Green Your Lending Process

Resource & Trainers’ Guidebook, Environmental Risk Scan

Banks are in the business of taking risks. Consequently, managing these risks is the bank’s first and foremost task. This resource book, however, focuses on environmental risks, among other risks that a bank is confronted with in its lending decisions. The book also provides a methodology that is contextual to a development finance institution (DFI). But banks and other financial institutions may find this book useful to them as well.

With the issue of the environment hugging today’s headlines and the concomitant pressure coming from almost all sectors to do something on environmental concerns, there is now, more than ever, no argument whether DFIs and their borrower-clients should be responsible for the environmental consequences of their actions. The degree of responsibility to take may however vary, and in fact, may be minimal in some cases. But the DFI should start, one way or the other, to fulfill basic responsibilities of mitigating environmental risks in its transactions and go further over time with greater impetus on overall environmental governance in its organization.

Each DFI has its own guiding principles and approach to environmental risk management (ERM). But two things seem to emerge though, at least based on the experience of the Project Team during its conduct of a series of workshops in the Asia-Pacific region: (a) that ERM is a function of prevailing national environmental regulations, and (b) that it is the responsibility of the lending officer to see to it that the DFI and the client comply with the minimum requirement of these regulations.

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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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