plenary 5_kondkhar millat

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nv ronmen a s anagemen u e nes: Bangladesh Experience

Khondkar Morshed Mil latJoint Direct or

Banking Regulat ion and Policy Depart ment

ADB PSOD

TRAINING SEMINAR ON

ENVIRONMENTAL AND SOCIAL MANAGEMENT SYSTEMS

FOR PRIVATE SECTOR FINANCIAL INTERMEDIARIES

Manila, Philippines

April 19, 2012

The views in this presentation are the views of the author and do not necessarily reflect the views or

policies of the Asian Development Bank (ADB), or its Board of Governors, or the government they

represent. ADB does not guarantee the accuracy of the data included in this presentation andaccepts no responsibility for any consequence of their use. Terminology used may not necessarily

be consistent with ADB official terms.


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a s nv ronmen a s

v .is a facilitating element of credit risk arising from

.

environmental conditions generating an elementof uncertaint or ossibilit of loss in the context of a financing transaction.


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What does Environmental management and

Environmental mana ementis not about the

management of the environment by anenvironmentalist, but rather about the organizationcontrolling its activities that have or could have an

impact on the environment.Environmental Risk Managementis about thePlan, Organize, Lead and Control the

env ronmenta r s s. ot o erat ng s ,Not Transferring Risk but to Treat Risk.


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Why Environmental Risk Management?(Bangladesh Context)

Bangladesh is one of the most climate change vulnerable countries.

The state of environment in Bangladesh is deteriorating.

environmental condition.

Due to unusual weather pattern, rising greenhouse gas, declining air,

safeguarding the planet.

-and low carbon industries i.e. green industry and green economy ingeneral.


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Why Environmental Risk Management?(Financial Sector Relevance)

B nk FI n r h ir x r

to credit risks arising from environmentaln lim h n i n l

lower NPAs

performance implies greater acceptance,


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Evolution of Bangladesh Bank's policies and practice

--BBs earlier major instructions for the banks :

facilitate their clients with utmost care in opening L/C for installation of ETP in the

industrial units.

finance in Solar Energy, Bio-gas and ETP.

comply with the guidelines on Corporate Social Responsibility (CSR)

- to concentrate on linking CSR at their highest corporate level

- for ingraining environmentally and socially responsible practices

- .

Banks have been brought under the purview of E-Commerce with a view to providing

the customers with online-banking facilities covering

- ,

- money transfer and

- transactions in local currency through internet.

. - , ,

ETP and Hybrid Hoffman Kiln (HHK) in brick field.


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Motivation behind integratingenv ronmen a cons era ons

The sense of social responsibility of the Bangladesh Bank as an organization was the mainr v ng mo va on

This was preceded by BBs issuance of guidance circular for mainstreaming CorporateSocial Responsibility in the corporate goals and objectives of all banks and financialinstitutions

e nanc a sector was c ose y nvo ve n t e consu tat ve processes o creat ng t eguidelines

The commitment of banks and financial institutions for implementation of these guidelineswill follow logically from their embracing and ingraining of social responsibility in their corecorpora e goa s an o ec ves

The need to recognize the credit risks associated with environment have long beenapparent and ERM Guidelines from the Bangladesh Bank are a mechanism to ensure thatBanks and financial Institutions incorporate Environmental Risk into their credit risk

Earlier in 2010 , BB in association with IFC arranged workshops and awareness programsfor the banks and FIs covering as many as 300 officials in all major divisions of the country.Afterwards, these awareness programs were kept running in association with ADB and

. .


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BBs In-house environment friendl activities

Over the past few years, BB has initiated adoption of sustainablepractices in several areas.

Introducin the use of renewable ener with the installation of asolar power system in the main building of BB Head Office.

-,damaged bank notes is being phased out, resorting instead toshredding. The shreds are sold to private sector manufacturers.

Steps for measuring the carbon footprint of Bangladesh Banksinternal processes and operations are also underway; eventually to

.


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Purpose and Stages of Environmental Risk Management

General Purpose To understand and manage risks that arise from environmental and climate

c ange concerns.

Specific Purpose

Identifying, evaluating and managing risks Taking better decisions

tages Identifying risks

Rating risks

Mitigating risks

Monitoring & controlling risks


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L n l i n

Regulatory non-compliance

Labour / social risks

Chan in ex ort market conditions

Climate change impacts


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Direct Risk

Indirect Risk

Reputation Risk


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Types of Environmental Risks those are interlinked to

principal elements of Credit Risk

us ness n ustry r s

anagement r s

ecur ty co atera r s

ega s


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Environmental risk & credit risk (Distinction & Linkage)

Credit Risk is different from EnvironmentalRisk in identity

Credit Risk is what it is in a financial deal

Environmental Risk is not a part of

Credit Risk

Major Environmental issues and thereby High

even Moderate. Environmental Risk in this

case has less or marginal impact overCredit Risk in the Overall Credit RiskMethodology

nv ronmen a s a ng can wea en even

Strong Graded Credit Risk. Environmental Riskin this case has greater impact over Credit Risk

in the Overall Credit Risk Methodology

Sources of Environmental Risk and

Credit Risk are different from

respective risk point of view whatever

Some environmental risks those areinterlinked to principal elements ofCredit Risks still do not give anindication that Environmental Risk is

separate)

Management component will certainly

have se arate wei ht in BBs CAMELS

a part of Credit Risk.

Management component will certainly haveseparate weight in BBs CAMELS rating for a

bank for its Environmental Risk

rating for a bank for its Credit Risk.

Separate treatment in existing guidelines of

Risk Based Capital Adequacy(RBCA) for

Separate treatment in existing guidelines ofRBCA for Environmental Risk in computation ofAde uate Ca ital b BB

Credit Risk. Basel Capital Accord does not

recognize Environmental Risk is a Part of

Credit Risk


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Principles Integration of ERM in Banks/FIs credit policies and

procedures. Ca acit buildin of staff relevant to Environmental Risk

Management. Adoption of a value adding approach to ERM with their

potential borrower. Requirements Top management review to determine whether ERM is

bein effectivel racticed in its o erations.

Roles, responsibilities and authorities No separate management is required. Credit risk

care of the environmental issues/factors.


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Key responsibilities in different functions To be awareness of environmental issues

To communicate to the potential borrower To assess the potential borrower

management function.

To ensure that the additional financing conditions/covenants, if any,are included in the agreements.

To ensure that environmental risk monitoring should also beundertaken as a part of monitoring credit risks.

The Chief Executive of the Banks/FIs will be responsible for

Credit Risk Management. The operational responsibility will be with the Head of Credit or any

of the senior management team member nominated by the Chief.


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Procedures Identifying and planning for Environmental risks EDD checklist given in the Technical Annex and EnvRR given in the Technical Manual are to be

comp ete pr or to orwar ng t e propose nanc ng to t e cre t r s management orconsideration.

Integrating Environmental risks with Credit Risk Management In this credit risk management function, it is required to verify whether the EnvRR has been

correctly done. Wherever the EnvRR is High, the credit risk management function will ensure that additional

conditions / covenants are included. The borrower will conduct business and maintain property in compliance with all environmental

laws The borrower will provide environmental clearance certificates as and when obtained or renewed

e orrower w ave emergency response proce ures n p ace The borrower will take immediate and necessary remedial action in the event of a hazardous spill

or release. The borrower will not use the property for disposing of, producing, treating, storing or using

contaminants, pollutants, toxic substances or hazardous materials or wastes.

e orrower w emp oy a separate env ronmenta manager w t requ re ac groun an s sto address environmental problems. The borrower will ensure adequate preparedness to climate change induced extreme events

such as floods and cyclones. At a portfolio level, Banks/FIs should classify their financing of business activities across the

, ,(Schedule 1 of the ECR 1997). Banks/FIs should estimate the number and financial exposure toeach of these categories.


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Or anizational Re uirements Credit processing and approval process: Incorporating Environmental risk covenants Banks/FIs need to modify credit processing and approval processes to include Environmental Risk

. Wherever the EnvRR is High, the credit approval decision should be taken by the Executive

Committee / Board. For all other ratings of the EnvRR, there is no separate requirement forapproval decision.

All credit agreements should include the standard condition / covenant about meeting there ulator re uirements.

At the time of approving the financing, it needs to be ensured that the appropriate, additionalcondition / covenant has been included wherever EnvRR is High.

Credit Administration:Verifying Environmental risk considerations

Credit Monitoring:Carrying out Environmental risk monitoring

is being adopted. Banks/FIs should follow-up with the borrower on the findings of the inspections. Credit recovery No new procedures are required in relation to environmental risk management. - Banks/FIs should establish and maintain a database of NPLs that are due to environmental

reasons. Reporting system Reporting system for intimating management, shareholders, and other stakeholders on the use of

ese u e nes.


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Technical ManualEnvironmental regulationsBangladesh ECA 1995 and ECR 1997 are the most important regulations.

Procedural requirements

Industrial unit and projects shall in consideration of their location and impact onthe environment be classified into the following 4 categories:

Green least polluting, 22 unitsOrange-A-medium scale impacts, 26 types

Orange-B --medium scale impacts, 69 typesRed --most ollutin 69 t es

For the each category of industries, there are different levels of documents tobe provided at the time of seeking the Environmental Clearance Certificate.Standards re uirements

ECR 1997 prescribes various performance standards requirements that areboth general and industry specific. Such as Water (Schedule 3), Sound(Schedule 4), Sewage discharge (Schedule 9) etc.

Standards have to be met in order to ensure that there is no legal non-

compliance.


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Preliminar Environmental Risk Review

Introduction Preliminary environmental risk review using.

There is one General EDD checklist (Technical

Annex 4.1 Ten Sector EDD checklists A Guidance Matrix (Technical Annex 4.11)

Environmental Clearance Certificate from DOEis required for both new and expansion ofexistin business activities.


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These aspects are covered in the General

there are environmental risks are not, the

General EDD checklist should be used. Sector-specific aspects

be used if the proposal for financing is inany of the ten sectors(say).


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Technical Annexes

General EDD Checklist for all proposals

Sector Environmental Due-Diligence Checklist: Agri-business(Poultry & Dairy) Sector Environmental Due-Diligence Checklist: Cement

Sector Environmental Due-Diligence Checklist: Chemicals (Fertilizers,Pesticides and Pharmaceuticals)

Sector Environmental Due-Diligence Checklist: Engineering and basic metal Sector Environmental Due-Diligence Checklist: Housing Sector Environmental Due-Dili ence Checklist: Pul & Pa er

Sector Environmental Due-Diligence Checklist: Sugar & Distilleries Sector Environmental Due-Diligence Checklist: Tannery Sector Environmental Due-Diligence Checklist: Textile and Apparels

ec or nv ronmen a ue- gence ec s : p rea ng ERM: Technical Annexes: Matrix for Quick Guidance on Potential Environmental Risks


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Environmental regulations requirement covering mainly

Bangladesh ECA 1995 an ECR 199

Environmental Risk Rating are required for all individualcustomers corporate, nst tut ona , persona , sma anmedium enterprise) whose aggregate facilities are above

the following financing thresholds:

For Small and Medium Enterprises (SMEs), financing >BDT 2.5 million

For Corporate, financing > BDT 10 million. and

For real estate financing > BDT 10 million.


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v

Overall Environmental Risk Rating (OEnvRR):

General EDD Sector-specific EDD OEnvRR Low Low Low

Moderate/Low Low/Moderate Moderate

If any one or both the General and Sector-specific EDD checklists isindicated as High Then the OEnvRR will be high.


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v

D i i n M kin

If the EnvRR is high, then the proposal for financing will have to be approvedby the Board or its Executive Committee.

,

from a Credit Risk Specialist ranking above the Country Chief ExecutiveOfficer, typically, a regional credit risk head.

If the EnvRR is low or moderate, then the financing decision can beundertaken on the basis of the usual credit risk management guidelines.

If the EnvRR is unclear, then it is required for the Bank/FI to collect moreinformation from the borrower so as to gain an understanding of the inherentr s s an arr ve a a g mo era e ow ec s on.

If a risk factor not be applicable, it may be excluded from the total number of

questions used in calculating


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Environmental Risk Rating

ase tu

Case Study KL Engineering Works.docx


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Environmental Risk Rating

ase tu

Case Study XY Poultry Farm.docx


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General Environmental Due-Diligence Checklist

-

basic metal

- -

(Poultry & Dairy)

EDD.doc


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Challen es ahead Need to build capacity with the staff Need to apply Green Banking and use Environmental Risk

Develop a culture within the organization based on environmentalgovernance

Replicate global as well as local best practice Share knowledge and technical know how with peer groups Further integration with Credit Risk Management

Apply quantitative approach for Environmental Risk Ratingee o eve op a a a ase or ec n ca ss s ance ssues

Developing a systemic arrangement /regulation /policy for insurancecoverage may be taken into active consideration in collaboration withother re ulator bodies

Relocation of different industry with significant environmental impact


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Khondkar Morshed MillatJoint Director, Banking Regulat ion and Policy Depart ment

Bangladesh Bank Head Of f iceEmails: morshed.mil [email protected], mil lat brpd@gmail .com

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