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Developing Green Banking Products In Bangladesh : Involvement Of Stakeholders
Environmental safety and sustainable ecological balance have appeared as significant argument of the twenty first century as increasing number of “green” technologies are finding their way into the numerous functional areas including banking. As environmental concern gain greater consideration, pressure is being placed on all industries, along with financial services to implement green initiatives. Environmental concern has risen in the 1990s, while green banking is not yet a predominant reason for most customers to choose one financial institution over another; customer interests and greater environmental awareness are influencing a number of financial institutions to go green. In an economy defined by increasing globalization, industries and firms are obligated to be affected by forceful environmental policies which have strike not only consumer to go for green, but also placed high on the list management’s priorities. For example, 78% of CEOs of the top 50 firms agreed with the importance of green issues to their firm’s present activities and 82% considered that greening would be more important in the future (Peattie and Ring, 1993). Through larger investment in greening the firm can minimizes environmental sabotage and serves an important competitive advantage (Porter and van der Linde, 1995). Among both developed and developing economies, green investment is now the prior economic mantra. With most developed economies oppressed with debt after the 2008-09 global recession when they have to pay off debt (as is the case in a number of EU member states and the USA), then their spending power is consequently reduced and channeling funds to tomorrow's green infrastructure becomes more problematic. However, the process can be promoted, but it may require that the firm substantially change its culture to include green issues into all business decisions and activities (McDaniel and Rylander, 1993).
The opportunity or coverage and benefits of green banking are by and large recognized. Since banks provide funds to the industries and firms, they can come across severe credit and liability risks under such environmental policies. Further, the quality of their assets and rate of return in the long-run may also be affected by environmental policy impacts. Thus banks are finding it essential for them to go green and play a pro-active role to take environmental and ecological aspects as part of their lending principle, which would force industries and other categories of borrowers to direct themselves towards environmental management, usage of appropriate technologies and appropriate management systems. Green banking clearly has a direct and positive effect on the environment, but the benefits go much further, reaching into security and cost (Javelin Research, 2009). Green finance may cover all the financial services related to the promotion and development of green industry and green economy. The banking sector influences the economic growth and development in terms of both quality and quantity, there by changing the nature of economic growth. Banking sector is one of the major sources of financing investment for commercial projects which is one of the most important economic activities for economic growth. Therefore, banking sector can play a crucial role in promoting environmentally sustainable and socially responsible investment. Banks, by using their commercial lending and securities underwriting, are in a position to catalyze the necessary transition to an economy that minimizes green house gas pollution and relies on energy efficiency and low/no carbon energy sources (Bank Track 2010). Corporate firms are also finding that “going green” makes good business sense as well as good environmental sense (Menon and Menon, 1997, Porter and van der Linde, 1995). IFC (2010) notes that international organizations/institutions can influence the corporate practices in regard to the climate change aspects, but only banks, institutional investors, and other financial institutions have the power to change them.
However, banks which have not involved key environmental stakeholders or which have not adopted a learning-organization approach to business (e.g. risk taking and outward looking), will find that adopting a green mindset is difficult. The new generation Banks and financial institutions in Bangladesh are particularly embracing environment protection with every passing day, in some cases with a missionary zeal to protect the mother earth. This is done both as a part of their corporate social responsibility and as a drive towards socially and ethically responsible banking. They are gradually coming to realize that there is a need for a shift from ‘Profit, profit and profit’ motive to ‘planet, people and profit’ orientation for sustainable development in the long run. In fact, the concept of socially responsible banking has grown considerably with the dawn of twenty first century with the growth in green movement and emergence of a new generation of environmental activists. Further, those industries which have already become green and those, which are making serious attempts to grow green, should be accorded priority to lending by the banks. This method of finance can be called as “ Green Banking ”, an effort by the banks to make the industries grow green and in the process restore the natural environment. This concept of “Green Banking” will be mutually beneficial to the banks, industries and the economy. To maximize this opportunity, banks must shift to an organizational-learning approach, such that the banks adopt an outward-looking and risk taking orientation.
There is some evidence that some banks in Bangladesh have already adopted innovative learning-organization initiatives and are including wider environmental input in strategy development by involving environmental groups or stakeholders in their product development or “New Green Banking Product Development (NGBPD)” process. For example, DBBL has the largest on-line banking network and extensively using its on-line facilities which has brought user-friendly state-of-the-art technologies for the masses, offering variety of product supports at a minimum costs and fostering fastest customer services through its professional expertise. The bank has also formed a Green Banking Cell of separate dedicated team , consisting of 06 (six) officials from related divisions led by Head of Credit Division who may contribute with the vested responsibilities in line with the principles towards implementation and reporting of Green Banking initiatives of the Bank. All the Divisions, Branches and senior level management have been informed on the principles and responsibilities on their part. The team is actively working covering the respective areas for compliance.
Using Bangladeshi samples, this article tries to address the current position of environmental responsible banking by commercial banks in Bangladesh and examines which stakeholders should be involved in the developing of green banking products in Bangladesh, and what strategies can be used to involve these stakeholders and how banks can learn from these interactions. The results will hopefully provide some insights into strategies and approaches that can be used by others to develop less environmentally harmful green banking products.
There are studies showing positive correlation between environmental performance and financial performance (Hamilton, 1995; Hart, 1995; Blacconiere and Pattern, 1993). Thus, it is imperative for the banking institutions in the present context to consider environmental performance in deciding whether to invest in companies or advise clients to do so. There are also few cases where environmental management system has resulted in cost savings, increase in bond value etc. (Heim, G et al, 2005). In few cases the environmental management system resulted in lower risk, greater environmental stewardship and increase in operating profit. The banking and financial institutions should prepare an environmental risk and liability guidelines on development of protective policies and reporting for each project they finance or invest (Jeucken, 2001). Though Schmidheiny and Zorraquin (1996) concluded that banks are not hindering the achievement of sustainability, banks can also play a hindering role for sustainable development because (1) they prefer short-terms payback periods where as sustainable development needs long-term investment (2) investment which take into account of environmental side-effects usually have lower rate of return in short-term (Jeucken and Bouma, 1999).
Habib Pandit Mizan et al (2010) in their research paper, “Environmental Responsibilities of Banks: A Proposed Framework for Banking sector of Bangladesh” have found out “Environmentally Responsible banking is a concept that is gradually receiving attention and acceptance from the depositors and investors who are not only searching for a place to save and invest their money safely, but also a place where their money will be channeled to productive activities which are free from elements that contribute to the deterioration towards standard of living and environmental aspects.” In the Paper “Environmentally Responsible Banking in USA”, Shah Habib (2011) also emphasized about green lesson for banks in Bangladesh. It covers examination of survey information on selected US banks to draw lesson and the status of environmentally responsible banking practices in Bangladesh.
The article, “Developing Green Products: Learning from Stakeholders”, researched by Polonsky, Rosenberger and Ottman (1998), examines US and Australian markets’ perception of stakeholders’ potential to motivate the process for producing new green product, and the strategies for making greater involvement from stakeholders. They focused a point of view where there is limited formal communication between firms and its stakeholders (with high influencing abilities), and they are learning from others with less green product expertise.
The paper, “Green Banking practices in Bangladesh” written by Islam and Das (2013), portrays the green baking practices in Bangladesh. Study is mainly based on secondary data highlighting the mobile banking, online banking, green financing, and guidelines for green banking practices as well as green banking unit.
The economic theory of market failure (externalities and public goods) has strong correlation with environmental adulteration and rectifying measures. Air pollution, water pollution, green house gas emission etc. are occurred as negative externalities (Activities that degrade environmental qualities and affect third parties) for the exploitation of environment by business firms (supply side of goods and services) and consumers (demand side). Banks/financial institutions are being made responsible on the ground of financing these business/economic activities.
The concepts of externalities and public goods are closely associated. In today’s world, focus on global public goods (GPGs) and innovative financing mechanisms are closely related to sustainable development (Binger 2003). The GPGs with cost is also known as Global Public Bads (GPBs). The results of the global pollutions and emissions like global warming, contamination, disruption of eco-systems etc are GPBs. The negative externalities and GPBs are the burdens of the entire society. As the theories of Economics go, the motivation for providing GPGs arises from a desire to produce or enhance positive externalities and correct negative ones. In the area of environment, efforts for conservation and reduction of emission are GPGs (Morissey et. al. 2002).
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Global climate change is the greatest environmental challenge of the earth that is caused mainly by the rise of global temperatures and may have devastating effects on the planet and it’s in habitants in the near future. There is overwhelming consensus that these changes are human induced and governments, businesses and consumers are individually and collectively responsible forces. As the financiers of economic and business activities, banks and financial institutions also cannot avoid liabilities. Bangladesh is a low carbon dioxide emitting country even among the developing countries; however, it is likely to be one of the worst sufferers of climate change. Considering the severity of potential adverse impact, the responses of the stakeholders including banks in the country remained inadequate.
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The variation in the impact of environmental policy and climate change responses make it difficult to generalize about the changing need for financial services and responsibilities of institutions. Alongside formulation of environmentally responsible policies and strategies, banks have huge scope to reduce the use of electricity, petroleum and paper. Banks may undertake and support tree plantation. Through creating Environment Risk Fund, banks should ensure smooth flow of financing to the disaster-prone areas. Banks may help availing of the opportunities of Clean Development Mechanism (CDM) projects to optimize cash flow of project financing. For climate initiatives, cooperation among banks, NGOs and business houses may bring effective output. Nonetheless, it is obvious that financial industry, consumers, governments, and businesses each have different vulnerabilities to environmental issues and responsibilities. Being the core component of the financial industry of Bangladesh, effective green strategy of banks is expected to complement the efforts of other stakeholders and help attain national action plan.
Need for intergovernmental efforts to handle environmental issues are well recognized. In this connection, Kyoto Protocol (The United Nations Framework Convention on Climate Change, aimed at fighting global warming.) is a remarkable initiative, which was adopted in 1997. As of January 2010, 187 states have signed and ratified the protocol under which 37 industrialized countries committed themselves to a reduction of four greenhouse gases and all member countries gave general commitments. Banks and financial institutions have also been involved in designing and framing guidelines and standards to be followed by the banking and financial communities. A good number of environment related principles, guidelines and standards have been developed over time by the international organizations for the improvement of the Environmental Responsibility (ER) practices. Some examples of these include Equator Principles (EPs), UN Principles for Responsible Investment (UNPRI), UNEP Finance Initiative Statements etc. In the area of project financing, The Eps are a set of voluntary commitments, designed by group of banks based on the environmental and social policies and guidelines of IFC. UN and commercial and investment banks, fund managers, and insurance companies are also made a collaborative effort to set a standard called UNEP Finance Initiative Statements.
Before the early 1990s, many banks used to consider environmental compliance by their clients as a kind of interference in the businesses of the customers (Zeitlberger 200 7). The attitude has changed dramatically over time. US banks are early starters that drastically began changing their policies after enforcement of the Comprehensive Environmental Responses, Compensation, and Liability Act (CERCLA) by the US government in 1980. CERCLA holds US banks directly responsible for contamination caused by their clients (Weber et. al. 2008). Besides enforcing regulations, governments and central banks in many economies have been undertaking initiatives to support ER practices by banks. Governments are also responding positively to the suggestions of stakeholders. In 2009, Green Alliance proposed to set up a Green Investment Bank in order to deliver a low carbon economy in the UK and US government responded positively (Reuters 2010). In 2007, a Green Credit Policy was jointly developed by the State Environmental Protection Agency, the People's Bank of China, and the China Banking Regulatory Commission with the objective to guide loan financing away from highly polluting and/or energy consuming enterprises and projects. According to the policy, firms that fail to pass an environmental assessment or implement state environmental protection regulations will be disqualified from receiving loans from any financial institution. The policy sends a strong message to banks concerning new responsibilities towards environmental protection (Business Issues Bulletin 2009).
Approaches and Activities of IFIs and IGOs
According to a survey on selected banks by Jeucken (2001), close to 60 percent of the banks worldwide have an environmental policy statement: looking at the regional differentiation this applies to 67 percent of the European banks, 50 percent of the banks in North America and 25 percent of the banks in Oceania (standardized). Basically, banks have been getting aware of environmental risks since the beginning of the 1990s, and about 56 percent of the banks paying close attention to environmental aspects when setting up credit and financing agreements by2000.
Table- 3: Mega Banks Behaving Responsibly: HSBC
HSBC Holding PCL is one of the largest financial institutions in the world with total assets of around USD 2.5 trillion. HSBC is active in more than 80 countries, providing consumer and commercial banking services, credit cards, asset management, private banking, securities underwriting and trading, insurance, and leasing. The bank is ranked Number One by Ceres (of the global 40 largest banks) for its environmental activities globally for 2008. The Bank has specific Environment and Sustainability Policy and Strategies. In December 2004, HSBC made a commitment to become the world’s first major bank to achieve carbon neutrality and it met the target in 2006. At the board level, there are two committees that have responsibility for climate change matters. The Group Management Board, which is chaired by the Group Chief Executive, operates as a general management committee under the direct authority of the Board. The second committee with board representation is the Corporate Responsibility Committee (CR), which is responsible for overseeing corporate responsibility and sustainability policies. As part of its internal environment management, HSBC sets reduction targets for energy, water and waste, as well as GHG emissions, covering 90 percent of its product portfolio. In financing, HSBC has issued five sector lending guideline reports on forest lands and forest products, freshwater infrastructure, the chemicals industry, the metals & mining industry, and the energy industry. HSBC has also called on clients to disclose their carbon emissions and mitigation strategies in a consistent manner. It follows Equator Principles in its project financing activities. HSBC is associated with the Bali Communique; member of EPA Climate Leaders; member of EPA Green Power Partners; signatory of Equator Principles; associated with Extractive Industries Transparency Initiative, and G8 Gleneagles Initiative; member of Institutional Investors Group on Climate Change; member of UNEP-Finance Initiative; signatory of Climate Principles, Carbon Disclosure Project, Extractive Industries Transparency Initiative (EITI), GRI, UN Global Compact (UNGC), and Wolfsberg Principles (WP). In 2007, the bank launched HSBC Climate Partnership, a five-year, USD100 million partnerships among HSBC, The Climate Group, Earth Watch Institute, Smithsonian Tropical Research Institute and WWF. The program involves carbon measurement in forests and protection of major rivers from the impacts of climate change. HSBC published its ‘World Sustainability Report 2009’ following GRI guidelines in 2010. The report identified six priority areas of which four are directly related to their environmental responsibility.
Source: Habib (2010)