sustainable banking and risk management a - AR-CSR

JUNE 28-29, 2012
It is indeed a pleasure to be invited to speak to you today on
the topic “Sustainable Banking and Risk Management- a Global
Comparative Analysis”, at the second session of the Africa CEO
Roundtable and Conference on Corporate Sustainability and
Responsibility. The Governor, Central Bank of Nigeria has asked
me to extend his felicitations and to congratulate the Thistle
Praxis Consulting Limited, and its partners, for pioneering and
carrying on this effort which has helped in no small measure in
awakening our consciousness on issues of sustainable
development and also bringing it to the fore in our national
The concept of sustainability was established in the 18th
century, when it meant that the amount of wood cut should
not exceed the amount of new trees planted.
The United Nations 2005 World Summit Outcome
Document refers to the "interdependent and mutually
reinforcing pillars" of sustainable development as
economic development, social development, and
environmental protection.
Sustainability has been observed to be a central issue in
the continuous growth and development of both
developed and emerging economies. According to the
International Finance Corporation (IFC), sustainability is
about ensuring long-term business success while
contributing towards economic and social development,
a healthy environment and a stable society.
Gro harlem brundtland report, in the UN world commission on
environment and development in 1987, described sustainable
development as
“Development that meets the needs of the present
without compromising the ability of future
generations to meet their own needs”.
It contains within it two key concepts:
the concept of 'needs', in particular, the essential needs
of the world's poor, to which overriding priority should be
given; and
the idea of limitations imposed by the state of
technology and social organizations on the environment's
ability to meet present and future needs."
To facilitate our discussion on the subject, this presentation
is structured into three additional parts, as follows:
 Part two dwells on the concept of sustainable
banking and risk management. It then
describes the relationship between sustainable
banking and risk management.
 Part three gives a global comparison of
sustainable banking and risk management, in
developed, emerging and developing
 Part four concludes the paper and proposes a strategy
for ensuring sustainable banking and robust risk
management in Africa.
I. What is sustainable banking?
II. Risk management
III. Relationship between
sustainable banking and risk
Sustainable Banking:
Bouma et al (2001) defines it as a decision by banks to provide products
and services only to customers who take into consideration the
environmental and social impacts of their activities. This goes on to
explain that sustainable banking aims at benefiting its customers and the
economy as a whole without impacting negatively on the society and
natural environment. The international institute for sustainable
development (2012) informs that the integration of sustainability into the
the pursuit of environmental and suatainable responsibility in a
bank's operations through environmental initiatives (such as
recycling programs or improvements in energy efficiency) and
socially responsible initiatives (such as support for cultural
events, improved human resource practices and charitable
the integration of sustainability into a bank's core businesses
through the integration of environmental and social
considerations into product design, mission policy and strategies.
Examples include the integration of environmental criteria into
lending and investment strategy, and the development of new
products that provide environmental friendly businesses with
Sustainable banking therefore, requires that banks’ commercial
activities should not benefit its owners and employees alone, but also
its customers and wider economy, while at the same time
minimizing, if not preventing, any adverse events on the society and
the natural environment.
There are basically three dimensions to sustainable bankingeconomic, social and environmental, seldom referred to as “the three
bottom line” approach. This implies that sustainable banks should
focus on not just economic advancement but also environmental
protection and social stability.
The economic dimension requires that a bank’s activities should contribute to overall
economic growth and stability, with minimal negative impact on the environment or
society. A bank must, therefore, give customers what they want fairly, responsibly and
transparently. At the same time, it must provide good working conditions for staff and
deliver profitable growth for shareholders. The events of the recent banking crisis
revealed that many banks flouted these principles. For instance, there was too much
lending to businesses and individuals who could not afford to repay their debts.
The social dimension entails a bank managing the impact of its activities on the
society by removing, or at least mitigating, any negative impacts its operations may
have and by taking positive steps to help communities through its employment
practices, fundraising, volunteering and charitable giving. The first part requires a bank
to follow ethical business principles to ensure it is a responsible provider of financial
services to customers so that bank-financed customer activities do not harm others. The
second part entails employment policies that ensure that staff come from diverse
backgrounds, in terms of gender, race, religion and other criteria; allowing or
encouraging staff to get involved in fundraising and volunteering activities to help
disadvantaged people and communities; investing in communities by making donations,
providing loans and giving other assistance to charities and other good causes;
persuading suppliers to act in a socially responsible manner; and gaining the support of
shareholders for all of these initiatives.
The third dimension of every bank’s sustainability agenda is the environment,
particularly climatic change. Banks want to minimize any negative impact their
activities may have on the environment and, if possible, ensure their activities have no
negative impact at all. Their sustainability policies will also extend to taking steps to
protect the environment from others by, for example, refusing to lend to businesses
whose actions cause unacceptable harm to the environment, or by insisting that key
suppliers adhere to prescribed sustainability standards.
II. Risk Management
The problems of risk management are no longer strange in
banking and finance. It is clear that poor risk analysis and
management led to the exposure of financial systems to the
global financial crisis. This has been increased by the
challenges posed by financial innovations with the
introduction of new and complex financial instruments
especially derivatives. Investors in these instruments and
indeed most bankers find it difficult to appreciate the risk
and technicalities of these financial instruments. Recent
failures are linked with the consequence of rogue traders as
can be described in the failure of baring brothers, UBS
Switzerland and recently the JPMorgan affair. Risk
oversight cannot be overemphasized in banking, as it is
necessary that investors and depositors confidence is
maintained and that the financial system as whole is safe.
Sensitivity to risks’ has been added to the
traditional parameters of capital, asset quality,
management, earnings and liquidity (CAMEL),
for the assessment of banks’ health. It is heartwarming that most countries in Africa have
imbibed some form of risk-based banking
III. Relationship between sustainable banking and risk
There is no gainsaying that effective risk management backed by
good governance is the basis of the sustainable bank. The board of
the bank has the responsibility of establishing appropriate structures
for risk management, as well as implementing a sustainability policy
which, amongst others would require mandatory compliance with
relevant laws, regulations and industry standards.
The implications of the bank not establishing appropriate risk
management procedures, to manage sustainability issues in this era
of heightened awareness, could be grave. For instance, if a bank
treats a customer unfairly or its activities end up harming
communities or the environment, not only would it be affected
commercially, its reputation and perception by the public will also be
Sustainable banking entails increased lending to small and medium
enterprises which are known to harbor a high level of risk,
necessitating the need for lenders to understand the pitfalls of such
activities before entering into them. The environmental and social
risks of lending to power, manufacturing, mining, etc, are also high
requiring banks to be circumspect about such activities.
To ensure adherence with sustainable banking principles, banks are
expected to embibe environmental and social risk management
(ESRM) system into their enterprise risk management systems. This
entails the following, among others;
identification of the environmental and social risks associated
with the sector, activities or projects financed by the bank as well
as sectors excluded from financing;
the establishment of structures for ESRM system;
disclosure of the banks’ view on such sustainability issues as
climate change, biodiversity and human rights both at client and
portfolio levels; and
use of appropriate tools for environmental and social risk
identification, analysis, categorization, mitigation and monitoring
Many banks are also signatories to the Equator
Principles (EPs) which are basically a credit risk
management framework for determining, assessing
and managing environmental and social risk in large
ticket project finance transactions. The EPs are
intended to serve as a common baseline and
framework for the implementation by each adopting
institution of its own internal, social and
environmental policies, procedures and standards
related to its project financing activities.
3.0 Global comparison of sustainable
banking and risk management
I. Developed Economies
II. Emerging markets- Asia,
Central and Eastern Europe
III. Developing
EconomiesMiddle East, North Africa
IV. Sub-Saharan Africa
V. Nigeria
The financial times (UK), based publication holds an
annual sustainable banking conference, recognizing
the banks and financial institutions that exhibit
leadership and innovation in integrating social,
environmental, and CSR issues into their operations.
The list of nominees for 2012 sustainable banking
award shows that out of the 21 banks, 11 are from
developed economies and 5 each from emerging and
developing economies, respectively.
i. Developed economies
Banks in developed economies have
been rated fairly high on sustainable
banking. Examples include, Triodos
Bank (Netherland), Deutsche Bank
(Germany) and Standard Chartered Bank
(United Kingdom).
Triodos Bank believes that profit doesn’t need to
be at the expense of world’s most pressing
environmental problems.
Deutsch Bank’s promise includes; understanding
diverse client needs, adding value, building trust and
commitments that endure, acting today, thinking
about tomorrow, demonstrating transparency and
leadership and building Social Capital: Investment in
society and in our own future.
Standard Chattered bank’s ability to create value
for their shareholders is linked intrinsically to the
health and prosperity of the communities in which
they operate. The bank is determined to use its
business model to contribute more broadly to society.
Their three key priorities remain unchanged: to
contribute to the real economy, to promote
sustainable finance and to lead the way in
ii. Emerging markets – Asia & central & eastern Europe
ASIA: Before the crisis of the 1990s, sustainability was not on the
radar of Asian banks, since performance was driven by rapid
economic growth and market liberalization, propelled by massive
capital inflows. Government intervention has helped rebuild
confidence in the market through the establishment of a Risk-Based
approach to lending and investments and credit risk analysis. As
market barriers that have historically inhibited foreign banks from
operating in many Asian countries have fallen, competition has
intensified. Foreign banks are taking up equity stakes in domestic
banks and are competing for market share. The infusion of corporate
sustainability policies and procedures by foreign banks into their
Asian subsidiaries may encourage leading domestic banks to adopt
sustainable lending practices.
Thus for the next decade, sustainable banking in Asia is likely to be
driven by market mechanisms, such as privatization and
consolidation, and the importance of Asian export in the global
supply chains.
In the Central and Eastern Europe including the former USSR:
Sustainability consideration for banks is largely affected by
proximity to the European Union (EU). As European export
regulations and market based mechanism such as labeling and
certification, have strong social and environmental component,
they generate higher demand for cleaner production and energy
efficiency finance, especially for member countries and
countries planning to join the union. This strongly influences
the manufacturing standards and trade in general, and thereby
impacts on the level of sustainable banking in the region.
iii. Developing Economies
Middle East, North Africa
IFC and the World Bank are completing joint pilot programs in
sustainable finance in Egypt, Morocco, and Tunisia. The programs
aim to identify the drivers for sustainable finance in these countries
and develop the capacity of Central Banks and local banking
institutions for sustainable finance. In response, banking associations
of the three countries, with the support of their central banks have
sponsored capacity building workshops and issues publications on
managing environmental risk.
Middle East and North Africa cont:
The Tunisian government has identified significant opportunity to upgrade
the entire production system and establish a branded product. Egypt has
enacted a National Energy Efficiency strategy which focuses on three
goals: accelerating the use of natural gas instead of oil; developing
national energy efficiency codes and standards; and promoting private
investment in energy efficiency activities.
The banking sector is becoming increasingly aware of environmental and
social risks and opportunities in the region and is taking steps to manage
them. For example, International Commerce Bank (CIB) which operates
in Egypt, Qatar, and Saudi Arabia has recently joined the Global Banking
Alliance for Women (GBA), a worldwide group of banks that are sharing
best practices to accelerate the global growth and development of
women’s businesses and women’s wealth creation.
The sub-saharan Africa
The region’s social and environmental
regulations have been steadily improving
over the past decade. For example, in South
Africa, financial institutions can be found
liable for environmental pollution and risks
of social nature under the South African
National Environmental Management Act
(NEMA). Another good example of
improvement is in the area of corporate
Committee on Corporate Governance).
In 2011, Access Bank of Nigeria emerged the winner of the 2011 FT/IFC
“Sustainable Bank of the Year Award” for Africa and Middle East region.
In the bid to incorporate sustainability in the banking sector, the members
Nigerian Bankers Committee developed sustainable banking principles for
the Nigerian banking sector, to drive long-term growth and help the industry
focus on development priorities, as well as safeguard the environment and
its people. This strategic turn is particularly appropriate, more so, with the
current global financial crisis that has brought threats to the global financial
services sector and also as a result of the governance, ethics and risk
management issues that have besieged the Nigerian banking system. The
Sustainable Banking Principles cover oil and gas, power (with a focus in
renewable energy), agriculture and related water resources issues. This will
give banks guidelines on when and what to invest on. Prior to
announcement for sustainable banking principles, Corporate Social
Responsibility (CSR) amongst Nigerian banks was mainly centered on
corporate community investments or corporate giving. These include
construction of roads and decoration of public spaces; donations to
hospitals, schools, local communities, prisons and orphanages; economic
empowerment and poverty alleviation. Sustainable banking however
involves more than philanthropic spending. It also involves the
consideration of environmental, social and governance issues in investment
and financial decisions.
These improvements in sustainable banking and risk
management, are important to the
Africa continent in
general in view of the strong competition for international
investors both from within the continent and emerging
markets in other continents especially Asia and Latin
It is imperative that Africa must craft processes, policies
and practices that would fast track the improvements in
sustainable banking and robust risk management. To
achieve this, this paper proposes the Feed Forward System.
Factors (How, Why &
Processes (Policies & Regulations)
The Feed Forward System.

similar documents