Climate change is a global concern. It threatens our ecosystems and the survival of future generations. It can lead to unpredictable weather, flood our coasts due to a rise in the sea level, and strain our food and water supply, among others.
Furthermore, climate change and natural hazards will progressively impact sectors that are strategically important for growth of the economy, e.g. agriculture, fisheries, and water resource management. Increase in temperature, coupled with changes in precipitation patterns and hydrological regimes, can only exacerbate the country’s existing vulnerabilities, threatening its sustainable development.
Climate change is primarily caused by accumulation of greenhouse gases (e.g. carbon dioxide, methane) in the atmosphere, trapping the sun’s heat. There are two approaches to address the impacts of climate change. First is mitigation—technological change and changes in activities that reduce resources inputs and emissions per unit of output and implementing policies to reduce greenhouse gas emissions and enhance sinks. Second is adaption – in human systems, the process of adjustment to actual or expected climate and its effects, in order to moderate harm or exploit beneficial opportunities. In natural systems, the process of adjustment to actual climate and its effect.
Banks must realize its role with respect to climate change and the environment. On the one hand, environmental risks can create challenges for banks’ performance, especially in its transactions like lending. On the other hand, banks can also influence the environment, both directly and indirectly, in its internal processes and program objectives.
Environmental risk can lead to economic and reputational losses. A financial project that is declared a pollutant can be sued and fined, affecting its debt repayment capacity. Also, the bank can be publicly blamed for irresponsible lending, thus exposing itself to reputational risk. In addition to loan default risk by debtors, other risk includes reduced value of collateral, changing market, and so on.
The banking industry has both a direct and an indirect influence on the environment.
Direct impacts are related to the operations within banks, such as energy consumption for lighting, heating, using computers and ATM machines, water and paper usage, waste disposal, and business travels. Indirect impacts, also called external environment impacts, refer to the impact caused by banks’ clients who are provided with financial services. This covers a wide range, including selling financial products, deposits, and lending transactions. Compared with direct environmental impacts, the indirect ones seem more significant and therefore deserve more consideration.
Incorporating environmental principles into banking policies becomes very important. It can save the banks losses caused by environmental risk, and at the same time, promote environmental protection. The approach need not be isolated to defensive or preventive postures where the objectives are simply avoiding environmental costs or saving on other costs. In the pro-active sphere, the bank actually recognizes an environmental concern as competitive opportunity in the financial market.
Responding to the call for climate change action, the Development Bank of the Philippines (DBP) signed in 2015 two statements/agreements supporting climate change actions in the Philippines, namely: The Case for Business Action on Climate Change and the Manila Declaration 2015. In the first, DBP “committed to using our innovation, economic influence and entrepreneurial spirit to seek ways to address both the environmental and societal challenges created by global warming.” Under the latter, DBP joined hands with MBC, MAP, PBE, PBSP, PCCI and Finex “to define our country’s Intended Nationally Determined Contributions (INDCs) that are aligned with national priorities, circumstances and capabilities.”
Furthermore, in support of the Climate Change Act, the DBP has enhanced its Green Financing Program (GFP) to incorporate climate change adaption and mitigation (CCA/M) and disaster risk reduction (DDR) measures into the eligible projects that can be funded under the Program, and institutionalize a climate-resilient approach to project financing by incorporating CCA/M and DRR considerations in the evaluation and implementation of all DBP-funded projects. This approach forms part of the credit process, specifically in the assessment of projects in terms of their technical, environmental, and social aspects, including good governance.
Bank policies and management can be “greened” to promote sustainable development. Green finance within the banking sector includes a full spectrum of market-based lending and investing businesses, involving retail banking, project financing, asset management, as well as the types of loans and investment finance that are all geared responsibly toward promoting the welfare of the environment and society. Green finance involves changing the processes in business review; as well as changing the object of finance to meet not just the requirements of the present but aiming for the future we want.
Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.