimately support the country’s sectoral and macroeconomic strategies or risk fragmentation.

Regional positioning: Southeast Asia’s experimentation

The Philippines is not alone in exploring the intersection of monetary policy, prudential supervision, and climate finance. Across Southeast Asia, central banks and financial authorities are experimenting with different models:

• Singapore has leaned heavily on taxonomy, disclosure, and concessional tools to build green finance hubs.
• Malaysia’s central bank has incorporated climate considerations into supervisory frameworks and scenario analysis.
• Indonesia has pursued green taxonomy development and sustainable sector mandates, particularly in energy and industry.

What distinguishes the Philippines is its blend of regulatory incentives, taxonomy work, and market development—an approach driven in part by its exposure to natural hazards and development financing needs.

The path to scale

The extension primarily serves as a bridge. The incentives create space for banks to finance sustainable projects more aggressively, test market instruments such as sustainability-linked bonds, and identify pricing and risk models suitable for a climate-constrained world. At the same time, regulators gather information about adoption, barriers, and unintended consequences.

Whether this incentive package translates into transformational volumes of sustainable finance will depend on several factors beyond the BSP’s control, including project pipeline readiness, regulatory coordination, and the broader macroeconomic environment.

But from a regulatory standpoint, the direction is clear: the financial system will play a central role in the country’s climate transition, and the BSP intends to shape how that role evolves.

As the central bank prepares for a comprehensive review before the incentives expire in 2028, the Philippine sustainable finance ecosystem enters a phase less defined by experimentation and more by scaling, a shift that brings both opportunity and complexity for the financial sector and the broader economy.

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