Green Banking In India Environmental Sciences Essay

Moving to a prosperous low carbon economy can drive innovation, increase productivity and generate new well paid jobs. However, to achieve this, significant new investment will need to be found and, though government can provide the necessary incentives, it will be the private sector that will provide the bulk of this investment.

Climate change is a significant issue for India. But while the effects of climate change are increasingly a risk to the health, economy and the environment of the country, economists are also recognizing that there are financial rewards from controlling climate change and developing a low carbon economy.

Banks can provide important leadership for the required economic transformation that will provide new opportunities for financing and investment policies as well as portfolio management for the creation of a strong and successful low carbon economy.

In this report I have tried to examine how banks can be catalysts for change. Discussing how banks are providing commitment and leadership in creating a low carbon economy and also the challenges to investment.

“A carbon credit is a generalised term used for any tradable certificate or permission representing the right to emit one tonne of carbon di-oxide [CO2]”

 The goal of carbon trading is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs [Greenhouse Gases] into the atmosphere.

In simple terms carbon credits gives a monetary value to the action of polluting the atmosphere and hence reduce greenhouse emissions, thus playing a pretty important role in saving the planet.

Of late there has been a lot of discussion regarding the environment management in industrialised countries. However, because of the financial globalisation and ever increasing environmental regulations, there has been a large development in the banking sector which has been operating in developing and emerging countries and is pressed to better manage risks from environmental liabilities.

As other economic players and industries, banks also consume natural resources. However, in developing countries this type of environmental impact can potentially be high in view of the insufficient availability of clean sources of energy.

[Banco Itaú, one of the largest banks in Brazil, recycles 2,200 tons of shredded paper annually]

INTRODUCTION

CLIMATE CHANGE-BACKGROUND

1.1 CLIMATE CHANGE-THE SCIENCE

We all know that the climate change is a serious issue and which needs to be taken great care of in the near future or else we will have to face serious consequences in the future. A study conducted by “The Climate Group” with “Price WaterHouse Coopers” indicates an increase of more than 0.7 ËšC over the last century and will continue to rise. The current projections of global average temperature change are in the order of 0.2 ËšC per decade (from 1990 – 2050) or between 1.1 ËšC and 6.4ËšC within a century.

CLIMATE CHANGE-THE INTERNATIONAL POLICY RESPONSE

There have been international conferences and concerns on how to save the environment and efforts have been taken to gain consensus on how to save the environment since the early 1990’s. In 1997 UNFCCC [United Nations Framework Convention on Climate Change] introduced the Kyoto Protocol [1] India being a non-Annex 1 party to the UNFCCC is under no legal obligation to curtail its greenhouse gases [GHGs] emissions, but India has announced a voluntary plan to reduce the carbon emission intensity by 20-25% by 2020. The Indian Government is very keen and has shown great interest in finding the solution to this problem and is actively involved in

discussions that will lead to a “Post Kyoto” regime that tackles the problems.

UNFCCC also held a recent conference in at Copenhagen called the CoP [Conference of Parties], which did not deliver any legal binding commitments, but the Accord it produced had led to all the major developing nations to publish their plans on how they will cut or reduce the gas emissions over the coming decades.

Also a massive financial help was pledged, which can be counted as a success of the summit [US$ 30 Billion by the end of 2012 and a total of US$ 100 Billion by 2020] for the mitigation and help of developing countries to implement the plans for cutting down the emissions, along with the deployment of latest technology and techniques.

India is sure to receive a major part of these funds but our authorities need to ensure that the necessary framework is in place to take best advantage of them.

1.3 CLIMATE CHANGE-INDIA’s RESPONSE

India ‘s National Action Plan on climate change essentially proposes eight national missions , namely , Solar ; Enhanced Energy Efficiency ; Sustainable Habitat; Water; Sustaining the Himalayan Ecosystem ; Green India ; Sustainable Agriculture; and Strategic Knowledge for Climate Change

India holds a major position and is signatory to both UNFCCC and the Kyoto Protocol. The Clean Development Mechanism [CDM] provided by Kyoto Protocol has provided India with a significant opportunity for reducing carbon emissions at a relatively low price through renewable energy projects and energy efficient projects. The above also provides India with a wonderful opportunity of creating and trading carbon credits via (through) the help of regulated carbon emission trading schemes, in exchange of money.

The CDM also allows and helps developed countries like USA to invest in emission reduction globally where it is the cheapest. The success of CDM can be gauged by the fact that since its inception in 2001 till 2012 it would have 1.5 billion tonnes of carbon-d-ioxide equivalent emission reductions.

India along with CDM has also been working to develop a National Action Plan on Climate Change which enumerates a number of steps to simultaneously advance India’s development and climate change adaptation and mitigation objectives. Finance especially the BANKING SECTOR is a key element of the National Action Plan on Climate Change, outlined in the plan’s National Missions.

Example 1:

NATIONAL MISSION ON ENHANCED ENERGY EFFICIENCY

The proposed National Mission on Enhanced Energy Efficiency (NMEEE) has been designed to focus on the creation of mechanisms that supports financing of demand side energy management programs by capturing the financial benefits of future energy savings.

The Partial Risk Guarantee Fund has been developed with a purpose of providing commercial banks with partial coverage of risk exposure against loans made for energy efficiency projects.

India has set voluntary targets to reduce carbon emissions intensity by 20-25% by 2020. The targets are being supported by legislation that requires mandatory fuel efficiency norms for all automobile vehicles, introduces green building codes, techniques and provides an amendment to the Energy Conservation Act to make it necessary for an initial group of 714 energy intensive businesses to take part in a scheme to cap energy usage and subsequently trade energy efficiency certificates.

BANKING SECTOR RESPONSE TO CLIMATE CHANGE

We are all aware of the fact that banks play a very important role in mobilizing financial resources across the economy-in particular for providing investment money i.e. capital for large scale infrastructure and low carbon technology deployment.

As of now the climatic changes have only effected/influenced the financial decisions only on the margin i.e. to a very less extent. That too the impact is much less in India as compared to other developed or developing countries. The following are a few international examples of the same:

In all over 180 financial institutions support the United Nations Environment Program Finance Initiative (UNEP FI) which is the oldest association between UN and banking, insurance and investment worlds

There was an increase in the pace of the global clean energy investment from US$ 60 billion in 2006 to US$ 150 billion in the year 2007

Banks that have been controlling more than 80% of global project finance volume have adopted the Equator Principles[2].

2.1 BANKING RESPONSE TO CLIMATE CHANGE IN INDIA

IBA [Indian Bank Association] and TCG [The Climate Group] conducted a study know about how banks in India are responding to the climatic changes. The survey which was carried out focussed basically on following five themes:

COMMITMENT & LEADERSHIP Questioning the commitment of the bank and how is it demonstrated.

MANAGEMENT To what level does the management take interest and participate in and around the climate change issues and how is the bank tackling its own impact.

ENABLERS What are the key enablers for pushing the climate change agenda as perceived by the bank?

PERCIEVED BARRIER What are the major barriers and key inhibitors which hinder the climate change agenda as perceived by the bank.

INNOVATION AND ACTION What are the core business activities, products and services which the banks are offering to fight the climatic changing conditions.

2.2 THE SOLUTION: GREEN BANKING IN INDIA

For the last one and a half decade India is on a higher growth trajectory and the industrial sector has been playing a very important role in India’s growth. However, Indian growth has always been limited due to the challenges faced in controlling the environmental impact of their business activities i.e. reducing pollution and emissions of their clients. Though environmental legislations and laws are being framed by the government to address the issue and it also encourages the industry to follow the environmental technologies and practices, but they are not enough considering the poor track record of enforcement, public awareness and inability to derive competitive advantage by producing eco friendly products.

Just for the fact-book India is the sixth largest and the second fastest growing country in terms of producing green house gases. To add to your surprise three of India’s metropolitan capitals are amongst the world’s ten most polluted cities. The industries which contribute to making these cities most polluted majorly are: (a) Metallurgical Industries (b) Paper & Pulp (c) Pesticides/Insecticides (d) Refineries (e) Tanneries/Fertilizers (f) Sugar etc. Thus the banking operations and investment by the financial institutions should take care of these polluting industries which can be done by improving the overall environment, the quality and conservation of life, level of efficiency in using the materials and energy, quality of services and products and hence in this context, the role of banking sector, which is the major source of financing for these industries, which is used for the implementation of the eco-friendly measures.

The environmental regulations in India can be broadly classified in two broad categories:

Command & Control Regulations.

Liability Laws.

However, there is no law in India which can hold banks responsible for the checking and scrutinizing investment projects and granting/denying the financial aid to a company on the basis of environmental damage to be caused by the client.

The most important thing here is that because of the growing concern for the environment legal framework for the environmental pollution standards are being formulated in India and once the formulation is done the companies violating these rules will either have to shut down or will have to make the necessary changes in terms of investment and methodology which will require the help of banking sector, thus proving the importance of GREEN BANKING.

In the above process the above companies are sure to loose their viability and competitiveness in the international market and this will eventually affect the Indian Economy and the Banking Sector.

Thus for the future prospects and the current scenario it is very important for the banks to protect themselves from the changing of their performing assets [3] to non performing assets [4]. If the banks realize these facts then the adoption of GREEN BANKING becomes fast and easily acceptable to them.

One thing which is very obvious is that the industries that are ill equipped in preventing pollution today are the possible polluters of the future

Example 2

Non Compliance to the Mandated Environmental Standards

About a hundred and fifty SSI (Small Scale Industries) units around Agra and Delhi had been forced by the government authorities to make changes in the methodology or were made to shut down the entire units because of non compliance to the mandated environmental standards and were hence declared nonperforming assets for the banks that financed them. These rigorous steps were taken with the ultimate goal of protecting the Taj Mahal situated in Agra from the Greenhouse Gases and thus eventually losing its charm.

Apart from the list above there are a number of companies that have been closed down due to non compliance of the standards in such a scenario the banks are the only ones incurring a financial loss due to the increase in bad asset and liability. The following Table1 reflects category wise summary status of pollution control in 17 categories of industries in India where we find that the industries are increasingly complying with pollution control norms.

Refer to Table 1 in the appendix.

2.3 DISAPPOINTMENTS FACED: GREEN BANKING IN INDIA

The financial banks and institutions are running far behind the schedules as compared to the global trends. None of the Indian banks or financial institutions have adopted the equator principle [2] even for the sake of records. None of our banks are signatories to the UNEPFI [5].

The British business newspaper and Financial Times in a joint effort nominated for Sustainable Banking Awards in 2006 for leadership and innovation in integrating social, environmental and corporate governance objectives into their operations did not find a single Indian nationalized bank or major private bank in the list except Yes bank (which is a small player in Indian Banking sector) which was nominated in “Emerging Markets Sustainable Bank of the Year” category. The other nominations have been shown in Table-2.

It was very evident that there was no systematic attempt to integrate the environmental concerns into the business operations here by our nationalised banks.

Though there has been a little improvement as in the previous years as for the year 2007 ET sustainable banking award two banks namely YES Bank and ABN AMRO Bank had filed nominations. Though it’s a little improvement but it also shows the ignorance in the part of our banks about the green banking initiatives at international levels.

As we all know today the products of the countries violating the human rights or child labour laws are denied in countries like US and UK (European Markets), so it would not be surprising if the export of the domestic polluting industries get a severe jolt if they continue to neglect the degrading environment.

If such a thing happens then the major blow would be to the Indian Banking sector because most of the SSIs have sponsored by the Indian Banks and if they do not comply with the environment standards then they would be worst hit by such an act. Therefore, banks in India need to be more careful about the environment aspects of both clients and products because:

The future of exports and product markets will be going through stringent environmental rules and eco-friendly products will have a better future.

Increased demands for pollution control equipments will want more and more financial aid from the banks.

Reserve Bank of India (RBI) may also follow environmental friendly rules and regulations hence enforcing them on other banks just like the IFC [6] and Asian Development Bank [7].

Recent announcement by the government to use economic instruments for environmental control may also include banks also.

Big investment projects supported by international organizations like The World Bank and ADB [7] require EIA [8].

2.4 THE BRIGHTER SIDE: COMMITMENT AND SENIOR LEADERSHIP CHANGE IN INDIA

Number of Banks Participating in:

Carbon Disclosure Project 5

UNEP FI 2

UN Global Impact 2

Equator Principles 2

Climate Principles 1

Four Indian Banks named the challenges due to climate changes as “very important” and in the “Top Ten Priorities Critical To Success”

Seven out of the eight banks surveyed believe that commercial lending banks in India can play a leadership role in the business community in addressing the challenges of climate change.

The top management has been driving the climate change agenda in majority of the surveyed banks.

Banks that demonstrate a high level of senior support for addressing climate change also demonstrate a high level of activity around initiatives that address the issue.

All private sector and international banks involved in the climate change activities through formal partnership or relationships with external partners at a regional, national or international level.

Public sector banks have not been taking part voluntarily but have been postponing the work until the legislations have been forced upon.

Participating banks have highlighted that they have been forming partnerships with government agencies as well as industry associations to effectively discuss and act on issues.

The RBI has issued notifications on corporate social responsibility for banks with reference to the role of banks in sustainable development and non financial reporting

Six out of eight banks highlighted that the change in climate will highly affect the way they conduct their business and hence they would want to take advantage of the situation and enforce their business by being well prepared for the coming situations.

2.5 ROLE OF MANAGEMENT: GREEN BANKING IN INDIA

Policies and Programs:

Most of the banks have a formal written statement which describes the purpose and objectives of the organization’s commitment to climate change. Such statements are usually included in the annual report of the company.

Most of the banks have also been putting in place the policy of saving/reducing the footprints of the electricity consumption by implementing energy efficient systems in the offices and also by replacing the older systems.

Most of the banks have a specific policy in place to consider the environmental issues associated with energy use, purchasing, transport, recycling and waste minimization.

2.6 MANAGING CARBON EMISSION

Majority of the banks have been calculating their energy consumption and carbon footprint.

Banks are getting external audits done for their energy consumption and follow it as a norm as opposed to the exception. The findings of such audits are being used to reduce their bills of energy consumption.

All the banks have been indicating that the issue of climate change and sustainability was important to the organization.

Example 3

Union Bank of India’s Energy Efficient Measures

The union bank of India has decided to take an annual electrical energy audit. The bank has also installed solar power water heaters at the various facilities they maintain. It’s the support service department of the bank that has been identified to implement such an energy reduction program.

2.7 EXTERNAL REPORTING

All the participating banks communicate their actions on climate change as a part of their Environment or Corporate Social Responsibility Reports and statements.

Almost 5 out of the 8 banks surveyed maintained their own greenhouse gas inventory such as calculating their carbon foot printing and undertaking annual energy audits.

Seven out of the eight banks have a energy reduction or emission reduction plans on the agenda.

Example 4

IDBI Bank

IDBI bank is a member of National Action Plan on Climate Change (NAPCC). The bank is also an authorised signatory to the Carbon Disclosure Project (CDP). CDP aims to create a relationship between shareholders and corporations regarding the shareholder value and commercial operations because of the climatic changes.

2.8 INTERNAL COMMUNICATION AND EMPLOYEE ENGAGEMENT

All the participating banks claimed that the issues relating the climatic changes were communicating internally to the concerned employees.

Five out of the eight bank also informed that they have also initiated employee engagement programs so as to tackle the situations arising out of climatic change.

Majority of the banks have also put up information regarding the climatic change on their intranet sites.

Many banks have also been training their employees on specific technical fronts such as, sustainability screens on lending portfolios, enhanced investment criteria for low carbon projects.

Banks have also been implementing car pools for their employees, hence encouraging not only clerical staff but also higher management to share transport so as to save the environment.

Example 5

HSBC Global Research: Climate Change

The HSBC Climate Change Centre of Excellence which had been established in 2007 has been ever since investigating the likely risks and opportunities of climate change for the financial markets and HSBC’s business unit. About 30 reports were produced by the Centre in 2009, which also included a comprehensive analysis of fiscal stimulus for climate related investments.

These reports have helped over 3000 customers to identify the opportunity and plan for potential climate change risks.

2.9 ENABLERS FOR CLIMATE CHANGE ACTIVITIES

Internal Factors:

The top internal factors which have an effect on the climate change activities can be broadly classified as:

Economic Benefits and Profitability

Board influence

Marketing benefits

Refer to Table 3

External Factors:

The top external factors can be specified as:

Environment benefits

Competitive advantage/new business opportunities.

2.10 PERCIEVED BARRIERS TO CLIMATE CHANGE ACTIVITIES

In the survey conducted by TCG and IBA it was concluded that the following are considered to be the major barriers for the cause:

The Indian system lacks regulatory benefits and policy.

The personnel lack technical knowhow.

The cost implications.

One interesting fact that came in light after the survey was that many banks in the survey wanted more legal regulations that provide an enabling framework.

Some banks also raised the point that lack of general awareness about the climatic changes and its implications hindered their efforts to implement the green banking concept.

Cost implications were also highlighted as a major hindrance, by three of the eight banks, to addressing climatic changes. However they believe that due to the added advantages and features such a s improved reputation or increased customer loyalty can overcome the financial concerns.

Refer to Table 4

2.11 INNOVATION AND ACTION

The Climate Principles framework have been represented in the research innovation and action by the banks as findings from key business lines.

Research:

The survey revealed that only two out of the eight banks currently have research on climate changes being carried on.

The research being carried on by the Indian banks are less sophisticated as required by the cause.

As most of the research is based on global level and is based on international standards the personnel here in India lack the technical knowhow of implementing the survey.

Retail Banking:

Half of the participating banks reported that they have implemented/incorporated carbon and climate issues to their retail banking arena.

The banks also claimed to convince their clients to use paperless as a part of their green campaigns at retail outlets.

Corporate Banking:

Many of the banks that participated responded that many initiatives in corporate banking are underway which facilitates a transformation to a low carbon economy.

Banks are also cognizant of how client defaults may increase from unanticipated `or underestimated mitigation.

Project Finance:

As there is a lack of knowhow to evaluate the risks associated with the changing climate and also the opportunities arising out of such a condition thus it acts as an hindrance for the consideration of finance of projects relating to climatic changes.

Lack of technical knowhow often tends to raise the total cost of the project and hence restrains banks from entering into such a project finance.

Asset Management:

This field of the finance sector is still in its preliminary/infancy stage in India. So far only one bank has been thoughtful enough to launch a fund that takes account of ESG [9] issues.

LEADING INDIAN BANKS AND GREEN BANKING

3.1 STATE BANK OF INDIA – SBI

Example 3.1.1

SBI Green Home Loans

The State Bank Of India has started a new policy which they call as “SBI Green Home Loans”. It has been started with the objective of supporting the cause against the climate change and its implications. One of the initiatives which the bank has taken is the bank provides incentives to customers who choose green projects i.e. those projects which will be helpful in reducing the gas and carbon emission and help saving energy. “Green Housing” or “Green Home” is one of the types of loan identified for this purpose. The new Green Home Loan Scheme supports environmentally friendly residential projects and offers various concessions like reduced margins lower interest rates and zero processing fee.

Example 3.1.2

Generation of Green Power – SBI

State Bank of India became the first bank in India to venture into the generation of Green Power on its own for by the installation of windmills for captive use.

This action has been carried out as a Green Banking initiative, SBI has installed 10 windmills with the total aggregate capacity of around 15 MW in various parts of the country like Tamil Nadu, Gujarat and Maharashtra. The future plans by the banks are even more lucrative as they plan to install additional 20 MW capacity windmills in Gujarat and soon touch a total production of 100 MW power generation through windmills in the coming five years.

The officials of the bank believe that the bank consumes around 100 MW of energy in an year and hence by this initiative they are trying to be energy neutral and reducing their carbon footprints.

The project has been carried on by Suzlon Energy and as one of the employees tells the cost of installation of one windmill of 1.5 MW is around Rs. 10 Cr. And the bank believes that the initial investment will be recovered in a short period of four years

In an interview Mr. Tulsi R.Tanti CMD Suzlon Energy said that the mission of Suzlon Energy is to make all the Indian Banks go green and he also informed of being in talks with 25 banks.

3.2 ICICI BANK

ICICI Bank’s Environmentally Sustainable Finance Initiative

Example 3.2.1

Corporate Environmental Stewardship Initiatives

ICICI Bank pioneered the corporate environmental stewardship programme with the Bombay Natural History Society (BNHS) to sensitize various corporate bodies, financial institutions/banks and government agencies involved in the project planning on issues regarding biodiversity, wildlife habitats, various environmental laws and conventions. As a part of the programme BNHS has initiated “Green Governance Award” to recognize the efforts of the company working for this cause.

Example 3.2.2

ICICIs Clean Technology Initiative

ICICI bank has been assisting many government and non government organizations to undertake clean energy and environmentally sustainable projects/initiatives. ICICI bank has been assisting projects that would specifically promote energy efficiency, renewable, demand side management by utilities etc. ICICI bank has also assisted ESCOs [10] in facilitating various urban local bodies and manufacturing companies in reducing their energy bills.

3.3 IDBI BANK

Example 3.3.1

IDBI Carbon Desk

IDBI bank has a separate team working on the CDM advisory service. The bank provides end to end services from the documentation to registration of the CDM projects for the commercialization of carbon credits. The bank also provides an upfront financing against the carbon credits/carbon credit receivables. The bank also facilitates the registration of the projects with UNFCCC and trading of carbon credits generated by the CDM Projects. There is also a refinance scheme initiated by the bank for energy saving projects for micro, small and medium enterprises (MSME) sector.