Sustainable banking - an imperative in Ghana (I)
From a banking perspective, environmental and social risk management relates to the conscious integration of the potential effects of environmental degradation and concern for the total well being of people in project financing.
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Financial institutions are catalysts for economic development through the mobilization of financial resources from the surplus units of the economy and the allocation of credit to deficit units in the economy. Extensive commentaries have been made on the principles of lending in financial institutions.
Current developments in the credit space have created a need for what has become known as “sustainable banking” where equal emphasis is placed on the 3 Ps- People, Profit and Planet in credit management.
Sustainable Banking is an integration of sustainability (environmental and social considerations) best practices in a bank’s business activities and operations. It is a holistic awareness and acceptance of the qualitative dimensions of the impact of bank sponsored projects on the environment and other social considerations.
The concept of sustainable banking, which is derived from environmental and social risk concerns, places enormous responsibility on financial institutions not only to emphasise the immediate profitability or the earnings accruing to the bank during the course of evaluating projects for financing.
Al Gore- a former vice - president of the US is reported to have likened respect for sustainable banking to “sustainable capitalism”- an allusion to respect for sustainability even as we press the accelerator for the profit motive.
Banks must equally consider the potential deleterious effects of these projects on the eco-system and the future well-being of societies. Thus effects on global warming, rising sea levels, melting ice caps, endangered species of flora and fauna, carbon emissions and other considerations must be focal points in project/credit management.
Financial institutions must recognize the extent to which the project being financed by them will ultimately inure to the benefit of the bank’s customer and other stakeholders, including the continuity of the bank’s business and continuing profitability.
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Nostalgia And Interest In E & S Management.
Growing up in my then little village of Kwamo in the Ashanti region of Ghana in the 1960’s, I loved to set my hand-woven fish traps in river Saman ( now a pale streamlet along the Ejisu-Kumasi highway). How I miss the roaring current of this river during the rainy season and our youthful show of swimming dexterit !
I proudly supplemented the family’s protein needs from my usually handsome catch of fishes and crab varieties. That I was grandma’s favourite boy is an understatement on account of how my hobby improved our taste buds.
Then came this factory set up along the banks of the river and discharging its hot water from its steam powered engines directly into the river. Over time my fish catch reduced significantly as the fishes and crabs went further downstream to avoid the discomfort of the hot flowing waters.
To worsen my hobbies, the forests around the river which used to harbor colonies of monkeys and the occasional chimpanzee swaying from tree to tree also suffered massive degradation. I lost the sight of the familiar monkeys and other animals.
I look back with fond memories of our traditional respect for the ecosystem (even if they were then rooted in superstition and taboos to ensure compliance and respect for the environment). Paradoxically in an age of enlightenment, the ecosystem generally has suffered immeasurable damage to the extent that water bodies are getting extinct or unsuitable for human consumption. The sad cases of rivers like Birim, Pra, Ankobra, Densu and the enormous amounts of chemicals used to purify them by the Ghana Water Company Limited to make them suitable for their operations is a sad reflection of man’s stewardship of the earth’s resources. Surely, the gods are not to be blamed for such wanton destruction of our eco-sytem, particularly the pristine water bodies and forest resources.
This writer’s fondness for environmental and social risk management is rooted in nostalgia and a natural concern for our poor stewardship of the earth’s resources, culminating in impunity and disregard for the protection of the environment and the negative consequences on society.
Mutuality of stakeholder interest
Financial Institutions are placed in a unique position to promote socially and environmentally sustainable outcomes in the global imperative to protect the planet and its inhabitants, as well as sustaining the profit motives of their shareholders.
To further promote their mutual self interest, financial institutions and their clients owe a responsibility to other stakeholders to ensure that they identify and employ risk mitigation measures towards the sustainability of projects they finance. This requires an understanding of the environmental and social challenges inherent in projects and also capturing the opportunities open to them in effective management of such schemes.
Developing an Environmental and Social Risk Management policy requires tacit acceptance of the board and senior management of the benefits of implementation and hence the unfettered approval and support for its effective implementation. Acceptance and support (especially in committing adequate resources towards ESRM implementation) would be made easier if the policy is integrated into the bank’s existing enterprise-wide risk management plans.
Infrastructure grows in tandem with economic growth. This is even more so for a developing country. Infrastructural facilities are expressed in oil and gas investments, transport and communication, dam construction for agricultural and energy uses, high rise residential and office accommodation, inter alia. Relatively heavy investment outlays are implicit in the realisation of these objectives.
There must be in-built safeguards to the sections of society who may be disadvantaged from the implementation of these projects, by way of re-location from ancestral homelands and the attendant loss of livelihood for indigenous people. Other direct negative outcomes could reflect in adverse impact on ecological resources- flora, fauna, the displacement of wildlife and endangered species, decimation of forest, surface and ground water and land degradation generally.
Indeed the re-drafted Equator Principles of June 2013 enjoins member countries to adopt the new IFC Performance Standards, which among other objectives, now contain an explicit commitment to respect human rights in due diligence processes.
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These call for equitable distribution of the benefits of such infrastructural projects to avert situations where aggrieved people resort to sabotage of vital installations just to elicit attention to their plight.
Why adoption of ESRM in Ghana?
As the effects of globalization deepen, the legal regimes in many countries have increasingly permitted foreign participation in local financial institutions. Many multi-national banks have thus taken equity interests in local banks in many developing countries, sometimes majority holding where local laws permit this. As a result, the capital levels of banks in these developing countries have increased, permitting them to take on greater project financing than before.
It is also common to find syndicated deals involving large international banks, where limitations on single obligor limits hinder sole financing of projects beyond defined thresholds as both a risk mitigation strategy and regulatory compliance.
In addition, many of these financial institutions are increasingly accessing finance from Development Finance Institutions like the International Finance Corporation of the World Bank, in view of the comparably favourable terms, subject to country risk analysis.
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This opportunity opened through easy access to funding inherently disposes the banks to the dictates of internationally accepted ways of doing things, key among which is how the credit evaluation process is conducted and the additional variables to be considered beyond financial ratios and profitability.
Increasingly, therefore, the new approach to credit delivery recognizes not just the financial or quantitative factors, but also qualitative issues bordering on the potentially negative impact on people and the environment. For instance it is no longer “fashionable” to merely evaluate the project on incremental revenue or pay-back period basis only but also how the project displaces indigenous people, wildlife, water bodies, and the ecosystem generally.
The construction of a hydro dam may have positive effects on electricity generation, industrialization and economic growth. The impact on areas to be flooded, the spread of water borne diseases like bilharzia and the loss of agricultural farm lands must be given prominence in evaluating the cost/benefit of the project.
Even for other plantation agriculture involving rubber, sugar cane and similar products that are not directly edible, the cultivation of indigenous food crops may suffer, leading to local residents having to rely on foreign food items which may only become available through improved and sustainable purchasing power.
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In mining, especially in developing countries with weak regulatory regimes to enforce laws on regenerating the eco system, the local population lose their livelihoods for several years after the ore has been extracted and the mining companies have left. This leaves in its wake deforestation, pits and contaminated water bodies, among other economic and social problems which regulatory institutions can hardly resolve effectively whether or not reclamation bonds were executed initially.
The driving forces
Perhaps an indirect accelerator to the adoption of ESRM would emanate from the need to augment the capital bases of local banks to escape restrictions imposed by the Single Obligor Limits. This has the potential to force local banks into Tier 2 or Tier 3 capital arrangements with multilateral financial institutions.
Similarly, as the economy progresses, the need for infrastructural growth would become more crucial. With such projects calling for large capital outlays beyond the reach of individual banks, syndication arrangements and public/ private partnership schemes would assume centre stage in project financing. The complexity of some of these projects may call for external financiers/investors who will almost invariably insist on adherence to ESRM initiatives.
National legislation regarding labour, health, safety and environmental laws abound in the country. The major difficulty lies with enforcement of these laws which could also be drivers for effective implementation of ESRM in the financial institutions and among their borrowing clients.
The Komenda Sugar Factory, for instance has been re-activated to the pleasure of Ghanaians, particularly to the indigenes around Komenda- Edina- Eguafo Assembly (for the potential direct and indirect jobs that may be created). The Cocoa Processing Factory has been reported to be elated to buy their sugar requirements from this sugar factory.
It remains to be seen the extent to which the Environmental Impact Assessment would address farmlands that may be taken up by the expansive sugar cane cultivation (to the detriment of other food crops) and the handling of waste from the factory, among other environmental risks.
Recent agitations against the producers of Diamond brand cement in Aflao regarding air and dust pollution from the factory is a precursor for social dysfunction, especially in an election year. Shareholder interest should ignite efforts to assuage the concerns of the constituents before NGOs and other pressure groups escalate these concerns into social tensions, especially as their trust in the regulatory bodies wane. (To be continued)
The writer is a banking consultant and a former Head of Risk Management in Stanbic Bank Ghana Ltd.
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