Environmental and social (E&S) risks related to a client’s business can translate into direct monetary losses for a Financial Institution (FI). FIs thus have not only an ethical but also an economic incentive to fully understand their clients’ E&S performance.
Environmental and social risks related to the financial engagement of a FI can include:
- Direct operational risks leading to potential financial losses;
- Reduced profitability due to higher costs;
- Substantial clean-up costs;
- Delayed construction and completion of projects;
- Penalties / sanctions levied by local authorities;
- Market loss due to boycott of clients;
- Financing risks (lower willingness of financiers to borrow/fund);
- Reputational risks for both the borrower and potentially the financing FI, such as negative headlines or even NGO campaigns.
The number of cases in which FIs have either lost money or reputation due to improper E&S performance of their clients is rising sharply and will certainly continue to rise (e.g. driven by social media communication).
It seems that, in the past, FIs needed to experience such problems at least once before E&S risks begun to be perceived as real business risks that must be identified and mitigated like other business risks. At the same time, E&S opportunities usually remain unexploited.
IK’s experience clearly shows that a proper E&S management will help banks to get a more comprehensive understanding of their clients and related risks, which are usually not visible when focussing only on the balance sheet. Against this background, the Sri Lankan Sustainable Finance Initiative (SL-SBI) has been created in 2015, with the aim to
- jointly agree upon minimal standards or principles for integrating environmental and social considerations into operations (Phase 1)
- jointly agree upon minimal standards or principles for integrating environmental and social considerations into operations (Phase 1) • to implement these standards among the signatory banks (Phase 2)
Under the umbrella of the Sri Lankan Bankers Association (SLBA) Phase 1 had been successfully completed on November 5, 2015, when Chief Executive Officers (CEOs) from 18 Banks operating in Sri Lanka have placed their signatures to a document containing the “11 Sustainable Banking Principles” for Sri Lanka. The principles had been developed in a joint coordination process, facilitated by IK.
Following this event not only some of the signatory banks have started to implement the Principles in one way or the other, also the Central Bank of Sri Lanka has now actively taken up the issue of Sustainable Finance and organized a first Sustainable Finance Workshop in February 2017. Under the auspices of President Maithripala Sirisena this workshop aimed at building a consensus among the key stakeholders on the right approach and explicitly acknowledged the SLBA-SBI and the development of the 11 principles as very commendable sector initiative.
It now seemed more than timely that SLBA provides further assistance to Sri Lankan banks in systematically developing and implementing strategies on how to put the 11 Principles into practice.
The second phase of the Sri Lankan Sustainable Banking Initiative hence will focus on providing all the necessary “input” for this endeavour in terms of guidance documents, trainings, coachings, E-learning and case studies. Phase two started with a kick-off workshop in Colombo (August 15). Invitees for this full day event included CEOs of all 32 SLBA member banks and their representatives, members of the Central Bank of Sri Lanka, Heads of NGOs concerned with developing sustainable financing principles, the Ministry of Sustainable Development and Wildlife and the Central Environmental Authority, among others. The second phase will last 18 months.
Phase two of the SL-SBI is financed by
- DEG – DEUTSCHE INVESTITIONS- UND ENTWICKLUNGSGESELLSCHAFT MBH (DEG) of Germany,
- NEDERLANDSE FINANCIERINGS-MAATSCHAPPIJ VOOR, ONTWIKKELINGSLANDEN N.V. (FMO) of the Netherlands,
- OESTERREICHISCHE ENTWICKLUNGSBANK AG(OeEB) of Austria and
- SOCIETE DE PROMOTION ET PARTICIPATION POUR LA COOPERATION ECONOMIQUE(Proparco) of France.
In an international tender, IK – again – has been selected to provide for all the necessary services.
Benefits for participating banks are:
- Getting all the necessary “ingredients” to implement the signed Principles
- Getting access to a tailor made E-Learning and E-coaching platform
- Benefitting from joint activities (trainings, case studies, capacity building)
- Proactively participating in shaping Central Banks approach and expectations
- Benefitting from a “levelled playing field”
- Being involved in the latest discussion on relevant issues
- Improving overall risk management
- Better understand the business case of proper E&S management
- Learn about arguments to convince customers
- Learn from other banks and benchmark against them
- And last but not least: contributing to sustainable development in beautiful Sri Lanka