Research/Case Studies

Background Research on Environmental Aspects in Bank Lending Decisions

How do banks consider environmental aspects in lending decisions? This is the question that this part of the report will aim to address. At first sight, environmental risk in bank lending decisions sounds like a rather clear topic area. It is not. Different people understand environmental risk differently and even banks have different ideas of what constitutes an environmental risk. As a result, banks also treat environmental risks in a different way.

Banks playa crucial role in the context of environmental risk. On one hand, they (co-) determine how we will produce in the future and thus which environmental risks we will be exposed to in the future. On the other hand, environmental risks can have a negative impact on economic capital and it is their function to make sure that economic capital is shielded from the detrimental effect environmental risks can have. From that point of view, environmental risks are quite simply just another business risk for banks.

The way risks are managed is at the heart of a bank’s operations and of crucial importance for the success of a bank. In public, a bank’s risk management is usually not discussed in great detail. This also holds true for the way banks manage environmental risks. To some degree this might be due to the fact that banks see the way they manage environmental risks as part of their competitive advantage and it is this competitive advantage, which they do not want to lose.

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Background Research on Internal Environmental Performance Monitoring in European Financial Instit

This report is prepared in the scope of the project’ entitled “Environmental Governance Standards for Development Financing Institutions in Asia”. The project aims at initiating a EU-Asia Environmental Governance Partnership Initiative, which leads to the development and initial application of Environmental Governance Standards (EGS) for the development financing institutions (DFls). The partners are the Association ofDevelopment Financing Institutions in Asia and the k $ c (ADFIAP), the European partner institutions, Wuppertal lnstitute of Climate, Environment, Energy and Leeds lnstitute for Environmental Science and Management.

One of the task of the Wuppertal lnstitute in the project is to carry out a background research on the Internal Environmental Performance Monitoring Program (EPM), which is one pillar of the EGS. The EPM comprises of environmental management policies, tools and instruments, which enables the well management of internal functions and operations within DFls. On the other hand, the SRI at the University of Leeds is conducting the background research for the second pillar, the Environmental Rating Standards for Loan Appraisal and Project Finance in Europe.

The two studies will illustrate European practices and policies in the field of environmental rating standards and performance measurement of financial institutions. The results will be transferred to ADFIAP in order to start the discussion on how to adapt and further devel.op a concept for the Asian region.

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