Banking on the Environment

By Elizabeth Levy
Winslow Environmental News

July 2005

Finance has implications beyond banks’ ledger books. From investments to loans, financial services companies affect the world around them. Whatever projects they fund, from oil extraction to entrepreneurial businesses to home ownership, they impact the physical and social environment – for better or worse.

Financial institutions, broadly defined, can have many different types of environmental impacts, depending on the type, location and scale of activities in which they engage. This article presents examples of some of the ways that financial institutions operating at three different levels – funding small, medium and large projects – can influence environmental outcomes.

Micro help to those who need it

At the most local level, microcredit banks provide capital directly to people in need. Microcredit loans, typically in the range of tens to hundreds of dollars, help borrowers transition out of subsistence living by providing money for small entrepreneurial enterprises.

One of the pioneers of microfinance is Bangladesh’s member-owned Grameen Bank, providing housing, educational and income-generating loans to its members. Grameen has dispersed $4.79 billion to its 4.48 million members as of April 2005, with a loan recovery rate of 99%. Notably, Grameen has been profitable for all but three years since its founding in 1983 and has not needed or accepted donor funds or loans since 1998.

Microcredit banks are in a unique position to encourage borrowers to incorporate environmental protection into local projects. For example, damage assessments after the December 2004 tsunami have revealed that degraded coastal areas suffered more destruction than those with intact mangrove forests and wetlands. Extrapolating from this, the February issue of the UN Capital Development Fund’s Microfinance MATTERS noted that microcredit organizations can play a major role in future sustainability efforts by encouraging or requiring borrowers to include conservation measures as part of rebuilding loans.

Mid-level Community-Based Financing

Among these is Wainwright Bank, a Boston-based financial services company active in community investment, as highlighted in this issue’s Featured Company article. Also in Winslow’s neighborhood, Boston Community Capital (BCC) is solely devoted to providing community resources. BCC’s Boston Community Loan Fund provides loans and assistance to local organizations, such as developers of affordable housing, childcare centers or other social services. The Loan Fund has committed more than $140 million over its history and has written off less than 0.10%, beating commercial banks’ 2004 write-off rate of 0.47%, according to Federal Deposit Insurance Corporation (FDIC) data.

Community investment financers have a particular opportunity to raise environmental awareness. Both BCC and Wainwright, for example, provide loans specifically for green building projects, and BCC also offers expert advice on green enhancements to clients that might not have even considered environmental aspects of their projects. BCC’s Chief Operating Officer, DeWitt Jones, explained that in addition to providing necessary capital for projects, “We are committed to…providing borrowers with access to the most up-to-date standards and experience on new sustainable technologies.”

Impacts on a Large Scale

While large commercial banks are usually not directly involved in development projects that they finance – such as telecommunications, energy or resource extraction infrastructure – they do influence project selection and development. According to an April 2005 report by Bank Track, a consortium of non-governmental organizations (NGOs) monitoring the sector’s environmental impact, the financing of major development projects “may result in unsustainable practices because banks and project sponsors (bank clients) often do not produce adequate environmental and social impact assessments.”

In response to such criticism, 10 financial institutions from seven countries launched the Equator Principles in June 2003. The Principles provide a common method for signatories (31 as of June 1, 2005) to analyze the environmental and social risks of projects before they’re begun. Additionally, they require borrowers to develop impact management plans following established best practices, and allow lenders to call in loans if borrowers don’t meet those conditions. While some critics have noted that the Principles don’t set out absolute standards, they can help protect lenders from risks to their own institutional wellbeing. As an article in Project Finance International’s Yearbook 2004 noted, “…Banks that fail to weigh and address [environmental and social considerations] could be overlooking significant credit and reputation risk, let alone the potentially costly project liability that might arise from an environmental mishap or miscalculation.”

A “Tipping Point”

Increasingly, the financial services industry is recognizing its responsibility for the social and environmental impacts of its lending and investment practices while discovering the opportunities these wise practices can yield. For example, partnerships between microcredit institutions and commercial banks are developing worldwide and allowing microfinancers to extend their services and banks to expand to new markets, such as Citgroup’s underwriting of a bond raised by Mexican microfinancer Compartamos in August 2004.

This spring, the sector’s clarion call may have come from JPMorgan Chase, which had been targeted by NGOs for its delay in publishing an environmental policy, non-participation in the Equator Principles and lack of transparency. A March 2005 headline on SocialFunds.com posed the question, “Comparing Citigroup and JPMorgan Chase Policies: Which Stems Illegal Logging in Indonesia?” and speculated whether JPMC’s overdue environmental policies would be as comprehensive as those of leaders Citigroup and Bank of America. The next month, JPMC adopted the Equator Principles and released an inclusive environmental policy to great acclaim, prompting SocialFunds.com to declare: “JPMorgan Chase Environmental Policy Triggers Tipping Point for U.S. Bank Sustainability.” Based on these recent developments, it’s clear that the path forward for financial services companies will continue to include increasing environmental responsibility.

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