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How do Banks in Latin America Incorporate Environmental Issues?

The Environment, Competitiveness, and Banks

The Environment, People's Well-Being, and Banks

What contribution can Latin American banks make in order to achieve a better, more sustainable balance between environmental performance and quality of life?

• In the industrialized nations, consumer preferences are rapidly orienting themselves toward more environmentally-friendly products and processes. Environmental performance is already a competitive necessity in many markets and industries. In the future it will be even more so.

• The Latin American countries could enter the international economy more successfully if their industries develop competitive strategies based on a more productive, sophisticated and higher-value use of their natural and human resources, and on the incorporation of positive environmental attributes into their goods and services.

• In order to respond to their new competitive needs, banks in Latin America will have to work closely with their clients to identify and finance investments that add "environmental value" to their operations.

• Banks in Latin American have an important role to play in financing a transition toward more sustainable ways of producing, doing business, and living.

The Environment and Latin American Banks' Strategic Interests

Why are environmental issues crucial to the strategic interests of Latin American banks?

• Environmental risk is an important component of financial risk. Many normal transactions in Latin American banks are affected by this type of risk. If they are not evaluated, banks assume risks that they are not aware of. Latin American banks may be even more exposed to environmental risks than industrialized nation banks, since those have years of experience mitigating this type of risk.

• When environmental issues in financial transactions are considered systematically, banks in the industrialized nations, and some leading banks in the region, are reducing risk, reducing operating costs, and creating exciting new business opportunities. These leading banks have a competitive edge over those that do not address environmental performance.

• Each year, multi-lateral and multi-national banks place increasing emphasis on the environmental performance of commercial banks in Latin America in order to establish mutually beneficial relations with them.

• Environmental performance is becoming an increasingly important component in competitiveness for the more successful Latin American companies. The banks that learn to incorporate environmental issues into their financial activities will find better business opportunities and less risk of finding themselves displaced by others that better understand how to take advantage of those opportunities.

A Study on Environmental Performance by Banks

The recent study "Programas ambientales en bancos de América Latina" (Environmental Programs at Latin American Banks) by INCAE's Latin American Center for Competitiveness and Sustainable Development (CLACDS), presents detailed information about the current state of Latin American banks' environmental efforts.

The EcoBanking Project, directed by INCAE's CLACDS (www.ecobanking.com), was carried out with financing from the AVINA Group and in collaboration with the UNEP Initiative for Financial Institutions (UNEP IF) (www.unepfi.org).

Benefits of the Study

• The study evaluated current environmental management commitment and practice by banks across Latin America.

• In addition, a comparison (benchmarking) was made with a group of 77 banks from across the globe.

• Gaps in environmental performance were identified, pointing out opportunities for improving the competitiveness of the banking sector in this area.

• There is now a valuable knowledge base to guide the introduction of advanced environmental performance practices at banks in Latin America. .

The Banks Studied

• Managers and technical personnel from 86 banks in 18 Latin American countries were surveyed.

• Two-thirds of the banks operate operate regionally and almost half in the world arena.

• Some 40% of the banks surpass US $1 billion in assets and 9% have more than US $10 billion worth of assets.

In general terms, the study showed that banks' environmental performance can be categorized into three distinct levels of depth and sophistication:

• Those banks that possess essentially no type of program with regard to environmental issues.

• Those banks, that although they do not possess a corporate policy on environmental performance or specialized procedures for analyzing the environmental risk in projects that they handle, do possess some environmental activities, for example some internal activities (such as recycling, energy savings, etc.), and in addition take some legal precautions when they approve loans and investment projects.

• Those banks that have explicit environmental practices and policies, perform internal environmental process activities, and possess some environmental analysis, evaluation, and monitoring procedures for their financial services. Among the latter, there is a small group of less than 10% that demonstrates environmental compliance comparable to highly competitive banks in the industrialized nations.

The group referenced by the comparative analysis (benchmarking) is composed of 77 banks affiliated with the UNEP Finance Initiatives (UNEP FI). Most are in the industrialized nations (65 in Europe and 7 in North America). Among them are some of the most competitive financial institutions in the world. The following general results arose from the comparison:

• In the reference group banks, there was a majority (between 60% and 70%) of banks with specific actions in the areas of environmental management execution, direction, planning, and follow-up.

• In contrast, among the Latin American banks, the percentage of banks with specific environmental management actions is a minority and is not more than one-fourth. See figure 1.

Note: The referenced banks were surveyed in 1998 and 1999; therefore, they reflect performance lower than the current performance. Source: CLACDS-INCAE. "Programas ambientales en bancos de América Latina". November, 2001

Corporate Environmental Policies

• Some 70% of the banks do not have a corporate policy on the environment.

• Of the 30% that do have one at some level, they are generally limited to internal environmental processes (recycling, energy savings, etc.).

Environmental Processing Management

• Some 90% of the banks do not have a manager or a department in charge of environmental issues.

• At 90% of the banks, the bank's environmental performance is not analyzed.

• Some 70% do not have any goals or plans regarding environmental performance.

Environmental Management in Internal Processes

Most of the banks that have adopted procedures related to the environment - close to half - have done so in the area of internal environmental management.

Environmental Considerations for Banking Services

Banks that have explicit procedures to deal with environmental issues in providing financial services are a minority. The percentage varies depending on the type of service. See chart 1.

Analysis of Environmental Risk

A minority of the banks applies environmental analysis, or risk control procedures or techniques, or tracking of environmental performance for approved projects. Depending on the type of procedure and service, the percentages range between 44% and 19%.

"Green" Financial Projects

"Green" financial projects are offered at less than one quarter of the banks. Most are environmental investment and fund projects. Many are supported by state or international aid programs.

Communication About Environmental Issues

There is a notable absence of external or internal communication about issues related to the banks' environmental commitment and performance.

An aggregate index was constructed that provides a measure of environmental performance by banks: the Environmental Commitment Index (ICAM in Spanish). The index is based on the number of elements making up the environmental program. The following was found:

• The average value was 3.6, which comes to a commitment level between weak and moderate.

• · Nevertheless, there is a small percentage of banks with high commitment levels: 27% of the total reached a value of 6 or more and 7 banks had a rating of between 8 and 10, similar to that of banks with the high environmental commitment at an international level. See figure 2.

Source: CLACDS-INCAE. "Programas ambientales en bancos de América Latina". November, 2001

Chart 2 shows the ICAM values for the countries considered in the study.

The study recorded diverse cases where banks in Latin America have taken advantage of environmental issues in order to create business opportunities for themselves and their customers. To cite some:

• Investment funds (seven banks); trusts (three banks), and lines of credit (seven banks) to finance and support environmental projects.

• Lines of credit for agriculture with specific environmental criteria, such as, for example: "no" to clear-cutting or uprooting of forests; "yes" to soil conservation and rehabilitation; "yes" to direct planting and biological fertilization.

• A loan to a dairy products company to allow the pulverization of whey, which will diminish the environmental impact on a hydrographic basin that feeds the city water supply.

• During the construction phase of a dam, 200 hectares of land were reforested in order to nurture the watershed, and work was done on saving wildlife when the reservoir was filled.

• Development of a carbon emission program that considers the creation of trusts for managing external resources with the goal of supporting the carbon market.

• Creation of financing projects for conservation and management of the environment. They promote the development of productive environmental activities such as, for example: forest management, recycling of industrial waste, production of natural foods (organic agriculture, biological control, etc.) and environmentally sustainable energy alternatives.

• As a consequence of the demand for social and environmental information by foreign investors about companies traded on the stock exchange, a bank with research services targeting ethical funds was created; the investors supported the initiative.

• In the past few years, a bank has provided loans for US $25.5 million for investments in environmental improvements for customer companies.

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