Business

Why development banks in Asia are going green

The Philippines-based Association of Development Financing Institutions in Asia and the Pacific is at the forefront of sustainable development in the region. Here, the organisation’s secretariat explains the role that banks can play in helping the planet.

For many years, financial institutions played a quiet role in development decisions. What prompted them to start thinking green? For one, numerous environmental organisations around the globe began to put pressure on institutions that bankroll destructive projects. But in recent years, banks have started to recognize the real costs of the consequences of ignoring environmentalists’ warnings. 

“We are now being confronted with global climate change issues,” observed ambassador Jesus P. Tambunting, chairman of Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) and Planters Development Bank of the Philippines. “Some financial institutions that previously found nothing wrong with underwriting millions of dollars for certain sectors like mining, illegal logging and other commercial operations that rapidly deplete the ozone layer, denude forests, deplete water resources, or pollute the rivers, have now started paying attention. Along with governments, civil society and business organizations, banks and financial institutions realized that protecting the environment should also be their business.”

Apart from lending, financial institutions have also started looking within their organisations to manage the environmental impact of their operations. Financial institutions have started tracking their resource use efficiency. They monitor water, paper, and energy consumption as well as carbon dioxide emissions.  

Financial institutions have discovered that it makes good business sense to embrace the concept of “green banking,” and to take into account the environmental impact of their operations. For example, in December 2004, HSBC, one of the world’s biggest banks, became the first major bank in the world to publicly commit to going “carbon neutral.” It achieved this goal one year later, through a combination of reducing its direct emissions, buying green electricity, and offsetting its remaining emissions through the purchase of carbon offset credits. These credits have been purchased from wind and biogas energy production sites in India, Australia, Germany and New Zealand. According to the 2004 HSBC corporate social responsibility (CSR) report, while the British bank’s direct contribution to climate change is relatively small, they believe it is important to start making a difference close to home.

HSBC’s greening effort makes economic sense for the bank, too. In its Hong Kong office alone, HSBC expects to save US$140,000 annually through energy-saving initiatives. It introduced a technology that cut its energy demand by 1.07 million kilowatt hours and carbon dioxide emissions by 1,050 tonnes every year. It has also been able to reduce by a third its water and energy consumption in its operations in China and India.

In the early 1990s, The United Nations Environment Program started a Finance Initiative to catalyze the banking industry’s awareness of environmental issues. This global partnership between UNEP and the financial sector has grown to include over 160 institutions, including banks, insurers and fund managers. Companies work with UNEP to understand the impacts of environmental and social considerations on financial performance. In 2003, western financial institutions got together independently to introduce the Equator Principles. These voluntary guidelines were developed to address the environmental and social issues that arise in financing projects. They direct banks to deny loans for projects if the borrower is unable or unwilling to comply with the Principles, or the bank’s own internal environmental and social policies, whichever are stronger. Through efforts such as these, the greening of many banks, particularly in the west, has slowly but steadily gained ground.

For financial institutions in the Asia-Pacific region, the concept of green banking is still new. The Development Bank of the Philippines (DBP), an ADFIAP member, is an early leader in green banking in Asia, having started implementing an environmental management system in 1997. In 2004, DBP attained ISO 14001 certification after a thorough audit of its operational controls, policies, programs, monitoring and measurement systems, and corrective and preventive actions in areas such as waste management and building maintenance. By reducing use of water, electricity, and paper, DBP has also seen significant financial savings.

In addition, DBP has a green lending program which supports companies developing and implementing cleaner technologies. And it conducts environmental due diligence to evaluate the environmental impacts and benefits of all loan applicants. DPB requires its clients to conduct environmental impact assessments, and considers risks such as community concerns over the impacts of a project. Through these efforts, DBP has improved its ability to avoid unnecessary risks.

But are other banks in Asia following suit? In 2005, ADFIAP conducted a survey of its members to determine the state of sustainability in the finance practices of development financing institutions in the Asia-Pacific region. Survey results show that ADFIAP members agree sustainability in the finance sector will grow in the next five years. About 69% of the members still look at sustainability issues as a business risk, while about 63% regard its relevance as a business opportunity. As a follow-through to this initiative, ADFIAP commissioned two research studies – one on internal environmental management systems (EMS) by Germany’s UNEP/Wuppertal Institute Collaborating Center on Sustainable Consumption and Production (CSCP) and another on environmental risk scanning by UK’s University of Leeds and University of St. Andrews.

The CSCP and UK studies form part of ADFIAP’s Greening of DFIsProject, funded by the European Commission under its Asia Pro-Eco Programme. 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 for ADFIAP members and other financial institutions.

The CSCP study focused on the idea that to be a truly green bank, development banks have to be green from within. It created a step-by-step programme to integrate environmental practices within a bank’s operational and organisational structures. The programme also created a tool to benchmark the development bank's environmental management policies and practices against best-in-industry standards.

The University of Leeds’ and University of St. Andrews’ study looked at bank lending decisions and came up with an environmental risk scanning tool that banks can use in loan appraisal. “Environmental Risk Scan: a tool for integrating environmental aspects in bank lending decisions” is a guidebook and CD-Rom (available from www.egs-asia.com). The guidebook familiarises the reader with environmental risks in bank lending, what banks do about environmental risks and how they analyse these risks. It provides a six-step screening and analysis framework for evaluating environmental risk.

ADFIAP has also been deeply involved in conducting hands-on workshops about EMS and green lending among its member institutions and others. Through regional and national seminar-workshops conducted in Beijing, Manila, Hanoi, Kuala Lumpur, Mumbai and Colombo, over 200 senior executives and middle managers of development banks and other participating financial institutions have gained deeper insight into their environmental management practices and other environmental issues of their lending operations. Sixteen development banks across the region have instituted and/or enhanced their environmental governance standards through ADFIAP’s work. As the risks and rewards of EMS and green lending become more recognized, more development finance institutions are expected to join the movement to become green.

Homepage image by Reto Fetz via Flickr