PROMOTING ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT (ESRM) IN THE FINANCIAL SECTOR OF PAKISTAN

Size: px

Start display at page:

Download "PROMOTING ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT (ESRM) IN THE FINANCIAL SECTOR OF PAKISTAN"

Aubrey Greene
6 years ago
Views:

1 PROMOTING ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT (ESRM) IN THE FINANCIAL SECTOR OF PAKISTAN

2 OUTLINE The concept of ESRM Global ESRM programme Challenges faced by the bankers Why ESRM is important for clients Why ESRM is important for Banks Way forward 2

3 3 PAKISTAN SCENARIO

4 QUICK STATS Annual cost of environmental degradation in Pakistan is about 4.3 % of GDP (US $ 4.3 billion). ---SUPARCO Pakistan had needed to spend Rs82.5 billion on industrial environment management between 1997 and 2010, but actually spent only around Rs7.5 billion, leaving a deficit of Rs75 billion. If we continue polluting our ecosystem at the current rates, this deficit could climb to Rs140 billion by Express Tribune, cases registered against factory owners for not complying with the National Environmental Quality Standards (NEQS), 339 have been settled while remaining 402 cases are still under consideration of the Environmental Tribunals.---The Nation,

5 WHAT IS ENVIRONMENTAL & SOCIAL RISK MANAGEMENT (ESRM) FOR FINANCIAL INSTITUTIONS? Sustainable finance (ESRM for FIs) can be defined as the provision of financial capital and risk management products and services in ways that promote or do not harm economic prosperity, the ecology and community well-being. Sustainable Finance does not mean saving the environment just for the sake of saving it. Sustainable Finance means good business for FIs. Scope of ESRM Project Finance Corporate Finance SME

6 WHY IS SUSTAINABILITY IMPORTANT FOR CLIENTS? Compliance Cost saving Loss reduction Access to New Markets Reputational Risk Clients don t care for the Environment because of the goodness of their heart. Caring for the environment is a pure business decision. Banks should also care about sustainability for pure business reasons 6

7 Why Banks should worry about Sustainability? 7 Campaigners gave out the mock newspaper, The Daily Whale to employees outside each of the 3 banks, Standard Chartered, BNP Paribas and Credit Suisse in London.

8 This is an example what the banks should avoid--- a reactive approach once reputational harm has been done. 8

9 9

10 WHY IS SUSTAINABLE FINANCE IMPORTANT FOR BANKS? Litigation, shut down leading to increase in NPL Decrease in the value of collateral and additional cost of cleaning up. Disruption of operation Reputational risk Pressure from investors, government International Commitments: Equator Principle, Climate Principles The question is not WHY Banks should consider ESRM. The Question is HOW 10

11 E&S RISK ASSESSMENT (ESRA) FRAMEWORK POLICY ESRM Guideline PROCEDURE E&S risk Assessment Exclusion List REPORTING Annual Sustainability Review E&S Capacity Development Roles and responsibilities Training: E learning, Webinar E&S Risk Assessment Tool Risk rating Escalation Conditions/ Action Plan Monitoring E&S risk Annual review: monitor performance Managing non compliance 11

requirements Policy and regulatory Barrier Country laws not conducive Skill, knowledge,

12 CHALLENGES FACED BY RMS AND CREDIT IN E&S DUE DILIGENCE Perceptual Barrier Not important Climate Change is a myth Institutional Barrier Lack of valid data Misalignment between RMs target and E&S requirements Policy and regulatory Barrier Country laws not conducive Skill, knowledge, information barriers Lack of proper understanding of E&S issues Lack of training Lack of tools and processes 12

13 SUSTAINABILITY IS A SHARED RESPONSIBILITY - Policy - Enforcement - Tax/incentive Regulator/Government -Institutional strengthening Business -obtain social license to operate -Ensure safety, efficiency -Compliance Sustainability -Mission, vision -Policies procedures Banks -skilled workforce -Moving from only compliance to value addition to clients Media -Understand and sensitize the public - Publish case studies -Demystify technical issues 13

14 ENVIRONMENTAL & SOCIAL RISK MANAGEMENT (ESRM) FOR FIS ADVISORY SERVICES PROGRAM Objectives: Creating regulatory drivers through support for banking regulators and associations with E&S risk management guideline development Market capacity development for trainer and consultant networks to provide technical support for FIs ESMS diagnostic and implementation support to FIs Raising awareness through the Sustainable Banking Network, developing business case studies and best practices 14

15 ESMS DIAGNOSTIC AND IMPLEMENTATION SERVICES Sustainability Strategy Credit, Liability, Reputation risk management E&S Risk Management Policies Processes Implementation support People, Training, Culture 15

16 IMPLEMENTATION SUPPORT ESMS Core Module Support for Internal Audit ESMS Implementation Support ESRM Framework External Communication Capacity Development & Training ESMS Data, Ratings and KPI development 16

17 China Industrial Bank s Green Banking Journey: From Green to Gold E&S Risk Management / EP Implementation Built system, procedure and tools Created dedicated team and built capacity Actively communicated with client and multistakeholders Developed reporting system Sustainability Products First FI Green Bond (approved by authority, to be launched in 2015 ) Carbon finance Low carbon credit card First carbon assets backed lending First emission rights backed lending First IFC partner bank in China for energy-efficiency lending to support SMEs Strong contributor to overall business: Strong business results: assets grow 15 times (2003 to 2014), ROE over 20% since 2006, NPL ratio <1%, Reputation and brand value: brand value of US$1.09 billion (by Interbrand, 2012), 50% increase over 2011; won many top national and international awards Increased value to shareholders 2013 Asia Best Shareholder Return Bank Better access to international capital and cooperation (IFC, ING, Citibank, etc.) Green Finance Expansion: Green finance about 12% of total lending, highest among the Chinese banks (national average is 8%) Climate benefits: reduced 68 mn tons of CO2, saved 255 mn tons of water. The energy conserved and emission reduced is equivalent to shutting off 157 thermal power plants of 100 MW. 17

IB s 3-Stage Journey to be the Leading Green Bank in China and Asia Stage III: Fully Integrated

sign Energy Efficiency Finance (CHUEEE) with 18 IFC, Beijing 2007 Runner-up of FT Sustainable

Stage II: Adopting & Implementing Equator Principles 2008 Adopting Equator Principles, Beijing,

2009 Establishment of Sustainable Finance Center; FT Emerging Markets Sustainable Bank of the

Environmental Information Disclosure Award by 9 Chinese NGOs.

Sustainability Index & Hang Seng (Mainland and HK) Corporate Sustainability Index 2011

Best Green Finance Award by the China Banking Association;.

18 IB s 3-Stage Journey to be the Leading Green Bank in China and Asia Stage III: Fully Integrated Sustainable Finance Model Stage I: Piloting Green Lending Product 2006 First Chinese bank to sign Energy Efficiency Finance (CHUEEE) with 18 IFC, Beijing 2007 Runner-up of FT Sustainable Deal of the Year; Joining UNEP Finance Initiative. Stage II: Adopting & Implementing Equator Principles 2008 Adopting Equator Principles, Beijing, becoming the first EP bank in Asia emerging market; Launched CHUEE Ⅱ Establishment of Sustainable Finance Center; FT Emerging Markets Sustainable Bank of the Year (Asia) First Sustainability Report in China Banking sector; The Best Green Bank & Environmental Information Disclosure Award by 9 Chinese NGOs Launched the first Low-carbon Credit Card; Included in the Hang Seng (China A) Corporate Sustainability Index & Hang Seng (Mainland and HK) Corporate Sustainability Index 2011 Promoting 8+1 green financial products; Annual Most Social Responsible Institutions Award and Best Green Finance Award by the China Banking Association; Establishment of Sustainable Finance Department, sets up regional green finance business units across China 2013 Green finance clients hit 2,472, about 12 times vs. 2009; and green finance based financing balance reached US$30 billion, 13 times vs. 2009

Bank of Philippine Island (BPI): A Pioneer in Green Banking In the Philippines 1st Philippine bank to partner with IFC on Sustainable Energy Finance in 2008 1 st phase largely focused on energy

1 Million) 4 th phase included green buildings and continuous capacity building (ongoing, $130.

19 Bank of Philippine Island (BPI): A Pioneer in Green Banking In the Philippines 1st Philippine bank to partner with IFC on Sustainable Energy Finance in st phase largely focused on energy efficiency loans ($ 26.9 Million) 2 nd phase included renewable energy loans ($110.1 Million) 3 rd phase expanded to green mortgage, carbon finance and energy performance contracting ($216.1 Million) 4 th phase included green buildings and continuous capacity building (ongoing, $130.1 Million) As of December 2014, $483 Million total loan volume IFC helped generate with SEF since 2008 Over 1 Million metric tons of GHG emissions reduced Risk Sharing Facility RSF 1 signed in 2009 ($46 Million), expanded to ($114 Million) in 2012 BPI has utilized 78% of the guarantee facility as of end Winner, G20 SME Finance Challenge in 2012 BPI s entry focused on sustainable energy finance for SMEs Recognized among 345 innovations submitted from 75 countries. International recognition for its SEF program USD 1.4 Million grant for market development and capacity building E&S risk management Management system Capacity building for bank loan officers Demonstration impact for other Philippine banks Consider to join the EPs 19

20 EE INVESTMENT MATRIX FOR INDUSTRY IN PAKISTAN (SECTOR VS. TECHNOLOGY) Estimated Investment (Million PKR) Technology Textile Textile Payback Sugar Leather Paper Cement Fertilizer Other Sectors Total Spinning Process Period (Yrs) Co-generation 100,800 22,500 30, , Compressor 6,000 5, ,100 15, Heat recovery 43,300 35, ,750 98,968 - Heat transfer 4,000 15, ,950 24, Lights 2, , Meters 4,600 4, ,200 11,160 - Motors 16,000 9, ,700 33, Power Factor Process 1,350 1,200 6,250 7,900 5,220 5,500 27, Process Control 14, ,800 18, Steam system 550 4, ,450 7, VFD 4,100 1, ,700 8, Total 82,700 90, ,809 1,145 7,777 30,623 5,760 80, ,504 The overall investment potential for the Energy Efficiency ( EE ) measures identified in the industrial sectors in Pakistan is in the order of PKR 400 billion Payback times for the investments identified are generally below 5 years The opportunities are there for FIs to develop an entirely new business 20

21 Benefits for Pakistani Banks and their Clients For Clients: Cost savings Improved Productivity/Quality of Output Competitiveness Reasonable pay-back period Investments recovered from energy cost savings Reduced footprint Sustainable access to global supply chains For FIs: Expanded market through a new business line: Innovative product- First mover advantage/differentiation Sell on value to customer, not pricing Monetize existing client base- Attract quality new clients New marketing channels through vendor partnerships Improved risk profile of portfolio: Cost efficient clients = Better performing clients Energy cost savings as a part of cash-flow Positive social and environmental impacts: Enhanced brand reputation, PR opportunities 21

22 IFC S SUPPORT TO CLIMATE CHANGE MITIGATION THROUGH SEF Under Sustainable Energy Finance (SEF) product line, IFC provides financial products and/or advisory services to FIs in following areas: Energy Efficiency (EE): Investing into fixed asset to reduce energy bill of end-users through increased efficiency of energy use Renewable Energy (RE): Investing into technologies generating power or heat from renewable resources Resource Efficiency (Ref): Investing into technologies minimizing water, raw material, waste and emissions from industrial processes and maximizing product output 22

23 IFC S COMPREHENSIVE APPROACH TO OPTIMIZING SEF IMPACT Financial products tailored to the needs of diverse markets Credit lines and senior loans (medium- to long- term) Risk sharing products and partial guarantees Trade guarantees Mezzanine financing and subordinated debt Risk capital Mobilizing donor funding for concessional finance Advisory to build a profitable SEF business Market analysis and product development Enabling the FI to build a pipeline of EE/RE sub-projects Training for loan officers, credit risk managers, marketing personnel Tools and resources to add value with low transaction cost Work with contractors/energy service companies /vendors 23

24 About the Sustainable Banking Network (SBN) IFC SBN Launched in 2012 A unique, knowledge-sharing network of banking regulators and banking associations Supports a level playing field for E&S risk management by financial institutions Promotes green and inclusive lending Facilitator and Technical Advisor Supporting development and implementation of national policies/guidelines Facilitating South-South learning and cooperation Co-hosting SBN annual meetings Developing and disseminating tools and knowledge resources 24

25 Sustainable Banking Network The Network currently consists of banking regulators and banking associations from16 countries 25 25

26 Sustainable Banking Network How to become a member Interested institutions contact SBN coordinator* *contacts at the last slide IFC VP sends a formal invitation letter Heads of the interested institutions confirm their decision to join SBN

here to watch the video of the First International Green Credit Forum Click the

27 Sustainable Banking Network Events 1 st International Green Credit Forum in China 2 nd Sustainable Banking Network Meeting In Nigeria Click the picture or here to watch the video of the First International Green Credit Forum Click the picture or here to watch the video of SBN Annual Forum in Lagos, Nigeria, Mar

28 SBN Members Timeline of Initiatives Asia Bangladesh Bangladesh Bank- Environmental Risk Management (ERM) Policy China China Banking Regulatory Commission (CBRC) - Green Credit Guidelines China CBRC-M&E mechanism launched Indonesia OJK (financial regulator) -- Roadmap for Sustainable Finance in Indonesia Mongolia Mongolia Banking Association- Mongolia Sustainable Finance Principles and 4 Sector Guidelines China CBRC-Green Credit Guidelines KPIs Checklist launched Bangladesh Bangladesh Bank-ESRM Guidelines of 8 Sector Guidelines (planning) Vietnam The State Bank of Vietnam-the Directive on Promoting Green Credit and Managing Environmental and Social Risks and 10-sector checklists Nepal The Central bank- Sustainable Banking Policy (planning) Philippines The Central bank-roadmap to Banking Policy (planning) Latin America Colombia Banking Association (Asobancaria) - Green Protocol Brazil Central Bank s Guidelines of Social Responsibility Policy for FIs Peru Peru Superintendency of Banking and Insurance (SBS) -Resolution No Mexico Mexico Banking Association (ABM) - Voluntary Green Protocol (planning) Africa Nigeria Central Bank of Nigeria -Nigerian Sustainable Banking Principles & 3 Sector Guidelines Kenya The Kenya Bankers Association (KBA)-Sustainable Finance Initiative (SFI) 28 28

29 Common Success Factors Multi-stakeholder consultation and collaboration on industry-wide guidelines Mandatory or voluntary guidance tailored to country context and culture on industrywide Principles, WBG EHS Guidelines) Standards, Equator guidelines guidance Combining local E&S requirements and international good practice (e.g. IFC Performance based on Capacity Building for key stakeholders Market-based policy mechanisms; economic incentives and new business models Monitoring and supervision mechanisms 29 29

30 SBN Key Benefits For Financial Institutions Supports creation of a level playing field in line with international good practice Removes impediments and strengthens the business case for sustainable banking Supports country-level frameworks For Banking Regulators / Banking Associations Access to global trends, knowledge, practical experiences and lessons learned Support from IFC and other members when developing and implementing effective E&S risk management standards and sustainable banking guidance Platform for collaboration on a shared vision for sustainable banking For Local Markets Supports capacity building of local service providers, such as training and technical institutions, to assist FIs on E&S risk management Encourages consideration of E&S regulations in financial sector due diligence Supports national climate change and green growth agendas 30

31 IFC Advisory Services ESRM for FIs Program Regulatory and Market Drivers Regulatory & market environment Policy/regulatory support to develop E&S risk management guidance Banking Associations Awareness raising and promotion IFC ESRM Advisory Service Program Market Capacity Consultants Direct technical support for FIs through training and consultancy services Training Partners ESMS diagnostic reports FIs Capacity Individual FIs ESMS development 31

32 WAY FORWARD The ESRM Survey for the Financial sector Partnering with Key Stakeholders (SBP, PBA) ESRM Guideline Training and Capacity Building on ESRM Development of relevant tools and processes Pilot with FIs Develop M&E tool for Central Bank 32

33 CONTACTS Name Title Rong Zhang SBN Global Coordinator Atiyah Curmally ESRM AS Program Global Product Specialist Quyen Nguyen ESRM AS Program Manager Afifa Raihana Regional Specialist More resources SBN Website: IFC Sustainability Framework and Advisory Services 33

Sustainable Banking Network (SBN) Briefing (February, 2017)

Sustainable Banking Network (SBN) Briefing (February, 2017) 1. What is the Sustainable Banking Network? The Sustainable Banking Network (SBN) (www.ifc.org/sbn) is a unique, voluntary community of financial