(XIMB) Sustainability - Banking Industry

1. SDCS - REPORT
A Report on the Sustainability Practices
used in Global and Indian Banking
Industry
By
GROUP :- 4
Gitika Narang – UM15142
Gaurav Updahyay – UM15143
Indranil Roy – UM15144
Ishan Agrawal – UM15145
Jnandarshan Naik – UM15146

2. 1
Introduction
Sustainability which used to be found around the fringes in corporate decision making, has slowly
emerged to be a big strategic question and which may even lead to question of survival for some
companies. Skimming through the market, now at 2016, paints an image that is very evident of the
future course of sustainability, may that be Automobile sector changing courses given the Diesel ban
or the BS VI norms, or that be Real Estate, where rigorous EIA (Environmental Impact Assessment),
has stalled many projects and lead many companies to perish and file for Bankruptcy.
However, centre to all these is “Banking Industry”. This sits at the heart of economy, and promotes
credit growth and hence promotes or demotes investments. Banks are the ones that channelize the
money every company needs and hence, the objective of the report.
BANKING SECTOR: Centre to the economy and Hence the Planet
At the beginning of the 21st century, the biggest banks in the industrial world have become complex
financial organizations that offer a wide variety of services to international markets and control billions
of dollars in cash and assets. Supported by the latest technology, banks are working to identify new
business niches, to develop customized services, to implement innovative strategies and to capture
new market opportunities. Although, the banking industry does not operate in the same manner all
over the world, most bankers think about corporate clients in terms of the following:
 Commercial banking - banking that covers services such as cash management (money
transfers, payroll services, bank reconcilement), credit services (asset-based financing, lines
of credits, commercial loans or commercial real estate loans), deposit services (checking or
savings account services) and foreign exchange;
 Investment banking - banking that covers an array of services from asset securitization,
coverage of mergers, acquisitions and corporate restructuring to securities underwriting,
equity private placements and placements of debt securities with institutional investors.
Furthermore, banks are also in the industrialized world and are entering into investments,
underwriting of securities, portfolio management and the insurance businesses.
Taken together, these changes have made banks an even more important entity in the global business
community. Thus, Banks are in a position that can not only adopt sustainable practices and policies
but can also force other corporates to do the same. Also, a portion of the risk worn by the banks
includes their client’s Environmental Performance, as these parameters have now profound effect on
company’s Market Capitalisation. Infact in 1995, research by United Nations Environment Program
and Salomon Inc. of New York found that 70% of respondents in a group of 90 commercial and
investment banks from four different continents believed environmental issues had a material impact
on their business.
KEY DRIVERS
Lender's liability: - It is associated with the financial risks banks face when granting or extending loans.
Banks and other lenders rely on financial statements of companies when deciding whether to grant
or extend credit. They need to be fully and accurately informed about decommissioning liabilities in
order to avoid unacceptably high financial risks. Under current reporting requirements, potential
environmental liabilities can easily remain undiscovered unless a lender develops its own procedure

3. 2
to assess the environmental risks. Therefore, some banks can end up spending the money on clean-
ups of sites contaminated through their clients' activities.
Borrower's financial obligation: - Borrower’s obligation to clean up contaminated sites might impair
his or her ability to repay a loan. The contamination might also reduce the value of the collateral.
Prudent lenders are following the environmental trends and changes in regulatory framework to
assess the possible implications of these changes on their clients' overall financial position.
Environmental Concerns: - The last few decades have been marked by numerous changes in the
regulatory framework relating to environmental protection. Recent scientific discoveries of
environmental and health risks associated with pollution have contributed to an increase in public
demand for environmental quality. These growing concerns have contributed to a major shift in public
perception of corporate roles in society. Influenced by these trends, some banks have begun looking
closely into their own environmental and social performance. In many cases this effort has resulted in
adoption of energy and resource efficiency programs within the institutions themselves.
Business Opportunities: - The traditional approach of the banking sector to sustainability is often
regarded as reactive and defensive. However, several international banks have recently adopted
innovative, proactive strategies to capture the opportunities associated with sustainability. They have
developed new products such as ethical funds or loans specifically designed for environmental
businesses to capture new market opportunities associated with sustainability.
Global Standards of Banking Sustainability
It should be noted that the implementation of sustainable financial sector regulations is a fast-evolving
area of study, hence the list continues to change by the day.
TRENDS: - Recently, the Governor of the Bank of
England, Mark Carney, asked the financial sector
to examine their financial risks rising from
stranded assets in the oil and coal sector. That call
followed a request by the Bank of England to
analyse climate change-related risks for the
insurance sector in particular, with regard to their
risk profile, and was a response to the findings of
the Intergovernmental Panel on Climate Change
(IPCC) that stated only a small part of the
remaining fossil fuel reserves can be burned in
order to mitigate climate change (Field et al.
2014). This is a rare example of central banks’ and
other financial regulators’ intervention in
assessing financial risks caused by environmental
or sustainability issues. Generally, banks were not
forthcoming on the integration of environmental
and social (E&S) risk considerations into their
business and their relationship with clients. To a
certain degree, because of the events of the last
decade, especially the global financial economic
crisis in 2007-2008, the need to integrate
sustainability practices into the financial sector’s
internal processes has become increasingly
salient, as has the recognition that the financial sector’s business relationships are exposed to E&S

4. 3
risks. However, the combined forces have led to an emphasis on increased regulation of the banking
and financial sector by state and international actors, and an emphasis on recuperation of trust by
banks” (Stephens and Skinner 2013, 175-76). Therefore, a recent United Nations Environment
Programme (UNEP) inquiry1 has asked for a solution for the “tragedy of the horizon” (Zadek and
Robins 2015, IV) by addressing and overcoming the short-termism of the financial sector and taking
into account a longer-term sustainability view.
INITIATIVES TOWARDS E&S: - A number of voluntary initiatives focusing on the financial sector and
the environment, such as the United Nations Principles for Responsible Investing or the Equator
Principles, have evolved. These codes of conduct have become increasingly relevant for analysing the
risks inherent in the lending process through E&S responsibility of organizations or projects.
Therefore, it is a challenge to “ensure global long-term financial stability and economic development,
the banking sector needs to significantly change its attitudes and actions to promote more responsible
and sustainable business practices.”
This sentiment for a sustainable financial sector was recently echoed at the 2015 World Economic
Forum and by the UNEP inquiry for a sustainable financial sector. The integration of sustainability
issues into financial regulations is already happening in developing and emerging countries but not in
industrialized countries, even though industrialized countries were more strongly connected with
both the origins and the effects of the financial crisis. Emerging markets are taking the lead in
regulating sustainable banking practices, focusing on the impact of the financial sector on sustainable
development.
Leading the Game are Emerging Economies!! :- The implementation of financial sustainability
regulations leads to another question: why are the emerging economies taking the lead in the
development of this process? In addressing this, it should be noted that the establishment of
environmental and sustainable development practices started as voluntary efforts among individual
banks, and sometimes a combination of two or more banks, to form standards, codes or development
strategies for internal processes to help introduce, strengthen and integrate sustainability issues and
processes within their business functions and activities. However, as discussed earlier, this was not
popular in the emerging economies, mainly because of two reasons:-
“Awareness and Capacity”, It is argued that countries vary in their ability to formulate and
enforce environmental policies. They assert that developed countries are generally induced
to comply with international environmental treaty obligations through features in treaties and
by the potential of adverse publicity. This may not be the same for developing countries, as
the conditionalities are often different since many of these countries do not have respective
regulations in place or are not able to enforce them adequately. However, it is suggested that
the influencing factors are more than just a propensity to comply with policies. They argue
that in the absence of clear environmental standards for different industries, the financial
sector could play a central role in supporting high-sustainability performance and in penalizing
low performance of their clients.
A financial regulatory approach- Emerging Economies
It is useful for establishing sustainable banking practices in emerging markets, not only because it
creates a level playing field for all players, but it also helps collaboration and capacity development;
the lack of both has been a hindering factor in enabling banks in these countries to adopt systems that
effectively manage E&S risks and opportunities.
This is partly due to a lack of information, human capacity, knowledge dearth and sometimes existing
business climates and regulations. The need to bridge the gap between the current state of the
financial sector and a more sustainable one has led to the support and influence of international
multilateral organizations and development finance institutions in the establishment and integration
of sustainability in the emerging markets, which is a key factor for the development of this process in
developing countries.

5. 4
 ERM Guidelines: - The Bangladesh E&S guideline for banks is called ERM Guidelines. The policy
was formulated and launched in 2011 by the Bangladesh Bank, the country’s central bank,
with the support of its local banks and other international and local stakeholders. The ERM
guideline is mandatory for Bangladeshi banks. The guideline also mandates banks to train their
staff and raise their awareness on E&S issues, formulate their own E&S risk management
framework, introduce sector-specific policies and start reporting on E&S issues. The policy
includes the classification of investments into high-, medium- and low-risk categories and
division into sector-specific aspects to complement the general due-diligence guidelines. It
also focuses on strengthening the banks’ ability to evaluate environmental risks as part of
lending and investment activities. The guidelines were established as a minimum standard on
what banks and other financial institutions should be having in terms of ERM. The main goals
are to protect the banks’ financing from the risks of a deteriorating environment and ensure
sustainable banking practices (Bangladesh Bank 2011). In addition, it aims to ensure a level
playing field is maintained in the financial sector in Bangladesh. The policy was also clear that
banks and other financial institutions can go beyond the guidelines.
 Green Protocols: - It is popularly known as Protocol Verde, were developed for public and
private banks in Brazil. It is a set of voluntary guidelines developed by the Brazilian banking
association, Federação Brasileira de Bancos (FEBRABAN), in alliance with the country’s
Ministry of Environment and public banks. The Protocol Verde was first released in 2008 when
guidelines were issued for public banks while private banks signed the protocol in 2009
(FEBRABAN 2012).
Among other objectives, the protocol aims to improve cooperation between financial
institutions on sustainable development in Brazil. Commitments made under the protocol
include the provision of financial credit lines and programs: to promote the population’s
quality of life and sustainable use of the environment; to consider the impacts and
environmental costs in managing assets and projects; to promote conscious consumption of
natural resources and materials derived from internal processes; to inform, sensitize and
continuously engage interested associates into policy and sustainable practice;
 SELP(Socio Environmental Liability Policy):- This resolution, known as Resolution
No. 4,327, decrees financial institutions authorized to operate by the BCB to draft
and execute a Socio-Environmental Liability Policy (SELP). The goal is to establish
an integrated view of economic, social and environmental issues in financial
institutions and to establish an environmental and social policy to support a
sustainable development in Brazil. SELP includes systems, routines and
procedures for classifying, evaluating, monitoring, mitigating and controlling the
socio-environmental risk of banks’ activities and operations. Under this policy,
financial institutions will also have to conduct a preliminary evaluation of the
potential socio-environmental impacts of new types of products and services.
 Green Finance Programme :-China started a green finance program that introduced guidelines
and regulations for integrating environmental issues into financial decision making (Bai, Faure
and Liu 2013) that has achieved international recognition (Zadek and Robins 2015). 2015). In
contrast to earlier programs such as the Comprehensive Environmental Response,
Compensation and Liability Act in the United States and in environmental regulations in
Europe, the Chinese initiative focuses on banks and other lenders directly. One of the
programs is the green credit policy, started in 2006 and overseen by three agencies, the
Ministry of Environmental Protection (MEP), the People’s Bank of China (PBoC) and the China
Banking Regulatory Commission (CBRC).

6. 5
Part of the program is that banks should restrict loans to heavily polluting industries and offer
different interest rates depending on the environmental performance of the lenders’ sector.
The program allows for loans already provided to be withdrawn if an environmental accident
or instances of non-compliance occur.
The goal of the policy is to ensure that Chinese banks direct loans away from highly polluting
and high energy-consuming enterprises and projects and toward enterprises favouring energy
efficiency and emission-reduction projects. As a final step, the Green Credit Guidelines
Statistical System was implemented in 2014, requiring Chinese banking institutions to report
loan balances in 12 green sectors based on international sustainability standards, including
sustainable forestry, sustainable agriculture and overseas lending.
 Protocolo Verde: - Colombia also introduced a Green Protocol (Protocolo Verde), which is
similar to the Brazilian Green Protocol. The Colombian Protocol Verde is a set of voluntary
guidelines developed by the Colombian banking association Asobancaria. The association is
the representative body of the Colombian financial sector and its membership consists of
domestic and foreign commercial public and private banks and other financial corporations.
The Central Bank of Colombia holds an honorary membership of the association.
The protocol provides a voluntary framework for sustainable finance in Colombia and it was
developed and adopted by Colombia’s major commercial banks in 2012. The signing of this
voluntary agreement between the Colombian government and the financial sector was aimed
at generating environmental benefits for Colombian society. Similar to the Brazilian Protocol,
it includes different strategies and guidelines for banks to offer credit lines and investments
that will contribute to quality of life and sustainable use of renewable natural resources. The
protocol also considers the impact and environmental costs in asset management, risk
analysis and project financing. It aims to connect efforts of the Colombian government with
regard to sustainable development with business practices of the financial sector in particular
with regard to the development of products and services for financing activities and projects
with social and environmental benefits. In addition, the Colombian financial sector plans to
develop ways to offer attractive financing for projects in fields such as renewable energy, eco-
tourism and carbon finance
 Road Map to Sustainability: - The Financial Services Authority of Indonesia, otherwise called
Otoritas Jasa Keuangan (OJK), is the Indonesian government agency that regulates and
supervises the country’s financial services sector. In 2014, OJK unveiled a new regulation,
which stipulated the medium- and long-term road map for the country’s financial sector with
regards to sustainable finance until the end of 2014.
“The development orientation to increase durability and competitiveness is based on the
premise that sustainable finance is a challenge and a new opportunity that Financial Services
Institutions can benefit from to grow and develop more stably. Furthermore, to achieve this
through systematic stages, OJK in cooperation with relevant institutions have developed a
Sustainable Finance Roadmap. This roadmap sets forth the end goal of sustainable finance in
Indonesia to be achieved in the medium term (2015–2019) and long term (2015–2024) by the
financial services industry under the supervision of OJK and determines and prepares the
benchmark for improvements in sustainable finance.”
The policy, the Roadmap for Sustainable Finance in Indonesia 2015–2019, sets forth a detailed
work plan for banking, capital market and non-banking sectors with the end goal of
sustainable finance in Indonesia (OJK 2014). According to the Indonesian road map policy
document as mentioned above. The end goal of sustainable finance is split into medium- and

7. 6
long-term targets. Medium-term targets centre on the basic regulatory framework and
reporting system. Long-term goals focus on integrated risk management, corporate
governance, bank rating and an integrated sustainable finance information system (OJK 2014)
Comparative Analysis of Sustainable Policies with India
In India, The Private Banks are as much involved in the green banking approach as the Public Sector
Banks. All the banks are making efforts to make banking paperless. This has been fully supported by
technology in terms of electronic fund transfers, ATMs, internet and mobile banking. Banks are in
search of alternative energy sources for running facilities like ATM’s etc. The adoption of Green
Banking not only enhances the image of the bank, but also protects the environment and makes the
overall growth sustainable.
Some multinational banks and financial institutions incorporate sustainability in their functions by
supporting clean technologies and embedding the concept in their core business processes — risk
management and decision making. They also implement environmental conservation and betterment
of community initiatives within their operations. Most often, a separate foundation or organization is
instituted in India under the broad corporate structure of an entity, which is then entrusted with this
responsibility.
The kinds of activities these foundations support relate to education and health initiatives for
underprivileged groups, partnering with and supporting a social cause agent such as an NGO or a
charity; having employee engagement drives, in which employees donate a portion of their incomes,
volunteer their time and share their knowledge for various community improvement causes.
Sustainability reports underscore the commitment made by an institution to sustainability, which
helps to attract investments from new avenues such as socially responsible investors (SRIs), who only
invest in projects that are conscious of the environments and the hazards it faces. Reporting would
also showcase a financial institution’s adherence to voluntary global standards such as the Equator
Principles1, the Principles of Responsible Investment2 and Wolfsburg’s Principles.
Furthermore, disclosure of sustainability performance can help in ranking institutions, based on global
indices such as the Dow Jones Sustainability Index (DJSI), which tracks sustainability-driven companies
worldwide on their financial performance.
One of the most widely used frameworks for reporting on sustainability is the Global Reporting
Initiative’s G3 Guidelines. Nearly 7500 reports have used this framework to report on sustainability
worldwide and more than 100 GRI reports have been published by Indian companies so far. These
guidelines also include a sector supplement, which specially focuses on the financial services sector.
Currently, there are no regulations that mandate sustainability reporting. However, steps are being
initiated to set up standards that will enable India Inc. to become socially and environmentally
responsible. A parliamentary panel has sought a policy, which makes it mandatory for banks, major
PSUs and companies in the public and private sectors to invest 50% of their Corporate Social
Responsibility (CSR) funds in afforestation initiatives. The Institute of Chartered Accountants of India
— Accounting Research Foundation (ICAI ARF) Committee is working on a new set of rules on CSR and
the Confederation of Indian Industry (CII) is developing a green rating system for Indian companies.
The pressure to adopt sustainability has further intensified with the launch of Sustainable
Development Funds and Indices in India such as CRISIL, S&P ESG Index3.

8. 7
Conclusion
The global scenario as is pushed into a world where sustainability is not just an option but a need to
do, the emerging markets have taken the lead. The lead has come from the regulatory restrictions and
policies they have put on the banking industry of their country. And it could be understood that the
lead has come from the fact that emerging economies are hand tied to make reforms in other industry
or sectors of their economy, thus promoting the issue has taken the prime course in them which they
do it through the Banking Sector. India is not left behind in these developments. Rather, Green credit
growth, and Investments and Sustainability reporting and CSR has been shaping the Indian Terrain. It
is looked as a Business opportunity were corporates find a Branding opportunity in India.
The countries covered in the report are US, UK, Brazil, Mongolia, Indonesia, Nigeria, China, Bangladesh
and India. It was hugely noted in the readings that Global recession of 2008-2011 has made a dent in
the war Banking sector used to operate and could force E&S measures into the risk measures of the
industry and hence the strategy.
References:
1. http://www.ft.com/cms/s/0/189f21d8-7737-11e4-a082-00144feabdc0.html
2. https://wwf.fi/mediabank/7413.pdf
3. http://unepinquiry.org/wp-
content/uploads/2016/02/The_Equator_Principles_Do_They_Make_Banks_More_Su
stainable.pdf
4. https://www.cigionline.org/sites/default/files/cigi_paper_no.65_4.pdf
5. https://www.bb.org.bd/mediaroom/circulars/fepd/oct272015fepd18e.pdf
6. http://www.migalhas.com.br/arquivo_artigo/art20130429-03.pdf
7. http://webiva-downton.s3.amazonaws.com/877/0c/0/7222/2/emerging-
sustainability-frameworks-BNDES.pdf