Inter-American Investment Corporation. Member of the Inter-American Development Bank Group

Transcription

1 Business in Green Inter-American Investment Corporation Member of the Inter-American Development Bank Group

2 THE REAL BOTTOM LINE Environmental Risk Management for Financial In order to build and maintain profitable portfolios, financial institutions evaluate the credit risk of loan applicants. But many institutions overlook environmental and social risk as a component of credit risk. In doing so they endanger their own loan portfolio performance. Environmental and Social Risks for Financial Institutions Institutions The business activities of a financial institution s customers entail some inherent potential to cause damage to people and the environment. Governments can hold businesses financially and legally liable for noncompliance with environmental regulations and for making good on the damage they do. The financial institutions that provide these businesses with funding can also be exposed to financial and other environmentally derived liabilities, such as paying to clean up polluted property acquired upon executing loan security. More and more financial institutions are realizing that taking environmental risk into account makes good business sense. For example, major financial institutions around the worldincluding several in Latin America have adopted the Equator Principles. These principles are financial industry guidelines for assessing and managing environmental and social risk in project financing.

3 Rewards for Environmentally Responsible Financial Institutions Managing social and environmental risk to ensure that clients deal with pollution, health, safety, and product quality and liability issues not only avoids fines and other sanctions: it is also profitable. It reduces reserves for nonperforming loans, improves earnings and balance sheets, and increases the value of shareholder equity. A profitable new market is emerging, too. Financial institutions throughout Latin America are creating a market niche for themselves by establishing environmental or sustainable development credit lines and guarantee programs. The demand for such financing tools is expected to grow substantially in the near future. The Real Bottom Line Pollution, waste, and their associated risks are just resources (inputs) that are used inefficiently or handled incorrectly. Companies that operate cleanly and efficiently can be more competitive and profitable. Good client performance makes for good financial institution portfolio performance and improves the financial institution s bottom line. And financial institutions that proactively manage for environmental risk enhance their image in the financial sector and are more likely to attract funding on the international market.

4 How Financial Institutions Can Manage Environmental Risk A financial institution seeking to mitigate specific environmental risks identified during risk appraisal can include in its loan documents specific environmental covenants with conditions of disbursement or other requirements for the client. During the life of the loan, regular monitoring and reporting by financial institution staff can provide early warning of any environmental risk issues. Financial institutions that have successfully developed and implemented such policies and procedures have said that client resistance, perceived competitive disadvantage, lack of demonstrated value, and inability of staff to implement such procedures are among the major barriers they encountered. The Inter-American Investment Corporation can help its partner financial institutions overcome these barriers by assisting them in: developing and implementing environmental risk management policies and procedures understanding how managing environmental and social risks can enhance their own portfolios communicating to their clients the business case for improving operating efficiency and environmental performance and thereby becoming more competitive in their domestic markets and globally building their capacity through the IIC s Environmental Management Course for the Financial Sector

5 I came here thinking this seminar would be mostly theoretical or focused on regulations that banks have to follow in different countries, but I was pleasantly surprised. These two days actually changed the way I perceive social, community, and environmental issues. Beyond just being a question of regulations that companies and banks have to follow, these sustainable development programs actually provide many great opportunities to do good business and ensure the growth of our own institutions, giving us a competitive advantage in the long term. Roberto Cardoza BANORTE, MÉXICO

6 The IIC would like to thank the Netherlands Inter-American Investment Corporation Member of the Inter-American Development Bank Group For information on developing an environmental risk management system or on the IIC s environmental management courses for the financial sector, see under Sustainable Finance or contact IIC Environment Unit Attention: Angela Miller Inter-American Investment Corporation 1350 New York Avenue, N.W. Washington, DC United States of America Telephone: (202) Fax: (202) iicmail@iadb.org INTER-AMERICAN INVESTMENT CORPORATION Member of the Inter-American Development Bank Group Ministry of Development Cooperation for the funding provided through the Netherlands-IDB Partnership Program in Environment p paper with soy ink Printed on recycled