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Ganapathi Seminar

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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 major economic 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 or 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 of bank¶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 portfolio results in higher earnings. Thus, encouragingenvironmentally responsible investments and prudent lending should be one of theresponsibilities 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

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. The ³external´ 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 more interested 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 are adversely 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.

In recent times, environmental concerns are being integrated more into internal trade policies and often act as a trade barrier and often act as a trade barrier for environmentally sensitive goods. Some countries are contemplating the imposition of carbon taxes on import of such goods an products by adopting green banking, banks can manage these credit risks better. II. Legal Risk

Banks, like other business entities face legal risk if they do not comply with relevant environmental legislation. They may also face a risk of direct lender liability for clean up costs or claims for damages in case they actually take possession of contaminated or pollution causing assets. Anenvironmental management system helps a bank to reduce risks and costs, enhance its image and take advantage of revenue opportunities. In recent years several countries have adopted regulations that make banks responsible for the misdeeds of their customers. III. Reputation risk

In all likelihood, due to growing awareness about environment safety,banking institutions are more prone to lose their reputations if they are involved in big projects,which are viewed as socially and environmentally damaging. There are also few cases whereenvironmental management system has resulted in cost savings, increase in bond value etc. In few cases the environmental management system resulted in lower risk,greater environmental stewardship and increase in operating profit. Reputation risks involved inthe financing of ecologically and ethically questionable projects. The adoption of green banking strategies will help the bank to deal with these risksinvolved in their business operation. Green banking strategies involves two components: y y managing environment risk and Identifying opportunities for innovative environmentally oriented financial products (IFC, 2007).

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 that only 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 Dimas, 2005).

If all the impacts of environmental degradation are considered and costs are measured, then we can find the huge economic benefits these protection measures brings in.Environmental friendly technologies also make economic sense for the industries and actually lessen the financial burden. The cost of pollution is rising with more awareness about these issues all over the world. The polluting industries face more resistance and often forced to closedown or face massive boycott by the consumers. This adds to their cost enormously. Environmental concerns are integrated into the international trade policy and often act as tradebarrier for environmentally sensitive goods (ESGs). So adopting environmentally sustainable technologies or modes of production is no more considered as a financial burden, rather it brings new business opportunities and higher profit. Green banking saves costs, minimizes the risk, enhance banks reputations and contribute to the common good of environmental sustainability. So it serves both the commercial objective of the bank as well as its social responsibility. Green banking solves the problem faced by the environmental regulation and enforcements authorities related to size and location of the polluting unit. The authorities have practical limitations on enforcing environment standard on small-scale industries and also industries located in far off places.

Green Banking Strategies
Indian Banks can adopt green banking as a business model for sustainable banking by launching some of the following strategies: y Carbon credit business

Under the Kyoto protocol, Clean development Mechanism ( CDM) provides for co-operation between annexure ±1 and non annexure-1 ( developing) countries. The operational mechanism of CDM¶s involves an investment by a legal entity from an annexure-1 country into a project in non-annexure-1 country, which results in emission reduction. These emission reductions have to be certified by an appropriate authority and these certified Emission Reductions ( CERs) which are commonly known as carbon credits can be used to meet the commitments of annexure-1 countries under the Kyoto protocol. These carbon credits are traded in the markets. CDM

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 few of 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 building plans.

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 lesspaper 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 automation solutions 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 offices and ATMs. 

Using Mass Transportation System 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 statement goes,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

Bankregularly reviews environmentallysound.

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It will be noteworthy to mention that Netherland-based ABN-Amro bank has developedcertain Reputational Risk Management (RRM) policies to identify, asses and mange nonfinancial present within it business engagements. Similarly, some of the big international bankslike ABN Amro, Deutsche, Standard Chartered, HSBC Bank etc. look at environment issuesdiscussed under Kyoto Protocol. Going further, the Dutch Government has made a formalrequest to banks in achieving sustainable development. The dialogue between banks andgovernment was established in 1999 to initiate policies for environmental improvements throughthe development of new financial products and services. Similalrly, Earth (FoE) and the Rainforest Action Network (RAN) challenged the industry with high-profile campaign that highlighted cases in which commercial banks were ³bankrolling disasters´ in 2000 in the US. In 2002, a global coalition of NGOs formed a network named µBankTract¶ to promote sustainable finance in the commercial sector. This coalition cameup with a resolution constituting six principles promoting environmental protection and social justice by banks and this is popularly known as Collevecchio Declaration. The six principles that this declaration advocated included commitments to sustainability, noharm, responsibility, accountability, transparency and sustainable market, and governance. More than 200 organizations have endorsed this declaration and urged the banks to incorporate these commitments into their business operation. The declaration states that ³Finance and Commerce has been at the center of a historic detachment between the world¶s natural resource base, production and consumption. As we reach the boundaries of ecological boundaries of the ecological limit upon which all commerce relies, the financial sector should take its share of responsibility for reversing the effects this detachment has produced´. All these concerns for sustainable finance or green finance have compelled the bankinginstitutions to devise a common and coherent set of environmental and social policies and guidelines that can be used to evaluate the projects. A small group of banks along with IFC came together to initiate the process of designing the common guidelines in October 2002 and came up with a guidelines in June 2003 that is known as Equator Principles with 10 leading

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.

Incidentally, India¶s is the world¶s sixth largest and second fastest growing country in terms ofproducing green house gases. Delhi, Mumbai and Chennai are the three of the world¶s ten most polluted cities. The major polluting industries in India are: (a) primary metallurgical industriesnamely zinc, copper, steel etc. (b) paper& pulp (c) pesticides/insecticides (d) refines (e)fertilizers (f) tanneries (g) sugar (h) textiles (i) chemicals/pharmaceuticals etc The banking operation and investment by financial institutions should take care of environmentalmanagement of these polluting industries by improving the overall environment, the quality and conversation of life, level of efficiency in using materials and energy, quality of services and products. In this context, the role of banking sector, which is on major financing sources to the Industries, assumes high importance. Government across the globe is highly concerned about climate problems. This may lead to capping of green house gas emissions by different industries. For this companies will have to adopt stringent regulations. It will also require investment in new and efficient technology and emissions reduction methodologies. Small Industrial Development Bank of India (SIDBI), are of the principal lenders in the Micro, Small and Medium Enterprise (MSME) sector has committed itself to achieving sustainability by incorporating environmental and social (E&S) aspects in its core business.

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 tostore and 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.

State Bank of India's Green Banking Policy The State Bank of India (SBI), as part of its Green Banking Policy, will set up windmills to generate 15 MW of power in Tamil Nadu, Maharashtra and Gujarat for its own consumption. The SBIchairman inaugurated the windmills set up at Panapatti village in Tamil Nadu¶s Coimbatore district on April 23, 2010. The mill in Tamil Nadu will generate 4.5 MW of power, while the Maharashtra mill will have a capacity of 9 MW and Gujarat 1.5 MW. SBI was the first Bank in the country to think of generating green power as a direct substitute to polluting thermal power and implement the renewable energy project for captive use.

Union Bank of India's Energy Efficiency Measures Union Bank has decided to undertake an electrical energy audit annually. In addition the bank has installed solar water heaters at various facilities maintained by them. The support service department of the Bank has been identified to implement such an energy/emission reduction program. IDBI Bank IDBI Bank is a member of the Council of National Action Plan on Climate Change (NAPCC). The Bank is also a signatory investor to Carbon Disclosure Project (CDP), which aims to create a relationship between shareholders and corporations regarding the implications for shareholder value andcommercial operations presented by climate change. SBI Green Home Loans The State Bank of India has adopted a Green Banking Policy with the objective of contributing towards the fight against climate change. One of the initiatives approved by the board for this purpose is giving incentives to customers who choose green projects, i.e. those projects which reduce carbon emissions and promote renewable energy. ³Green Housing´or ³Green Home´ is one of the types of projects identified for this purpose.

The new Green Home Loan Scheme will supportenvironmentally-friendly residential projects and will offer various concessions²reduced margins, lower interest rate and zero processing fee. These loans will be sanctioned for projects rated by the Indian Green Building Council (IGBC). The new loans offer several financial benefits²by offering a 5% concession in margin, 0.25% concession in interest rate and waiver of processing fees.

ICICI Bank's Environmentally Sustainable Finance Initiatives 1. Corporate Environmental Stewardship Initiatives The Corporate Environmental Stewardship Programme withthe Bombay Natural History Society (BNHS) was pioneered byICICI Bank to sensitize various corporate bodies,

financialinstitutions/banks and government agencies involved inproject planning on issues regarding biodiversity, wildlifehabitats, various environmental laws and conventions. Aspart of the programme, BNHS has institutionalized a ³GreenGovernance Award´ to recognize the efforts of companies andother organizations that promote biodiversity conservation ofhabitats, flora and fauna. 2. ICICI's Clean Technology Initiatives ICICI Bank has been assisting various organizations to undertake clean energy and environmentally sustainable projects/initiatives.

ICICI Bank has assisted projects that would specifically promote energy efficiency, renewable energy, biomass co-generation, biomass gasification, demand side management (by utilities), waste heat recovery, energy service companies (ESCOs) that demonstrate substantialsavings in energy on a shared savings basis as well as projects that lead to pollution prevention and waste minimization at source. ICICI Bank has assisted ESCOs to facilitate various urban local bodies and manufacturing companies in reducingtheir energy bills. ICICI Bank introduced the municipal shared saving ESCO model for the first time in India. ICICI Bank's Support for Clean Technology 

Clean Coal Technologies In the area of coal technologies, ICICI Bank has been responsible for introducing innovative concepts like deep beneficiation of coal (coal washeries) and coal bed methane for the first time in the country. Through a demonstration project ICICI assisted the first coal washery in the country for providing a solution to Indian coal, which has high ash content and is highly polluting, via the process of deep beneficiation of coal. ICICI Bank also assisted the first company to successfully demonstrate the concept of coal bed methane in India. The replication potential of this demonstration project has been significant.  Zero Emission Vehicles ICICI Bank has taken steps to promote a cleaner urban environment by providing concessional assistance to projects that endeavor to manufacture vehicles with zero emissions. The project that designed and built the first passenger electric car in the country and that developed electric drive systems to manufacture electric three-wheelersin India, were assisted under this initiative.  Finance for Innovative Products ICICI assisted a company for the development of a product which provides an eco-friendly airconditioning alternative to conventional air conditioners (ACs). This product works with indirect evaporative cooling technology by incorporating a wet plate and a cross flow heat exchanger in its design. It provides 100% filtered cool fresh air and consumes about 35% power compared to an AC making it about 65% more energyefficient. Besides, it also does not need chlorofluorocarbons(CfC), as it does not run on compressor-based technology. The company is currently working on improving the product's heat exchanger efficiency, minimum offer temperature and product miniaturization. YES Bank's YES Community Through the retail branches, Yes Bank is incorporating community development initiatives such as clean and green drives, energy efficiency practices, workplace health and safety and the development of local disaster management plans through its Yes Community initiatives. Yes

Community engages with the local communities surrounding our bank branches in India through micro-events under the aegis of 'Planet Earth¶ on the sub-themes of: a. Pollution Prevention b. Recycling and Minimizing Waste c. Conserving Energy d. Conserving Water e. Improving Sanitation and Cleanliness

ABN AMRO (Royal Bank of Scotland) ABN AMRO launched the Indian Sustainable Development Fund, opening up a new emerging market for socially responsible investors. The formidable task for the India SRI fund is finding companies that meet global standards for environmental, social and corporate governance (ESG) issues. This is the first broadly-screened Indian SRI mutual fund. Work is being done by CRISIL and Boston-based KLD Research & Analytics to systematically evaluate Indian companies. ABN AMRO Asset Management is planning to put 65% of the fund¶s assets in screened companies, and the remainder in other stocks, debt and money market instruments.

The fundis structured as a three-year close ended equity fund with an automatic conversion to an open-ended scheme after the three years are over. Long-term capital growth is the fund¶s investment objective, using an actively managed portfolio of SRI companies focusing on sustainable development. It offered the regular plan with growth and dividend options. Working with CRISIL, whose majority shareholder is Standard and Poor¶s (S&P), ABN AMRO chose which companies to include in the Indian Sustainable Development Fund.

CRISILhas selected 245 companies from the S&P CNX 500 based on the companies¶ ESG practices. The S&P CNX 500 is a broad basedequity index covering the Indian capital market. CRISIL plans to evaluate two hundred and forty five companies from the S&P CNX 500 on a yearly basis to identify SRI companies in India.

Small Scale Sector in India and Green Banking
Industries irrespective of their size(large, medium or small) emit pollutants to the environment in which we all inhabit. Though the large-scale industries are more capable of degrading the environment, they have adequate financial resources to install pollution control equipment or waste treatment plants to control pollution. Moreover, these large-scale industries are always in the eyes of the government or the pollution control board, these industries strives hard to adhere to set emission standards. On theother hand, the small-scale industries (SSIs), on account of their financial constraints may not be able to unable to install the necessary equipment to meet the emission standards prescribed by the competent authorities. Also because of their small scale of operation, the SSIs escape from the eyes of the concerned authorities. SSI constitute major portion of Indian industry. These industries account for about 40 per cent of industrial production and 30% of total

manufacturing exports. Use of westerntechnological systems in small scale industries produce enormous gaseous, liquid and solidwastes. However, they may not be in a position to bear additional expenditures on account of environment audit and pollution control equipments. Therefore, banks need to apply differentprocedures to promote pollution controls like y y y environmental pollution status of SSI environmental Clearance from the appropriate authorities and steps undertaken or proposed for disposal of solid, liquid and gaseous wastes before lending to SSI in India. This is where thebanks and financial institutions can extend the necessary financial support where pollution is on account of inadequate financial capabilities.

Further, SSI exports takes place through merchant exporters, and export houses. They may also be in the form of export orders from large-scale enterprises for production of parts and components for use for finished exportable goods. The exports from SSI sector have been clocking excellent growth rates in recent years and this has been mostly fuelled by the performance of garments, leather and gems and jewellery exported by this sector. One of the keyissues for increasing the Small and Medium Enterprises (SMEs) manufacturers¶ role in directexporting are quality and conformity. Standards, as well as testing and certification processes, are a massive hindrance to sales since products cannot be sold if they do not comply with a range of safety, health and other regulations. SMEs have difficulty in adopting expensive qualitymanagement systems, or certification procedures that sometimes have to be repeated several times. The main external barriers are technical trade restrictions or non-tariff barriers (like standardization, quality requirements, conformity assessment, packaging and labeling, ecology requirements, etc.); Different countries specify different testing and certification procedures.

Assistance with product development and innovation, including product design, packaging, quality and environmental requirements and providing risk taking investment; obtaining of ISO 9000 series or ISO 14000 certificates. Therefore, a change in the environmental profile of theSSI industries is called for. Therefore, the lending institutions need to restructure their credit andfinancial instruments/products to help SSIs to endorse quality and conformity with environmental standards. Realizing the difficulties faced by SSIs in maintaining environmental standards and its hugeimpact on economy and society, different state governments provide schemes to encourage smallscale industries to adopt better environmental management practices such as: ‡ In order to improve the quality of raw materials and also finished products, the SSI units are allowed for testing facilities for products / raw materials and also to obtain the BIS Certificate etc. ‡ Grants and subsidies are given to an extent of 50% of the total for obtaining the ISO 9000Series (equivalent Indian Standard IS 14000 Series) in many states. However, SSIs are small but large in number. And most of the industries are in theunorganized sector. Therefore government and financial institutions must come forward to help these units financially to adopt expensive pollution control technologies developed in the other developed countries. However, the most practical solution to these large number of SSI enterprises would be developing low cost pollution abatement technologies, adopt mechanism from pollution control to pollution prevention activities and international cooperation. Government can further provide tax incentives and other financial help to SSIs to meet requirements.

Environmental Management by the Banking Institutions
Now a days, most of the commercial lending process in different parts of the world scrutinizes projects with a set of tools by incorporating environmental concerns in their day-today business. The financial institutions should encourage projects which take care of following points while financing them viz.,  sustainable development and use of natural renewable natural resources 

 

protection of human health, bio-diversity, occupational health and safety,efficient production, delivery and use of energy pollution prevention and waste minimization,pollution controls (liquid effluents and air emissions) and solid and chemical waste managementand there should be a third party expert to draw a plan for the environment management plan.

They should keep following aspects in mind while financing any projects:  Analyzing the project in terms of scale, nature and the magnitude of environmental impact. The project should be evaluated on the basis of potential negative and positive environmental effects and then compared with the µwithout project situation¶. There should be an Environmental Impact Assessment (EIA) of each project recommending themeasures needed to prevent, minimize and mitigate the environmental negative impact before financing the projects. 

While investing or funding the projects, the financial institutions should assess thesensitive issues like vulnerable groups; involuntary displacement etc and projects shouldbe evaluated in terms of environmentally important areas including wetlands, forests,grasslands and other natural habitats.  Banking institutions need to evaluate the value of real property and the potentialenvironmental liability associated with the real property. Therefore, the banks shouldhave right to inspect the property or to have an environmental audit performed throughthe life of the loan. 

Banks also need to monitor post transaction for the ideal environmental risk managementprogram (Rutherford, 1994) during the project implementation and

operation. Thereshould be physical inspections of production, resources, training and support,environmental liability, audit programs etc 

The next round of evaluation includes loan structuring, credit approval, credit review andloan management. Further banks have annual audits, quarterly environmental compliancecertificate from the independent third party and also from the government. Further the banks can introduce green bank loans and products like: (i) investing inenvironmental projects (recycling, farming, technology, waste, etc) for example reduced-rate of interest on loans to homeowners who install a solar energy system (ii) (iii) providing option forcustomers to invest in environmentally friendly banking products investing in resources thatcombine ecological concerns and social concerns

Environmental appraisal of projects
Following compliance with the World Bank¶s E&S norms, some banks have integrated a similar system for carrying out environmental and social appraisals of projects funded through the micro credit route. These appraisals broadly indentify environmental risks associated with some of the most relevant/common activities funded through partner Micro Finance Institutions (MFI). During appraisal, gender sensitization is also taken into account.

Enforcement of Environmental Management and Role of the Government
The financial institutions also should make sure that the customer is ready to comply with environment management plan during the construction and operation of the project and provides regular reports, prepared by in house staff and third party experts. There should be a direct communication between the lenders and monitoring group. However, much less attention is given for the environmental risk management after the post transaction period. Recently, western

financial institutions use environmental criteria with credit risk management activities than with formulating overall lending or investment strategy.

With the introduction of ISO 14000 anddevelopment of information network, it is easier now to the credit officers to compare firms and plants regarding their environmental management and measure the relative environmental liabilities and risks. Though commercial banking has been more attentive to the investment banking than the environmental problems, the environmental liabilities would play a larger role in their investment decision in the near future (Schmidheiny andZorraquin, 1996). Further, the environmental audits are required to determine the environmental status of a facility, property, and operation and to identify regulatory compliance status, past present problems and potential environmental risks and liabilities associated with the project. These should be done by an independent body or by any environment investigation team.

But to ensure all these work,, there should be legislation, which will enforce the standardsalong with training and demonstration skills. Government should enact legislation to force banks to consider producing a formal environmental policy statement and making this publicly available. Though Schmidheiny and Zorraquin (1996) conclude from their primary study that banks are not hindering the achievement of sustainability, banks can also play a hindering role for sustainable development because: y they prefer short-terms payback periods where as sustainable development needs longterm investment y investment which take into account of environmental side-effects usually have lower rate of return in short-term (Jeucken and Bouma, 1999). Therefore, sustainable investments are unlikely to find sufficient funding within current financial markets. Thus, government must design proper legislation of environmental rules for banks and ensure enforcement. The problems in India are the legislation is not yet framed and in few cases, things are not strictly enforced, but things can change overnight resulting in majorcompliance problems for the companies concerned and increased risk for the banks that have lent to them.

There should be continuous dialogue relating to environmental matters with relevant audiences, including stakeholders, employees, customers, governments and the public.

Role of RBI
To highlight the CSR of banks, the RBI circulated a notice on December 20,2007 to all scheduled commercial banks titled ³Corporate Social Responsibility, Sustainable Development and Non Financing Reporting-Role of Banks´ Major issues touched upon in the notice were:  Corporate responsibility  Sustainable development  Non-financial reporting

RBI also followed many international initiatives to throw light on the importance of the matter to other commercial banks: y y y y y United Nations Environment Program Finance Initiative Global Reporting Initiative International Finance Corporation The Equator Principles Declaration of Financial Institutions

It also reported certain important and urgent issues:     Global warming and the extent of the problem Stern Review- The economics of climate change The Happy Planet Index The Kyoto Protocol

As per the guidelines issued by RBI many member commercial banks started new programs to contribute to the society. As important players in the Indian economy, banks realized that their role extends beyond traditional banking activities which are commercial in nature to being more social. They also needed to examine the effects of their lending and investment decisions.

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