New Bottom Line Volume 4.2 – Banking on Green: The Financial Industry and the Environment

January 24, 1995

What’s banking got to do with environment? According to a new United Nations study, more and more each year.

In the past, bankers concern about environmental issues largely focused on risk: specifically, on potential liability associated with possible toxic waste legacy of properties for which they provide debt financing. Environmental audits to identify potential environmental liabilities have become part of the loan underwriting process in many countries.

But banks are starting moving beyond this purely defensive posture. In 1992, 23 of the world’s leading commercial banks (representing US$1.5 thousand billion in combined assets, 50 million customers and more than 500,000 employees) signed a statement endorsing “… the integration of environmental considerations into internal banking operations and business decisions in a manner which enhances sustainable development”.

Three years later, a worldwide survey of commercial and investment banks, sponsored by the United Nations Environment Programme and Salomon Inc of New York, found that 70 percent of the respondents believe that environmental issues have a material impact on their business. But the steps they’ve taken still only scratch the surface.

Over 80% of the 90 respondents to the UNEP survey perform some degree of environmental risk management on the debt side of their business. However, environmental issues presently appear to play little role when it comes to equity financing. Also, compared to the day-to-day management of risk associated with a specific transaction, environmental criteria are less likely to be included in formulating an overall lending and investment strategy.

Liability is still the single greatest issue currently facing respondents. Bankers understand that litigants will go after the “deep pockets” of the bank, as well as owners or occupants of toxic properties, in the event of any problems. Yet, the survey reports, “while much environmental due diligence is performed prior to committing funds to a transaction, once the funds are committed little monitoring of the environmental risk associated with a company’s activities occurs.

Some banks take environmental banking a bit further. Bank of America, for example, has made considerable effort to try to lend to the emerging environmental industry, according to Vice President Candace Skarlatos. “But we’re finding it hard to get our hands around it,” she observes. “Is an equipment company that makes some environmental equipment part of the environmental industry? It just considers itself an equipment company.”

In addition, Skarlatos notes, Bank of America is exploring the hypothesis that environmental quality can be a useful indicator of management quality. B of A trains its credit officers to be aware of the environmental standards in their customers’ industries, and to take environmental performance into account in making lending decisions. “We want customers who are good environmental citizens within their industries,” Skarlatos says. “Those that are not may be a bad credit risk.”

All of UNEP’s respondents, regardless of their current perspective, geographic base, or economic stage of development, believed environmental issues will receive more attention and become increasingly integrated with core business activities over the next 15 years.

In particular, financial institutions will be more likely to look for transactional opportunities with environmentally-related businesses.

The UNEP report, conducted by the Environment and Finance Research Enterprise, offered several suggestions for the banking industry:

  • expand environmental initiatives, especially as they relate to core banking activities.
  • extend environmental practices to developing countries and transitional economies.
  • explore more seriously the revenue side of the equation rather than focus primarily on risk management.
  • broaden focus to address environmental issues associated with equity financing.
  • support creation of “global” environmental guidelines/regulations, to simplify the approach to cross-border transactions
  • develop more sophisticated, empirically-based risk management tools.
  • gather more information on the industry’s requirements in the areas of risk management, credit analysis, training and modeling.
  • exchange information globally on environmentally focused banking policies and practices.

Banks–and insurance companies–can, it seems, carry a rare long term perspective in a world where management is all too often focused on the next quarterly report, and the future be damned (or discounted). Last fall the insurance industry joined with Greenpeace–strange bedfellows if ever there were–to look at the possible impacts of global warming, and at their common interests in preventing it. Could some of these most conservative of institutions actually help lead the way to economies that are both financially productive and environmentally sustainable?

[The UNEP report is available from Terry Collins, UN Environment Programme, Regional Office for North America, DC2-0803 Two United Nations Plaza, New York, N.Y. 10017 Tel: (212) 963-8098; fax: (212) 963-7341; e-mail: [email protected].]

(c) 1995 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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