Global funds scrutinize Philippine debt after corruption scandal

A number of asset managers are reviewing their exposure to Philippine government debt earmarked for climate and social objectives, amid concerns they may have inadvertently financed projects under investigation for graft.

Robeco Institutional Asset Management BV and Mirova SA told Bloomberg they’re trying to confirm whether any proceeds from sustainable bonds sold by a government-backed flood-protection program were tainted by the scandal. Neuberger Berman Group LLC is monitoring the situation, adding that ongoing probes show the country is working to improve its efforts on governance.

Accusations of corruption have sparked a flurry of arrests, left assets worth some $200 million frozen, and forced out two ministers from President Ferdinand Marcos Jr.’s cabinet. Revelations that many flood defense projects are defective — and in some cases not even built — have triggered mass protests in a Southeast Asian nation that’s highly vulnerable to extreme weather, and where hundreds of people were killed in two recent typhoons.

“Mirova maintains a strict zero-tolerance policy for corruption,” said Felipe Gordillo-Buitrago, a senior ESG analyst at the Paris-based asset manager, which holds the debt in its Global Green Bond Fund. “This controversy reinforces our conviction that any investment in high-risk countries requires in-depth due diligence and continuous monitoring.”

Robeco said it’s requesting more details and clarification on the steps Marcos Jr.’s administration is taking to prevent corruption in the future.

If the government doesn’t “provide a robust answer to those questions,” then Robeco will “divest in accordance with our policies,” the asset manager said in response to emailed questions. Robeco is exposed through its Transition Emerging Credits fund and Transition Asian Bonds strategy.

Philippine Finance Secretary Frederick Go said the issue had been flagged to him and that he’s referred the matter to the public works agency and the treasury bureau.

About P168 billion ($2.8 billion) of the proceeds of Philippines sustainability bonds have been allocated to flood-control projects, according to Bloomberg calculations based on government reports. That’s roughly 39% of all proceeds.

Over $7 billion of sustainable bonds have been issued by the Philippines government since 2022 and sold in US dollar, euro and Japanese yen capital markets. Investors with environmental, social and governance mandates are now more likely to scrutinize any future Philippine sales, said Justine Leigh-Bell, co-chief executive officer at the Anthropocene Fixed Income Institute, a nonprofit that looks at how debt markets can help mitigate climate change.

Sustainable bonds are coveted by ESG investors because their proceeds typically get allocated toward projects that are supposed to do good. At the same time, climate-vulnerable nations like the Philippines are an attractive prospect for sustainable investors keen for their capital to be used in a way that generates environmental benefits
Neuberger Berman’s EMD Corporate — Social and Environmental Transition Fund holds one of the Philippine bonds sold in 2023, according to filings. The asset manager has had “relatively constructive discussions” with the Philippines in the past on financial controls and has observed signs of progress, the fund’s investment team said in an emailed response to questions.

“To some extent, those improvements have led to the latest allegations being revealed,” Neuberger said in the statement. While the fund is “monitoring the allegations closely, especially as they relate to spending on sustainable bonds,” the investment team also views “the developments as a necessary step to improving the tackling of corruption and rule of law more sustainably.”

The Southeast Asia region needs roughly $20 billion of adaptation finance a year and receives only about $2.5 billion, Climate Policy Initiative said in a September report.

“Investing in emerging markets presents challenges,” Mirova’s Gordillo-Buitrago said, citing the need for enhanced due diligence and active monitoring. “It also represents a significant opportunity for generating climate and social impact.”

Funding allocation reports were subject to an assessment by DNV AS, a Norway-based risk management company that provides external reviews of sustainable bonds. That work relied on information supplied by the Philippines government, and was intended to verify that the stated use of proceeds was aligned with relevant principles, the company said.

“DNV’s assessment is not a full financial audit and it does not follow up and verify individual expenditures associated with the bond,” it said.

There are no suggestions that DNV, investors in the bonds, or the bankers who sold the debt on behalf of the Philippines, were aware of any corruption allegations prior to the sales. — Bloomberg