Recently, we saw a lot of newspaper coverage about fires in garments factories, pavilions crashing down in International Trade Fair, indiscriminate land grabbing and filling of water bodies along Buriganga, Turag and other rivers, discharge of toxic dyes into rice fields, burning of logs in brick kilns, dumping of industrial waste, lack of safety in ship breaking yards -- the list is quite long. There has been a lot of discussion about who should be responsible -- owners, government or public pressure.
Industrial pollution and how it can be stopped has long been debated worldwide. Every single industry, small or big, polluting or otherwise has some links with Financial Institutions (FI). FIs provide wide range of services to the industries, starting from working capital, heavy investments, trade services, deposit facilities, insurance to advisory services in many cases. Since FIs hold the money without which no business can progress, then do they have a responsibility of ensuring that their money is not being used to destroy the environment of a country?
I feel that FIs are extremely strategically placed in ensuring that businesses operate in an environmentally and socially compliant way. One might argue that saving the Buriganga cannot be the responsibility of FIs. I agree, but FIs surely have the right to safeguard their own investments, their reputation and their public commitment to do things right. I am not talking about Corporate Social Responsibility (CSR) -- though CSR is important. A bank can set up an eye camp or schools, or conduct tree planting campaigns. I am not talking about the Footprint initiative (reducing energy, water use in own offices, introducing solar powered ATM machines). These are all excellent efforts but I am talking about hard core business, I am talking about sustainable finance whereby, FIs can actually safeguard their profits by managing environmental and social (E&S) risks in their day- to-day operations. Sustainable finance can be defined as the provision of financial services (lending, insurance, advisory) in ways that promote, or do not harm, economic prosperity, the ecology and community well-being.
Sustainable finance does not mean saving the environment just for the sake of saving it. Sustainable finance means good business for FIs.
Why should FIs think about environment?
FIs should care about the environment and the society for the following reason:
- Litigation, shut down leading to increase in Non Performing Loan (NPL). For example, a loan to an RMG factory without considering compliance issues can lead to order loss, financial crunch and ultimately loss of the FI;
- Decrease in the value of collateral and additional cost of cleaning up. Land contaminated say by toxic waste, acid, dye will never fetch a premium price in the market;
- Reputational risk and damage to brand promise. In many countries FIs are held directly responsible for their client's environmentally harmful activities;
- There are pressures from investors, government and NGO, Media for FIs to be more responsible in their financing.
- International Commitments: Equator Principle, Climate Principles are commitments made by FIs, which prompts them to be responsible financiers.
Challenges faced by the FIs
Though there are compelling reasons for FIs to be more conscious about E&S risks, they face a lot of challenges.
- Perceptual barrier: Bankers at times feel E&S issues are not important. Investment is safe as long as financial risks are managed. Some sceptics feel climate change is a myth and media propaganda;
- Institutional barrier: NPL due to E&S reasons is not captured in the FI's database. There is a misalignment between the frontline sales staff's target and E&S requirements. When the person knows that his bonus is linked directly to the target, he will try to reach his target at any cost, at times ignoring vital compliance related shortcomings;
- Policy and regulatory barrier: In some countries the policies are not clear-cut, laws have not been enacted and even if there are laws, implementation is slow;
- Skill, knowledge, information barriers: Managing E&S risks and understanding climate change and its financial intricacies is a very new topic for FIs, thus there is lack of understanding, training and severe lack of internal processes and tools to ensure robust E&S risk management framework.
Current scenario and way forward
Given the challenges faced by the FIs and considering the contemporary nature of the topic sustainable finance the FIs have come a long way. What started as mere environmental reporting in the past decade has now evolved into sustainable finance. FIs are taking a comprehensive approach which includes mitigating their E&S risks in transactions, reducing their own ecological footprint, CSR and at the same time financing green projects like solar, biomass, energy efficiency etc. Bangladesh Bank played a crucial role in introducing the concept of sustainable finance in partnership with different development agencies in Bangladesh. It has developed an Environmental and Social Risk Management guideline for FIs, which is currently being rolled out. Some multinational banks follow international standards in managing E&S risks. Local banks have developed innovative products like green credit card and green loan.
However, the procedures for managing E&S risks require a lot of improvement, starting from setting standards specific to Bangladesh, to developing internal risk identification and mitigation procedures, monitoring progress, developing internal resources to ultimately public reporting. FIs are into the business of taking calculated risk, why leave out E&S risk which is going to become more and more important and the cost of ignoring it will be significantly high in the coming years, specially for Bangladesh, which is highly vulnerable to climate change. FIs need to intensify efforts in making sustainable finance a reality for Bangladesh.
The writer is a Sustainable Energy Finance Specialist.