Workshop on Environmental Management Framework Session I

1
Workshop on Environmental Management Framework
Session I

• June 3, 2006

2
ES risks and their implication for the financial
sector
3
Scope.

• Financial
• ES
• FI Risks
• Risks

4
Environment - A growing risk.

• Bicchri (Rajasthan) - Dye intermediate company
• 9km stretch groundwater contamination - costs
  up from Rs.280 million to Rs.1billion.
• Medak (A.P.) - Land contamination through
  disposal of untreated effluents. SC order for
  framing of industry compensation guidelines .
• 1100 farmers will be paid a total of Rs.323
  million.
• CPCB estimates clean up costs of industrial
  sites to run into thousands of crores
• US spends 40 billion every year on clean up
  costs.
• Source Economic Times, 15.11.98

5
Environment - A growing risk.

• Taj trapezium (1997) - 12 LMEs, 6300 SSIs Cost
  approx. Rs.1.44 billion (SSIs only), Rs.2
  billion (IOC)
• Vellore case (1996) - 900 tanneries in Tamil Nadu
  issued closure notices
• SC ruling for Delhi - Over 1500 units ordered to
  close relocate
• Grasim (Nagda, MP) - VSF plant shut for 46 days
  in 1996 due to water shortage. 17 drop in net
  profit.
• Global environmental issues - Climate change,
  Technology transfer, Trade restrictions, Product
  standards, etc.

6
Funneling effect Adapted from Natural Step
7
Indian context

• Financial liability for compensation clean up
  costs associated with hazardous industries
• Tightening of standards e.g. automobile emission
  norms
• Power of unaffected individuals to lodge a
  complaint
• Over 10,000 NGOs (20 times increase in last 15
  years)
• Compliance levels - Approx.45 for all
  enterprises
• Official consents - rubber stamp approvals
• Import of toxic substances/ industries
• Product standards (Toxicity, LCAs, social
  criteria) - textiles, leather, foods, spices
• Climate change - Emerging opportunity Long term
  challenge for business (India, China)

8
Risk linkages

• ES Risks
• Pollution
• Habitat destruction
• Hazardous wastes/ mtls
• Resource scarcity/ degradation
• Social issues (eg. child labour, wkg conditions,
  displacement)

• Business Risks
• Project delays/ cost overruns
• Business interruptions
• Legal fines/ penalties/ liabilities
• Delays in approvals
• Resource shortages/costs (water, power)
• Poor worker productivity
• Barriers to export mkts

Legal pressures Public pressures International
standards Resource shortages
Financial Risk
9
Where does ES risk fit within the Bank?

• Credit risk Non-payment of principal/ intt
• Collateral security recourse
• Lender liability risk
• Market risk Intt rate fluctuations
• Commodity pricing/ exchange risk
• Equity value fluctuations
• Operational risk Security
• Business interruptions
• Regulatory non-compliance

10
ES risk factors gt Financial risk

• Punitive fines, cost of new treatment facilities,
  cleanup costs, litigation costs, project delays,
  disruption of operations, market barriers, worker
  unrest
• On-site or nearby pollution, Site contamination,
  Accidents
• Clean-up costs where financier becomes owner of
  the contaminated site, in case of foreclosure
• Project insurance claims to cover compensation
  costs, cleanup costs, and damages

• Reduced ability to play
• (? credit worthiness)
• Security impairment risk
• Direct liability risk
• Financial claims (insurers)

Reputation risk
11
What can the financial sector do?

• Identification/ Screening based on sector, nature
  of project, location.
• To identify projects having significant ES
  risks.
• Assessment of risk based on audits, EIAs, site
  inspections, regulatory disclosures, other info
  sources
• Control of risk through mitigation or avoidance

12
Risk Mitigation Strategies

• Control the risk (clauses in credit agreement,
  indemnities, warranties, covenants,
  certificates). Provides contractual control over
  client activities
• Transfer the risk (guarantee/ indemnifications by
  3rd party eg. parent company or govts,
  syndication)
• Finance the risk (establishment of envl
  contingency fund, reclamation or remediation bond
  or LC)
• Insure the risk (risk transfer for a fee) - to
  cover sudden or gradual events
• Avoid the risk decline when risk is
  unacceptable cannot be mitigated. Last recourse
  option.

13
Participants in the ES risk mgmt process

• Bank clients (disclosure operational control)
• Credit officers / Credit risk management deptt
• Consultants (expert assessments advice to
  clients banks on risk mitigation liability/
  cost assessments)
• Other stakeholders i.e. govt., insurance,
  investors, public (specific functional
  contributions depending on client/ unit involved)

14
Role of Credit officers

• Manage relationship with client
• Inquire about screens for ES risk issues
• Determine optimum risk assessment and mitigation
  strategies
• Complete internal credit documentation
• Monitor on-going operations for implementation of
  risk mitigating measures
• Review for impact of internal/ regulatory changes

15
Role of Credit risk management Deptt (contd.)

• Screens adjudicates credit applications for ES
  risk
• Ensure adherence to internal policy and risk
  allocation procedures
• Formulate risk monitoring mitigation reqts.

16
Bank ES Policies

• Ensures consistency continuity
• Made to fit applicable ES risk management reqts
• Defines roles responsibilities
• Identifies specific thresholds for ES risk
  management
• Identifies bank specific risk mitigation
  strategies

17
What can the financial sector do?(Part 2)

• Apart from
• - addressing ES risk in lending/ investment
  decisions, and
• - tracking implementation of risk mitigation
  measures
• Facilitate adoption of better technologies/
  production systems
• Influence decision making at board level -
  encourage corporate governance and social
  responsibility
• Recognise link between environmental performance,
  quality
• systems management maturity

18
Indian Financial Institutions which have
Developed Environment Social Risk Management
Framework

• IDFC
• ILFS
• ICICI
• Bank of Baroda
• TNUIDF
• SIDBI

19
International initiatives

• UNEP Statement on Envt. Sustainable Devt. (160
  banks 85 insurance cos.)
• World Bank, ADB, IFC ES norms/ caveats for
  lending
• Credit Suisse Group, Union Bank of Switzerland,
  Bank of America, HSBC, Swiss Bank Corpn.,
  Cooperation Bank
• UNEPs 1997 survey of FIs - Over 90 respondents
  had managers/ deptts in place to identify envl
  risks
• Rise of green funds - 1.19 trillion (10 of
  total), 144 funds USA 2.2 billion, 19 funds
  UK DM 2 billion Germany

20
Sustainability ? Economic performance

• UBS Brinson eco-efficiency funds - Exceeded index
  by 1.6 for 2 years. an eco-efficient co. is
  making efficient use of its resources, and that
  is probably a strong signal that it is well
  managed as a whole.
• Storebrand Scudder Envl Value Fund - Exceeded
  Morgan Stanley Cap. International World Index by
  3 in 1996 4 in 1997.
• Alliance for Environmental Innovation - Cos
  which outperform peers envly, will also
  outperform them on the stock market by as much as
  2.
• Difference in shareholder value between Cos that
  actively pursue sustainable strategies and those
  that do not can be up to 15

21
Trends

• Rising stringency of legal
• standards
• Public demands for Envl risk - level
• transparency accountability unpredictability
  -
• rising
• Resource pressures
• International laws/ standards

22
Environment Social Issues
23
What Cause Environmental Risk?

• IMPACTS
• Health Impacts on Humans
• Land Contamination
• Degradation of Environmental Resources.
• Accidents / emergencies
• Occupational Hazards

• ISSUES
• Air Emissions
• Wastewater Discharge
• Hazardous Waste
• Resource Consumption
• Improper operational Practices

• RISK DRIVERS
• Enforcement of legal Requirement
• Community Pressure
• Judicial Intervention
• Expectations of Foreign partners

Environmental Risk
24
Key Environmental Issues

• Air Pollution
• Water Pollution
• Hazardous Waste / Materials
• Use of Ozone Depleting Substances
• Use of Persistent Organic Pollutants POPs
• Use of Poly-chlorinated Biphenyl

25
Air Pollution
26
Water Pollution
27
Water Pollution
28
Hazardous Waste
29
Hazardous Waste
30
Ozone Depleting Substances
31
Persistent Organic Pollutants
32
Poly Chlorinated Biphenyl
33
Occupational Health and Safety Hazards
34
Occupational Health and Safety Hazards
35
Key Social Issues

• Child Labour
• Forced Labour
• Wages
• Discrimination
• Freedom of expression and Right to collective
  bargaining
• Disciplinary Action
• Resettlement and Rehabilitation

36
Use of Sectoral Guidebook

• Process Description
• Basic Polluting Process
• Critical Pollutants
• Summary of Key Environmental Issues
• Recommended P2 Measures
• Cleaner Production Initiatives
• Regulatory Obligations

37
Environmental laws
38
Environmental Regulations in India

• Year Environmental Regulations
• 1974 The Water (Prevention and Control of
  Pollution) Act, Amendments,1988
• 1975 The Water (Prevention and Control of
  Pollution) Rules
• 1977 The Water (Prevention and Control of
  Pollution) Cess Act Amendments. 2003
• 1978 The Water (Prevention and Control of
  Pollution) Cess Rules

39
Environmental Regulations in India

• Year Environmental Regulations
• 1981 The Air (Prevention and Control of
  Pollution) Act, Amendments, 1987
• 1986 The Environment (Protection) Act,
  Amendments,1991
• 1986 The Environment (Protection) Rules
  Amendments, 2003

40
Environmental Regulations in India

• Year Environmental Regulations
• 1989 The Hazardous Wastes (Management and
  Handling) Rules, Amendments, 2003
• 1989 Manufacture, Storage and Import of
  Hazardous Chemical Rules, Amendments, 2000
• 1991 The Public Liability Insurance Act/ Rules,
  1992
• 1996 The Chemical Accidents (Emergency
  Planning, Preparedness and Response) Rules,

41
Environmental Regulations in India

• Year Environmental Regulations
• 1994 Environmental (Protection) Rules
  Environmental Clearance
• 1994 Amendments in the Environment
  (Protection) Rules, "Public Hearing made
  mandatory

42
Environmental Regulations in India

• Year Environmental Regulations
• 1997 The National Environment
  Appellate Authority Act
• 1999 Draft notification on Siting
  Guidelines for Industrial Projects
• 2000 Noise Pollution (Regulations and
  Control) Rules
• 2000 Ozone Depleting Substance Rules

43
Compliance Process