Development banks going green

Feature: ADFIAP

For many years, financial institutions have played the role of "silent collaborators" in the war against those that wreak havoc on the environment. From their glass windows, bankers and financiers silently watched in the sidelines as their clients’ office buildings got defaced or spray-painted by environmental activists.

But environmentalists have been expanding their hit lists. From large corporate polluters and environmental rapists, green groups have now trained their sights on institutions that bankroll these projects.

These led them to the doorsteps of many financial institutions: those that found nothing wrong with underwriting millions of dollars for mining, illegal logging and other commercial operations that rapidly deplete the ozone layer, denude forests, deplete water resources, or pollute the rivers. When the green groups started knocking hard on their doors, financial institutions started paying attention. They started thinking green.

Out of the growing social pressure came the slew of commitments. Several global financial institutions - recipients of much of the criticism from green groups - got together and introduced new industry standards such as the "Equator Principles." These are a set of voluntary guidelines developed to address the environmental and social issues that arise in financing projects.

Apart from lending, financial institutions also started evaluating their investment portfolio and promoting socially responsible investing (SRI) to their clients. They also started looking from within their organizations and managing the impact of their operations. While traditionally not viewed as a polluting sector, financial institutions started behaving like manufacturing firms and tracking how efficient they use resources - from water, paper, and energy consumptions to carbon dioxide emissions when bank staff travels.

On December 2004, HSBC became the first major bank in the world to publicly commit to going "carbon neutral" by 2006. According to the HSBC CSR Report in 2004, while the British bank’s direct contribution to climate change is "relatively small, we believe it is important to start here."

Before its commitment to go carbon-neutral, HSBC’s CO2 emissions from using electricity, natural gas, fuel oil and business travel were more than 550,000 tons - equivalent to 3.3 million trees saved if these were all paper consumption. The bank has started buying "green electricity" in Australia, Brazil, the United Kingdom, and the US so it could rid of using fossil fuels.

In Asia, the Development Bank of the Philippines (DBP) started implementing an environmental management system (EMS) in 1997. In 2004, it attained ISO 14001 certification after a thorough audit of its operational controls, policies, programs, monitoring and measurement, and corrective and preventive action in the areas of waste management and building maintenance, among other things. It has since been implementing the EMS in all its operations. It has also been active in advising its clients on how best their operations can contribute to sustainable development.

Along the way, financial institutions discovered that it also makes good business sense to embrace the concept of "green banking," or taking into account the environmental impact of their operations.

For example, HSBC expects to save $140,000 annually through initiatives that enable its Asia-Pacific head office building in Hong Kong to save on energy. It introduced a technology that cut its energy demand by 1.07 million kilowatthours (kWh) and carbon dioxide emissions by 1,050 tons every year. It has also been able to reduce by a third its water and energy consumption in its operations in China and India.

The momentum of global banks is slowly but steadily gaining ground and being followed by financial institutions in the Asia-Pacific region, where the concept of green banking is still new.

In 2005, a survey was conducted to determine the state of sustainability in the finance practices of 19 development financing institutions (DFIs) in Asia-Pacific. Respondents were members of the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP), which positions itself as "the focal point of all development banks and other financial institutions engaged in financing sustainable development in Asia-Pacific." ADFIAP partnered with the United Nations Environment Programme Finance Initiative (UNEP/FI) for the study.

Survey results show that ADFIAP members agree sustainability in the finance sector will grow in the next five years. About 69 percent of the members look at sustainability issues as a business risk while about 63 percent regard its relevance as a business opportunity.

As a follow-through to this initiative, ADFIAP commissioned two research studies - one on environmental performance monitoring by Germany’s Wuppertal Institute for Climate Change, Environment and Energy (WI); and on environmental rating standards by and UK’s Sustainability Research Institute, School of Earth & Environment (SRI) at the University of Leeds.

The initiatives form part of ADFIAP’s "Greening of DFIs" project being funded by the European Union (EU) under its Asia Pro-Eco Programme with a Euro 346,446 grant. The project’s ultimate goal is to support the "greening" of the banking and finance sector in Asia-Pacific through the development and implementation of environmental governance standards (EGS) for ADFIAP member-DFIs and other participating financial institutions.

The Wuppertal study focused on the internal application of an Environmental Performance Monitoring (EPM) program within DFIs’ organizational structures. The program provides tools to benchmark DFIs’ environmental management policies and practices against best-industry standards. To be a truly green bank, DFIs have to be green from within.

As an external dimension, the University of Leeds’ study looked into the feasibility of coming up with Environmental Rating Standards (ERS) that DFIs can use for loan appraisal and project finance. The study, however, concluded that there is "lack of uniformity" of the current approaches DFIs use in environmental loan appraisals.

"Combined with a severe lack of transparency," it says it would be difficult to understand how banks can treat environmental risks using a set of ‘one-size-fits-all" environmental rating standards. On the other hand, the study provided several tools European banks currently use to address environmental risks. These include: risk-adjusted pricing, monitoring, covenants, refusal of loan, and portfolio optimization.

Both studies were presented at ADFIAP’s first working conference in Hanoi, Vietnam in March 2006 and discussed further at the second working conference in Mumbai, India last June. ADFIAP is now in the process of developing a trainer’s guidebook and a resource book that will contain the resulting measures, methods, tools and instruments on environmental governance standards for dissemination and use of its member-banks.

Through national seminar-workshops to be conducted in countries in Asia, nearly 200 senior executives and middle managers of DFIs and other participating financial institutions will get a deeper insight of their environmental management practices and other environmental issues of their lending operations.

ADFIAP is the focal point of all the development banks and other financial institutions engaged in the financing of development in the region. The Association is the largest organization of its kind in Asia and the Pacific with currently 70 member-banks from 35 countries.