The private financial sector makes its money out of assessing risk. But how good is it at assessing environmental risk? And what role should it play in ensuring projects operate in an environmentally responsible way? ASER surveys the opinions of some leaders in environmental risk management within the financial sector (US-AEP, United Nations Environmental Programme, World Resources Institute).

In the past few years there has been a massive increase in the flow of private capital to developing countries. Net long-term private capital flows to these countries reached USD256 billion in 1997—more than six times the USD42 billion that flowed to them in 1990. The implications for developing countries in Asia struggling to achieve sustainable development are dramatic. But to those familiar with the changes made by industry in the last five years, the minimal way in which environmental issues are incorporated into the activities and decision-making processes of much of the financial sector is like stepping back in time.

With the exception of some parts of the insurance sector, the financial industry in Asia has so far not had to take a systemic approach to examining the environmental consequences of its own decisions, to report on its environmental performance, nor seek out the views of affected communities. And while there are now clear public expectations of good environmental performance by industry, the role to be played by the private financial sector in this is still being debated and defined.

However, some progress is being made, although slowly. In Thailand, for example, the state-run Bank for Agriculture and Agricultural Co-operatives (BAAC) will bring in environmental specialists next year to train bank staff, with these sessions to be backed up by in-house training for staff at all levels regarding "green lending" practices. The bank also plans to be certified to ISO 14001 within five years, a timetable designed to give it enough time to train its 13,000 employees and to start spreading the word to its clients—four million farming households.

United States-Asia Environmental Partnership

In India, the United States-Asia Environmental Partnership (US-AEP) notes that closure of some large projects on environmental grounds following public litigation has convinced the two quasi-governmental banks, the Industrial Development Bank of India and the Industrial Credit and Investment Corporation of India, of the need to watch overall negative impacts of projects with hazardous operations. Litigation is also compelling Indian financial institutions and commercial banks to anticipate environment-related default risk. In Malaysia, the Central Bank’s Institute of Banks-Bank Malaysia (IBBM), the Bank of America, and US-AEP recently teamed up to co-sponsor a training course on environmental risk management for bankers. Held in KL in July 1998, the seminar attracted more than 30 finance sector representatives, much to the delight of the Ministry of Science, Technology and Environment, which has been trying for a number of years to generate finance sector interest in environmental issues. The Malaysian Central Bank’s deputy governor, Dato Fong Weng Phak, gave the keynote address.

"Given the Asian financial crisis, a number of financial sectors and institutions are restructuring and rethinking the basic way they do business," according to Dennis Zvinakis, Manila-based regional representative of US-AEP. "Environmental risk management is not outside good solid bank management but an essential part of it. My experience in Asia is that bankers are perhaps the most sensitive group of people to the international trends and what constitutes international excellence. Increasingly they’re taking up the concept."

UNEP Financial Institutions Initiative on the Environment

There are also developments at a broader level. From Europe, NPI has launched its Global Care Asia Fund, which only invests in environmentally sound companies in Asia. Its team assesses environmental risk in potential Asian investments. At an international level, the finance industry, together with UNEP, established the UNEP Financial Institutions Initiative on the Environment in the early 1990s with the aim of raising environmental awareness within financial markets and fostering the integration of environmental and sustainability considerations in credit, investment, and operational practices. Some 112 banks - mostly from Europe and Japan - have now signed the statement of principles developed as part of that program. Outreach meetings are being held in Singapore last December. Until recently, most of the focus of the program was on corporate lending, but issues such as asset management and securities underwriting are now starting to be discussed.

But there are barriers to further progress. While the sector as a whole has a lot of leverage, individual firms within it often have very little. There is a widespread fear that if a lender’s environmental criteria are seen as being too onerous they will simply lose business to their competitors. Furthermore, the finance sector has so far been under little pressure from investors to take more account of environmental factors. Mainstream investors usually do not place a high priority on the environment, although this is likely to change. As well, many groups who advocate strong environmental performance - foundations, insurers, pension funds, public interest groups - often do not yet allocate a significant portion of their investments to environmentally responsible companies or funds. There is also something of a gap in the financial sector’s knowledge and skills base. While there is a growing body of evidence linking good environmental performance with good financial performance, this message has not yet reached many parts of the finance sector. And while financial institutions make their living out of assessing and pricing risk, historically, most of the focus has been on commercial, legal and technical risks. "The financial impact of environmental risks in countries with tax enforcement is sometimes diminished or ignored, and many banks do not pay as close attention as possible to socio-political concerns," says Linda Descano, vice president of environmental affairs with Salomon Smith Barney. These concerns are also often hard to identify, she adds, and are often "pitted in emotional terms rather than in terms of financial consequences." Consequently, the level of attention financial institutions give to these issues varies greatly, "primarily because it is difficult in many situations to ascertain who is opposing what, the ‘scope’ of the campaign (locals, international, etc.) and the nature of the concerns. However, progress is being made in this regard as more information is being made available on the Internet and through media coverage."

World Resources Institute

Frances Seymour of the U.S.-based World Resources Institute (WRI) acknowledges that the task of assessing whether a project has what she calls "a social license to operate" is more complex than ticking a box showing a customer has the necessary environmental permits. "Nobody is saying that it is easy, but it is something that is necessary." According to Seymour, one of the keys to determining whether this ‘social license’ exists lies in the impact assessment process. Transparency and consultation must be crucial elements in this process, she told ASER, and the assessment must be "more than just a technical exercise."