Introduction Sustainable development can best be achieved by allowing markets to work within an appropriate framework of cost efficient regulations and economic instruments. One of the majoreconomic agents influencing overall industrial activity and economic growth is the financial institutions such as banking sector. In a globalised economy, the industries and firms are vulnerable to stringent environmental policies, severe law suits o r consumer boycotts. Since the banks provide funds to industries and firms, they can come cross severe credit and liability risks under such environmental policies. Further the quality of assets and rate of return in the long run may also be affected by the environmental policy as every credit extension and investment caries the risk of non-payment andreduction of value (in case of direct investment) due to environmental liabilities. Therefore, it isof importance to the banking sector to follow certain environmental evaluation of the projectsbefore financing. As banking sector is one of the major sources of financing investment for commercial projects which is one of the most important economic activities for economic growth. Therefore, banking sector can play a crucial role in promoting environmentally sustainable and socially responsible investment (SRI). Banks may not be the polluters themselves but they will probably have a banking relationship with some companies/investment projects that are polluters or could be in future. Banking sector is generally considered as environmental friendly in terms of emissions and pollutions. Internal environmental impact of the banking sector such as use of energy, paper and water are relatively low and clean. Environmental impact of banks is not physically related to their banking activities but with the customer¶s activities. Therefore, environmental impact ofbank¶s external activity is huge though difficult to estimate. Moreover, environment management in the banking business is like risk management. It increases the enterprise value and lowers loss ratio as higher quality loan po rtfoli o results in high er earnings. Thus, encouragingenvironmentally responsible investments and prudent lending should be one oftheresponsibilities of the banking sector. Further, those industries which have already become greenand those, which are making serious attempts to grow green, should be accorded priority tolending by the banks. The banks should go green and play a pro-active role to take
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environmental and ecological aspects as part of their lending principle, which would force
industries and other categories of borrowers to direct themselves towards environment
management, usage of appropriate technologies and management systems.
This method of finance is called as ³Green Banking´, an effort by thebanks to make the
industries grow green and in the process restore the natural environment. Thisconcept of ³Green
Banking´ will be mutually beneficial to the banks, industries and theeconomy. Not only ³Green
Banking´ will ensure the greening of the industries but it will alsofacilitate in improving the
asset quality of the banks in future.
As the climate change and global warming have now become buzzwords in the global political
and social arena. Environmental protection and sustainable ecological balance have emerged as
significant of this 21st century, with an increasing number of green technologies finding their
way into various functional areas including banking.
Banks and financial institutions are embracing environment protection with every passing day, in
some cases with a missionary zeal to protect mother earth. This is done both as a part of their
corporate social responsibility and as a drive towards social and ethically responsible banking.
They are gradually coming to realize that there is a need for a shift from the´ profit, profit and
profit´ motive to ³planet, people and profit´ orientation, for suitable development in the long
run. As socially responsible corporate citizens (SRCCs), Indian banks have major role and
responsibility in supplementing governmental efforts towards sustainable reduction in carbon
emission with the growth in the green movements and emergence of a new generation of
environmental activists.
Green Banking
Although banks are considered environmental friendly and do not impact the environment
greatly through their own ³internal´ operations in terms of emissions and pollutions. The³external´ impact on the environment through their customer¶s activities is substantial. Due to its
dominant role as a financial intermediary, the banking sector as a major influence over industrial
activity and economic growth of the country. The banking sector is also major source of
financing for industrial projects such as steel, paper, cement, chemicals, power, fertilizers, and
textiles etc which cause maximum carbon emission. Therefore, the banking sector can play an
intermediary role between economic development and environmental protection, for promoting
environmentally sustainable and socially responsible investment. Banking of this kind can be
termed as green banking.
In a broader perspective, green banking refers to the banking business conducted in such areas an
in such a manner that helps the overall reduction of external carbon emission and internal carbon
foot print. To aid the reduction of external carbon emissions, banks should finance green
technology and pollution reducing projects.
Although, banking is never considered a polluting industry, the present scale of banking
operations have considerably increased the carbon footprint of the banks due to their massive use
of energy (e.g. lighting, air-conditioning, electrical equipments, IT, etc) high paper wastage, lack
of green building, etc. therefore, banks should adopt technology, processes and products which
result in substantial reduction of their carbon footprint as well as develop a sustainable business.
Importance of green banking
Green banking is very important in mitigating the following risks involving the banking sector:
I. Credit risk
Traditionally, banks are not concerned about environmental degradation as they are moreinterested in short-term gains. Due to climate change and global warming, there have been direct
as well as indirect costs to banks also. It has been observed that due to global warming, there
have been extreme weather conditions like severe droughts, heavy rainfall, intensive heat waves,
devastating cyclones, chilling snowfall,etc, which severely damage both the financial as well as
physical assets of banks. Extreme weather conditions also affect economic assets financed by
banks, which may lead to a high incidence of credit default.
Credit risk can also arise indirectly when banks lend to companies whose businesses areadversely affected due to changes in environmental regulation. The polluting industries face
resistance and are often forced to close down or face massive boycotts by their customers.
To manage environmental risk, the banks have to designproper environmental management
systems to evaluate the risks involved in the investmentprojects. The risks can be internalized by
introducing differential interest rates and othertechniques. Moreover, bank can withdraw itself
from financing high-risk projects.
The secondcomponent of green banking entails creating financial products and services that
supportcommercial development with environmental benefits. These includes investment in
renewableenergy projects, biodiversity conservation, energy efficiency, investment in cleaner
productionprocess and technologies, bonds and mutual funds meant for environmental
investments etc.
Thus, the banking and financial institutions should prepare an environmental risk and liability
guidelines on development of protective policies and reporting for each project they finance or
invest (Jeucken, 2001). They can also have an environmental assessment requirement for the
projects seeking finance. Banks also can issue Environmental hazards management procedures
for the each project and follow through8. International financial institutions like International
Financial Corporation (IFC), Japan Bank for International Cooperation (JBIC) have incorporated
environmental management into their business operation. All project proposals are classified in
terms of its potential environmental impact taking into account factors such as the sector and
scale of the project, the substance, proposed project site, the degree and uncertainty of its
potential environmental impact. Often, the World Bank¶s loans and grants are associated
withcertain level of commitment of the beneficiary countries to adopt environmental protection
measures.
The perception towards complying with environmentally norms and standards ischanging over
time. Adhering to environmental norms and standards were considered costly and as a bottleneck
to development. If we will consider the economic benefits of these in terms of health care,
productivity and insurance then the benefit is much higher than the cost9. A study confirms thatonly air pollution causes the loss of 200 million working days and the resultinglosses in
productivity and medical expenses costs around 14 billion pound to the European Union (Stavros
projects are those projects that contribute to credible and sustained reduction in GHG emissions.
Indian banks can involve themselves in carbon credit business, wherein they can provide all the
services in the area of CDMs and carbon credits including services of identification and funding
of CDM projects, advisory services for registration of CDM projects and commercialization of
CERs under different structures to meet the requirements of its customers, acting as an
intermediary for buying CERs on behalf of end-users or carbon funds, financing against CERs
and CERs receivables, and other related banking services. As India has huge potential for carbon
credit business, Indian banks can set up dedicated carbon credit cells to capture a major share of
this carbon credit business.
y Green Banking Financial Products
Indian banks should develop innovative green banking financial products which can directly or
indirectly help in the reduction of carbon emissions. These banks can introduce a µGreen Fund¶
to provide climate conscious customers the option of investing in environmental friendly
projects. Banks can also introduce green bank loans with financial concessions for environmental
friendly products and projects.
Besides introducing specific green banking products, banks can incorporate an Environmental
Impact Assessment (EIA) in their project appraisal while financing any project to measure the
nature and magnitude of environmental impact as well as suggest environmental risk mitigation
measures. Banks can also conduct environmental audits of the financed projects. Banks need to
redesign their credit products to assist SMEs to adopt quality and conform to environmental
standards. Banks should also include green guidelines in their credit policies to raise the green
loan portfolio.
y Green Mortgages
Banks such as Citigroup Inc., Bank of America, and JP Morgan Chase &Company are just a fewof the mortgage lenders offering special discounts on mortgages used to build or update
buildings and homes to be more green. One of the reasons for the push for green mortgages is
that green building and rebuilding tends to incorporate more energy-efficient materials and
There are two types of green mortgages: the Energy Improvement Mortgage ± it¶s like a second
mortgage that is to be used to upgrade a home or building to energy efficient by installing energy
saving items such as solar panels and improved insulation - and the Energy Efficient Mortgages
for the construction of new energy efficient homes and buildings.
There are many states getting in on the green mortgage by offering subsidized green mortgages
so that more home-owners and business owners can ³green-up´ their buildings. In addition to
helping save the environment by using less energy, these mortgages offer many advantages to
consumers by reducing monies spent on high utility bills and on high costs of obtaining a
mortgage. The Residential Energy Services Network reported on a recent study showing that the
market value of a home increases $20 for every $1 decrease in energy costs.
y Carbon Footprint Reduction
Carbon foot-print is a measure of the impact of our activities on the environment. It relates to
the amount of GHG we are producing in day-to-day business while burning fossil fuels for
electricity, heating, transportation, etc. Banks can reduce their carbon footprints by adopting the
following measures:
Paper-less Banking
As banks have computerized their branches, there is ample scope for doing paperless or less-
paper banking. Mostly PSBs use huge quantities of paper for office correspondence, audit
reporting, recording public transactions,etc. These banks can switch over to electronic
correspondence and reporting. Banks should encourage their customers also to switch over to
electronic transactions and popularize e-statements.
Energy Consciousness
Developing energy- consciousness, adopting effective office time management and automationsolutions and using compact fluorescent lighting (CFL) can help banks save energy consumption
considerably. Banks can conduct energy audits in all their offices for effective energy
management. They can also switch over to renewable energy (solar, wind, etc.) to manage their
PSBs can become fuel efficient organization by providing common transport for group of
officials posted at one office.
Green Buildings
The Indian banking industry uses more than one lakh premises for their offices and residential
houses throughout the country. These banks should develop and use green buildings for their
office and employee accommodation.
These measures will not only help banks reduce their carbon footprint but also save the
operational costs considerably.
Social Responsibility Services
As part of the green banking strategies, Indian banks can initiate various social responsibility
services such as tree plantation camps, maintenance of parks, pollution check-up camps, etc.
International Initiatives
The financial sector¶s growing adherence to environmental management system isattributed to
the direct and indirect pressures from international and local Non GovernmentalOrganisations(NGOs), multilateral agencies and in some cases the market through consumers. Inthe early
1990s, the United Nations Environment Programme (UNEP) launched what is nowknown as the
UNEP Finance Initiative (UNEPFI). Some 200 financial institutions around theglobe are
signatories of this initiative statement to promote sustainable development within theframework
of market mechanisms toward common environmental goals10.
The objective is tointegrate the environmental and social dimension to the financial performance
and riskassociated with it in the financial sector. As the commitment of this UNEPFI statementgoes,sustainable development is regarded basic to the sound business management. It advocates
for aprecautionary approach towards environmental management and suggests
integratingenvironmental considerations into the regular business operations, asset management,
and otherbusiness decisions of the banks11. IFC¶s environmental unit was established in 1991
forreviewing each project for environmental assessment. Similarly, the US Export-Import
commercial banks adopting these voluntary set of principles. This equator principle was
subsequentlyupdated and the new revised sets of principles are launched in July 2006. The
coverage of projects being financed are expanded in this revised set of principles by lowering the
finance threshold from $50 million to $10 million. Presently 46 financial institutions from 16
countries with business operation in more than 100 countries have embraced this equator
principle. So this principle has become a common standard of project finance that incorporated
environmental and social issues in project finance.
The activities of the equator banks (banks adopting equator principles) are beingreviewed by
NGOs worldwide and are being published whenever it is realized that they are not committed to
Equator Principle. IFC along with the Financial Times has initiated µSustainable Banking
Award¶ since 2006. More than 104 financial institutions out of 151 entries from 51 countries
have made it to the final lists of award in 2007. The number of banks applying was up
by more than 100 per cent compared to the previous year's 48 banks from 28 countries. All the
international initiatives towards integrating environmental concerns into business operation of
banks are voluntary in nature and are meant to promote a common good of a better ecosystem.
Voluntary commitment has its own shortcoming in a competitive market. Unless the market for
green money will increase, the lenders will always have an incentive to procrastinate their social
commitment and prioritize the commercial interest in the short run. So demand for green money
is a precondition of green banking if it will be voluntary. A Government legislation that makes
banks accountable for the misdeeds of their clients will help promote green banking.
Green banking in India
India is on a higher growth trajectory for last one and half decade and the industrial sector plays
the most important role in India¶s growth story. However, Indian industry faces the challenges of controlling environmental impact of their business i.e. reducing pollution and emission of their
clients. Though government has been trying to address the issue by framing environmental
legislations and encouraging industry to follow environmental technologies andpractices, they
would not be enough given the poor track records of enforcement, publicawareness and inability
to derive competitive advantage by producing eco-friendly products.
The banks requires the company to obtain a NOC (No Objection Certificate) or ³Control to
Establish´ from the respective State Pollution Control Board before the enterprise takes up
implementation of the project. This is stipulated as a pre-condition before sanctioning credit.
Thus green banking can be efficiently implemented through the use of technology. A bank can
make improvements in operations by replacing the daily courier service with scans and
electronic delivery. Employees can be sent paychecks and reimbursement checks electronically
to save paper. Implementation of the online banking system can also lead to an increase in
customer convenience, reduction in costs incurred by the banks and improvements in banking
performance.
Initiatives
For banks, only the colour of money was green-not any longer. Increasingly, banks are
consciously lending to projects that are green(in the way they treat the environment), opening
branches that are energy-efficient and environment-friendly and using recycled paper for printing
cheque books.(Eco-Friendly: The Economic Times-April 12,2007).
The following are the banks with their initiatives taken:
IndusInd Bank launches solar-powered ATMs
IndusInd Bank inaugurated Mumbai¶s first solar-poweredATM as part of its Green Office
Project campaign µHum aurHariyali¶. It also unveiled a µGreen Office Manual - A Guide
toSustainable Practices¶, prepared in association with the Centrefor Environmental Research and
Education (CERE). IndusInd¶snew Solar ATM replaces the use of conventional energy for
eighthours per day with eco-friendly and renewable solar energy.
The energy saved will be 1980 kW hrs every year and will be accompanied by a simultaneous
reduction in CO2 emissionsby 1942 kgs. The uniqueness of this solar ATM is the ability tostoreand transmit power on demand (in case of power failure)or need (time basis). In terms of costs,
the savings will besubstantial, approximately Rs. 20,000 per year in case of acommercial user
with grid power supply. And in areas witherratic power supply the solar will replace diesel
generatorsand translate into savings as high as Rs. 40,200 every year.