Sustainability and Financing

• Posted on: 7 September 2017
• By: admin

A reality check in India 

When the topic of sustainability and financing is discussed, the chicken-egg dilemma always remains there. Most of them are still discussing what comes first and Sustainability and financing has an indirect relationship. Businesses focus on management of risks which are material for financial institutions instead of managing risks for sustainable development. However, these sustainability related issues are being dealt with through credit risk management, socially responsible investing etc.

What is the real issue?!

Financial institutions are the backbone of businesses which help to infuse investments in products and services. Thus, they have indirect effect on sustainable development of those industries e.g. the emissions created by the industries financed by FIs are much higher than the direct emissions caused by FIs.

In past and even in present, we always have observed that financial decisions can have negative impact on the remaining 2 legs of triple bottom line i.e. society and environment. In simple words, currently FIs are investing huge chunk of money in great number of industries and projects which ultimately create negative impact on society, environment and perhaps economy in long run.

Do we have the solution?!

Conventionally, FIs are said sustainable if they deliver higher financial returns and able to sustain their business. But, need of an hour is to contribute on meeting the social, environment and livelihood needs of present generation without compromising the ability of future generation to meet their needs. (As defined in Brundtland Report 1987)

Financial industry has to identify the way to address this at their front. The main products and services of sustainable banking are "Sustainable credit risk management", "Sustainable project finance", "Socially responsible investment", "Impact finance" and "Social banking".

One of the main products of FIs is loan. So, Credit Risk Management is major activity for guaranteeing the successful loan business. In addition to borrower's ability to repay loan, social and environmental risks due to activities of borrower should be analyzed during lending.

Project finance is applicable for large scale projects in areas like infrastructure, natural resources etc. The voluntary code of conduct "Equator Principle" has been in existence since 2003 for assessment of Sustainability standards in project financing. The FIs should adopt those in regular practice.

Socially Responsible Investing (SRI) and Responsible Investing (RI) integrates non-financial indicators into investment decisions and risk management. SRI could be able to push firms to be more into triple bottom line approach to attract the investors. These could help only if the FIs as well as individual investors (HNIs and public) also follow RI approach.

Impact finance is comparatively new concept and talks about blended returns i.e. the positive Socio-Environmental impact compatible with a good financial return. The major difference between SRI and impact financing is that the SRI applies stringent criteria for risk assessment while impact financing uses funds for creating positive impact. Micro- finance and social banking are the products that can be covered under impact finance.

What is the take of financial sector ?!

Now, question arises if the financial sector is really ready to take responsibility to accelerate Sustainable development by adopting the mentioned practices.

In light of the fact that by applying such regulations and compliance the overall lending may decrease and economic growth of country may be affected adversely. But, out of many ways to ensure sustainable development in future, the financial sector had very critical role to play.

Many of the examples are found where FIs have willingly accepted responsibility and performed outstanding.

• The conventional bank like Royal Bank of Canada started to conduct impact investing in 2000s.

• In Indian context, prominent investment managers— Credit Suisse, Goldman Sachs, and JPMorgan Chase, to
name a few—have added impact products to their portfolios.

• One of the largest private sector bank in India YES BANK has voluntarily committed their contribution in sustainable development and combating climate change. YES BANK is also the first bank in India to issue green bonds in 2015. They are building their capacity by "Integrating ESG into lending decisions", "Innovating for the bottom of the Pyramid using FINTECH", "Increasing lending in positive impact sector like Renewable Energy".

To sum up, I can definitely mention here that India is internally getting prepared to mobilize finances for sustainable development and SDGs in broader sense. Innovative tools are identified and adopted by the leaders and they are setting up trails for others to follow. The opinions about sustainability as an alternative is being changed gradually and reaching to the mainstream. Still I find a long way to go ahead.