By The Mekong Eye
Mekong Sub-region, September 20, 2016
Citizens in the Mekong region are increasingly hearing about “sustainable banking,” mostly associated with infrastructure and energy projects. It means regional banks, slow to commit to sustainability, are increasingly considering more responsible ways of doing business.
Cambodia recently joined Thailand, Laos, Vietnam, China and 20 other emerging market economies in committing to better environmental and social risk management practices under the International Finance Corporation’s (World Bank Group) Sustainable Banking Network. And just this week, the Association of Banks in Cambodia (ABC) announced an initiative promising to work toward sustainable banking principles for Cambodia, “as ways to mitigate the damage associated with infrastructure, energy and large scale agribusiness projects.”
In countries where loans are sought to finance environmentally and socially controversial projects – particularly dams, mines and power plants – this new sustainable banking mechanism might be the harbinger of change. But here’s 11 things you need to know that can help you understand this trend.
1) The 21st Century Banking Lexicon
Melding the words sustainable or green with either finance or banking, announces that the bank has the intention to create both economic and social value through its business. It usually infers that the banks aim to reduce social and environmental risks through better assessments of projects they finance. And as the Co-directors of UNEP’s Inquiry into the Design of a Sustainable Financial Systems note, this is not just about funding environmentally friendly infrastructure or products, but as the 2007 financial crisis helped illustrate, such an approach addresses the need, “…to overcome an array of market failures – short-termism, misaligned incentives, inadequate transparency and ill-defined responsibilities – which entrench the allocation of capital towards resource and carbon intensive assets.” So as banks start to call themselves sustainable or green, the public will have to check that the actions match the lexicon.
2) Accelerating Attention
While the principles of sustainable finance date back to 16th century, with religious ethics guiding Italian banks and the emergence of credit unions in the 19th century, these ideals are now creeping into all aspects of global financial markets. UNEP’s 1992 Earth-Summit launch of its Finance Initiative, now boasts more than 200 members from public and private financial institutions addressing Environmental, Social and Governance (ESG) challenges within the financial sector. Meanwhile the Principles for Responsible Investment initiative launched in 2005 now has more than 1550 signatories from 54 countries holding US$69 trillion in assets. Among the more recent efforts include The Principles for Sustainable Insurance (2015) The Sustainable Stock Exchange Initiative (2012) and the Green Infrastructure Investment Coalition (2015).
3) Growth in the Gold Standard
The 13-year old Equator Principles (EPs), developed on the back of World Bank and IFC guidelines, has 84 financial institutions on board that are collectively responsible for 70 percent of international project finance debt in emerging markets. It’s principles for social and environmental risk assessment and reporting have been dubbed the Gold Standard. But despite ongoing revisions, some see the EPs as rather tarnished. The highly regarded Centre for International Governance Innovation outlined in an analysis two years ago,“…that without implementation efforts and enforcement, the EPs are merely window dressing and will not contribute to any change to sustainable development.” And as UNEP concluded in February, “It seems that the EPs did not really change the way environmental and societal issues in project finance are assessed or that the EPs lead to a rejection or a modification of projects with respect to environmental and societal impacts.”
4. Overcoming a Tainted Culture
Though the IFC is viewed as the world’s leading development finance institution, and a standard bearer for the future of sustainable finance, it fosters a culture that runs afoul of its social and environmental guidelines. Last year the IFC indicated that it is “above the law” and immune from legal challenges by project-affected people attempting to hold the institution accountable to its policies. In a 2014 it was reported that the IFC was again facilitating land grabbing in the Mekong Region, providing further evidence of documented problems with the institution’s lack of knowledge of how financial intermediaries deploy IFC loans. Such challenges led to the resignation of its chief executive in December of last year. However, as leading World Bank and IFC observer Bruce Rich outlines in his 2013 Book, Foreclosing the Future, IFC’s policy/practice disconnect is hardly new, so will be challenging to overcome.
5) A Soft Approach
A consistent critique of nearly all global sustainable finance initiatives is their voluntary, self-regulatory structure. This is the same approach to financial oversight that Nobel Laureate Joseph Stieglitz points out was at the heart of the 2007 financial crises. Enforcement of these sustainability guidelines is a major issue, according to researchers with the Center for International Governance Innovation, who say that voluntary approaches “mainly focus on the business case of sustainability, rather than the impact on sustainable development, and that the codes of conduct are compromises that each financial institution can agree to without changing their business to move in a more sustainable direction.” So they may be good for a bank’s image, but not always result in substantially better projects.
6) Hard Laws a Next Step
In October 2015, the Holland-based Center for Research on Multinational Corporations concluded, as has UNEP and others, that national laws and policies must emerge to pick up where these voluntary programs may be falling short. The authors, however, have many questions: “Regarding regulation, will it really manage to channel capital into less harmful kinds of real assets and channel money to the poor? Are mandatory regulations strict enough and do they ban financial sector practices that are considered particularly harmful to people or the environment? Are there unintended consequences and how harmful are they to whom? Is the challenge of effective enforcement being met given that financial actors are very resourceful and innovative when it comes to circumventing regulation?” Here in the Mekong region we may begin to get some answers as Vietnam and China are now implementing policies for banks to both promote green lending and to manage social and environmental risk. And major donor Japan started requiring greater transparency by banks in reporting on the social and environmental impacts of their business practices.
7) A Human Rights Lag
The UN Guiding Principles on Business and Human Rights is endorsed by many of the world’s major banks, yet human rights is routinely citied by NGOs as significant failing of financial institutions. Evan the World Bank and IFC have yet to provide credible leadership with regard to protecting human rights within their business practices as evidenced by the globally supported petitions delivered to them in July by 154 development, human rights, and environment groups. So it’s not surprising their private sector counterparts, too, are not performing well against policies like the United Nations guidelines. Bank of America, Royal Bank of Canada, HSBC and Sumitomo Mitsui are among many that subscribe to various sustainable banking programs, that faired poorly in Bank Track’s June 2016 report Benchmarking Banks against the UN Guiding Principles on Business and Human Rights. And overall, the industry received a poor grade, noting that there are no real champions and the majority of banks are “laggards”. Even the best banks, the report concludes, are not ensuring meaningful consultation with potentially affected people; sufficient reporting on specific human rights impacts, or establishing grievance mechanisms that meet the effectiveness criteria of the UN Guiding Principles.
8) The Climate Change Metric
Not till 2013 did the Equator Principles mention climate change as an issue. And at their January 2016 steering committee meeting, the international finance watchdog BankTrack stated, “It remains completely unclear what difference the current EP requirements for banks and project sponsors have made on the ground. … As a result there exists also no understanding at all of the effectiveness, or perhaps irrelevance of the EPs in contributing to combating climate change.” Furthermore, as the Financial Times reported in June, a recent study found that despite major banks’ participation in sustainable banking programs, they continue to deliver billions of dollars in financing for coal, oil and gas companies that are “deeply at odds” with the goals of the Paris climate change accord. World Wildlife Fund, which too is a major proponent of sustainable finance, noted in April that due to the CO2 cuts needed to meet the 1.5°C limit agreed in Paris, that there’s no room for financing new coal plants, even the “efficient” variety, and all existing plants should be decommissioned.
9) Other Money Available
While some institutions may adhere to guidelines which preclude engaging in deals that are unsustainable, other lenders remain to meet these borrowers’ needs. For example, member banks of The Thai Bankers’ Association, which too is a part of the IFC’s Sustainable Finance Network, are the main financiers of the controversial Xayaburi Dam in Laos as well as a number of other projects in the region. And while China has recently launched its own sustainable finance programs at home, it remains keen to make loans for troublesome projects abroad like Cambodia’s Lower Lower Sesan 2 Dam. The willingness of Chinese, Indian and Russian banks in particular to fund “dirty projects”, says Manuel Wörsdörfer of Goethe University Frankfurt, is a major impediment to preventing “environmental shopping” in the project finance marketplace.
10) Sustainable Semantics
Madam Bruntland’s now 29-year old dream of Sustainable Development remains an unanswered question for many top thinkers. So too are European partners in sustainable finance struggling when evaluating progress within the European Community. During a European Parliament conference on sustainable banking last November, Eurosif noted that among the many challenges: transparency, lack of legal frameworks and holistic approaches as well as green-washing were all key issues the European Community struggles with to implement Green Investment. And more fundamentally, as concluded in their recent book on sustainable banking, Olaf Weber and Blair Feltmate warn that for it to advance beyond its current “niche submarket” sustainable banking must overcome a major paradox: banks function on “financial indicators that incentivize short term investment and discount the future. Discounting, however, contradicts the concept of sustainable development, which states that we should act in a way that guarantees to meet the needs of current and future generations.”
11) Small is Beautiful
One niche within the sustainable banking niche often seen as operating more consistent with the spirt of sustainable development is microfinance. And Cambodia is among the leading micro finance markets in the World. Working more with the poor, women and the improved resilience of environmental services, this more community-based lending popularized by noble prize winner Muhammad Yunus and the Grameen Bank, has now become an industry of itself. But microfinance too is not at all immune to problems, with poor management fostering greater indebtedness, especially with increasing interest from more traditional financial institutions. Thus, there’s growing concern that the historic benefits of this effective approach could devolve into an industry merely seeking wealth for the few on the backs of the poor if the trend continues.
While there are some recent positive moves in Mekong region banking sectors, challenges remain. There are still many socially and environmentally risky infrastructure projects – particularly hydropower dams and coal plants – that find financing in the region. But efforts such as Cambodia’s commitment to sustainability principles could mean the region is turning the corner, towards a future that better supports both money-making and social good.
This article is available for republishing under Creative Commons, with credit to The Mekong Eye.