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CHAPTER 3. Sustainability in the Banking Community

In the banking sector, new standards and codes of conduct have been promoting corporate accountability, the need for transparency, and the need for management of risks for environment and society. They have recognized the need for sustainability as part of financing.

The traditional approach of the banking sector to sustainability needed to be adjusted, as financial statements alone did not present the whole picture of the sustainability of the business. Under this type of review, potential environmental liabilities, such as decommissioning costs that can create financial risks, can go undetected unless disclosed by the borrower. This may then impair the borrower in repaying the loan. Banks now look to new programs designed for environmental business.

International Finance Corporation – IFC Financing in Emerging Markets

IFC's definition of sustainability as outlined in its “Banking on Sustainability” report is about ensuring long-term business success while contributing toward economic and social development, a healthy environment, and a stable society.

Chris Coulter, vice president of GlobeScan Inc. (international public opinion researchers), from “Banking on Sustainability – Financing

Environmental and Social Opportunities in Emerging Markets” IFC, World Bank Group outlined is quoted in the report:

The role of companies in a society is currently going through a transition that presents important opportunities and, in many ways, is being felt most strongly in developing economies.

Expectations are highest in the developing world for the private sector to go beyond core business lines to help improve education and health systems, address poverty, protect the environment and reinforce human rights.

By responding effectively to these expectations, local companies can not only protect and enhance their reputations, but also ensure that they are on equal footing with multinational corporations entering their markets.

IFC – which is the private-sector lending arm for the World Bank Group – looks to Environment, Social and Governance (ESG) criteria in its portfolio analysis of investments. Institutional investors are fully concerned with the extent to which management of quality and longterm returns is being controlled within companies.

Banks are increasingly moving from avoiding risks to creating sustainable banking opportunities, where sustainable development is seen as an advantage and opportunity for growth.

Due to information being accessible so quickly through the web, all organizations including the banks need to handle social and environmental risks. The report outlines that the majority of banks ranked the risks of negative publicity and loss of reputation (83 percent) as the number-one long-term risk, more important than credit risk – unwilling or unable to fulfill contractual obligations (68 percent) and securitydevalued collateral (49 percent).

Banks' perceptions of key social and environmental risks facing their clients in order of priority were: disruption of operations, environmental legal issues, health and safety for workers, loss of market share because of environmental regulations, market devaluation because of social or environmental liability, loss of liability insurance coverage, and other.

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