SUSTAINABLE BANKING IS THE CRYING NEED OF TIME

SYED ALAMDAR ALI
Hailey College of Banking & Finance Lahore
June 02 - 08, 2008

The banking industry has experienced a series of significant transformations in the last two or three decades. Among the most important of them is the change in the type of organizations that dominate the landscape. Since eighties, banks have increased the scope and scale of their activities, and several banks have become very large institutions with a presence in multiple regions of the country. After this long period of transformations, now it is a good time to stop and look back at the changes that have occurred, changes which give rise amongst others to sustainable development in banking. What does "sustainable banking" mean? Bankers must understand that sustainable development involves hard choices. It is about balancing economic interests with communities" social aspirations and minimizing environmental impacts; it is about trade-offs and political objectives; there are no absolutes; and it is a challenge to maintain transparency. Sustainable banking incorporates social, environmental, and corporate-governance objectives into a bank's operations, all based on the concept of sustainable development. But many confuse matters of ethics, corporate social responsibility and the environment with sustainable development. They are related, but for business as a whole, how they are linked differs according to sectors, regulatory regimes, the global dimension of their business, and in how their own policies are implemented. The integration of sustainability into the banking sector has taken two key directions:

* The pursuit of environmental and social responsibility in a bank's operations through environmental initiatives (such as recycling programs or improvements in energy efficiency) and socially responsible initiatives (such as support for cultural events, improved human resource practices and charitable donations);

* The integration of sustainability into a bank's core businesses through the integration of environmental and social considerations into product design, mission policy and strategies. Examples include the integration of environmental criteria into lending and investment strategy, and the development of new products that provide environmental businesses with easier access to capital.

The second of these categories has the potential to influence business on a larger scale. By integrating sustainability into a bank's business strategy and decision-making processes, institutions can support environmentally or socially responsible projects, innovative technologies and sustainable enterprises.

In 1987, the World Commission on Environment and Development declared that development was sustainable when it "meets the needs of the present without compromising the ability of future generations to meet their own needs". It is not common to hear financial institutions emphasize their philanthropic contributions in the name of environment. However, financial sector increasingly recognizes that it affects social and environmental quality, whether through its own operations, or through those of the companies it finances.

First adopted in 2003 and based on IFC standards, these voluntary environmental and social-screening criteria provided a framework by which banks can measure the sustainability of the projects they finance. The standards apply to development projects with a capital cost of at least $50 million in all industry sectors. The principles contained in that framework are called Equator Principles. When institutions adopt the equator principles, they use a common set of terms to measure a project's environmental and social risk. Borrowers must meet applicable safeguard policies set forth by the IFC and World Bank. For high- and medium-risk projects, borrowers must also sign covenants requiring compliance with all required environmental and social-management plans.

While banks play a crucial role in promoting sustainable development, the industry got off to a late start in acknowledging sustainability as an item on its agenda. In 1990s, however, it started to play a more active role in sustainable development. The major shift happened when bankers realized poor environmental performance on the part of their clients represented a threat to their business success.

The interdependency between a bank's profitability and the environmental record of its clients has influenced the business strategy of both banks and their corporate clients. This has happened in several ways. In particular, to decrease their exposure to environmental liability and to improve risk management, bankers started to look more closely at the environmental performance of their clients. They developed mechanisms to assess the environmental risk exposure of their customers, and to protect themselves from potential losses. This growing concern about clients' environmental performance, manifested in lending and investments decisions, began to act as an additional driver of sustainability in the private sector. Companies were given one more reason to pursue environmentally and socially sound solutions.

A critical starting point is for banks to decide what sustainable development means for their business. They must understand the sustainability impacts that their business has and bring intellectual rigour and honesty to that understanding.

Organizations that are serious about sustainable development must put principles at the heart of decision-making. This includes fundamental points such as how deals are done and loans made, in searching proactively for opportunities - there are many in China and Asia and even in establishing and adhering to frameworks that deliberately preclude involvement in certain investments. Bankers need to be clear in their own minds that there are some issues to do with sustainable development that they may not be able to deal with. But their response to these issues cannot be to offload all actions to others and wash their hands of them: this is at the core of sustainable development commitments.

All this requires a bold and fundamental shift in the industry. There are clear signs that people's attitudes are shifting and will force real change.