Changing risk landscape towards environmental social risk management

Dr. Syed Asim Ali Bukhari

The sun is setting on the era of unchecked greenhouse gas emissions, resource degeneration and environmental degradation by the various economic stakeholders. On the not-so-distant horizon, we are all witnessing the dawn of the green and sustainable revolution.

The Prime Minister of Pakistan attended COP-27 and highlighted Pakistan’s climate change vulnerabilities endorsing United Nations’ call for climate justice and climate solidarity, especially for developing nations. Pakistan has suffered more than US$ 32 billion in economic losses due to the region’s recent flood catastrophe caused by climate change.

Although, the call for climate justice and climate solidarity resonates with the developing world, a strong need also exists to put one’s own house in order. Countries like Pakistan need to develop holistic, synergized, and long-term Environmental Social Risk Management (ESRM) frameworks across various economic sectors based on public-private partnerships to gain momentum in the sustainability journey.

In this regard, the State Bank of Pakistan (SBP) has taken a great step by launching the Environmental and Social Risk Management (ESRM) Implementation Manual for Banks and DFIs to promote Green Banking in the country on the 9 th November, 2022. The ESRM system is a framework that integrates social and environmental risk management into a bank’s core business processes.

It is a set of actions and procedures that are implemented simultaneously with the bank’s existing risk management procedures. Environmental risks are the risks to the financial institution and its transaction that result from conditions relating to the environment, such as climate change, GHG emission, water, sound pollution, waste management, land contamination, and loss of biodiversity.

Although ESRM framework implementation by the financial institutions is a necessity for the sustainable development of a country, it is critical to understand that a number of other factors and stakeholders are an integral part of this setup. With respect to the banking sector, an ESRM system basically encompasses the policies, procedures, tools, and internal capacity required to identify, assess, mitigate, manage and monitor its clients environmental social risks.

This means that the management of environmental social risks in various economic sectors and projects is not just the sole responsibility of the SBP banking sector rather, the banking sector acts as the identifier of such potential risks in a project it is financing and may subsequently become the financer of an environmentally friendly alternative to the environmentally hazardous project or process. This is the role Pakistan’s banking industry is playing in the case of financing renewable energy projects or brick manufacturing through zig-zag technology.

Thus, the ESRM approach not only introduces Pakistan’s economy to environmental social risk aversion but also opens the new doors to the lucrative territory of Green and Sustainable Financing. Issuance of a Green and Sustainable Business Facilitation Guidelines / Manual by the SBP can also play an important role in the development of Pakistan’s Green and Sustainable Finance landscape.

The SBP has given the Pakistan banking industry a time period of three years to implement the ESRM manual. But this cannot be achieved without the simultaneous issuance of ESRM guidelines or framework for other industries/sectors as well. For the financial institutions to mitigate environmental social risks and finance green projects, the borrowers must also be willing and able to embrace the eco-friendly business alternatives. This synchronization of ESRM implementation among the banks and the borrowers is not possible unless all the concerned regulator bodies also issue ESRM guidelines for other industries.

The regulators and industry associations can set implementation targets and reporting standards regarding environmental social risk avoidance measures and green business activities.

Similarly, industries may be required to set up environmental social risk units for identifying, assessing, mitigating, managing and monitoring the relevant environmental social risks. The Pakistan banking industry has to implement the IFC Performance Standards or the Equators Principles to mitigate and manage the environmental social risks.

The Environment Protection Agency (EPA) of Pakistan can play an imperative role in this regard by vigilantly monitoring, reporting, and controlling the environmental social risks of various industries, not just during the smog season but throughout the year. Industries may be required to acquire relevant certifications such as ISO14001 45001 or green reporting standards to ensure the avoidance of environmental social risks and the development of green business processes.

Managing environmental social risks is beneficial for both the banking industry and other industrial sectors. If the banks’ clients are impacted by legal action/litigation issues, penalties fines, closure of business, and loss of international market share due to environmental and social reasons, then the loan portfolio of the bank will be adversely impacted. Similarly, adopting green business practices opens new opportunities for international markets for the bank’s clients and reduces financial, reputational and legal risks for both parties. Currently, Pakistan is facing a lot of challenges in managing environmental social risks across various industries.

These are also intricately connected with the country’s inability to achieve United Nations – Sustainable Development Goals (UN-SDGs) 2030. Limited awareness and a lack of demand in Green Financing among the concerned stakeholders and a lack of industry experts are one of the major hindrances in the adoption of green business ideology and managing the environmental and social in Pakistan.

The banking industry also lacks Green Banking experts that can highlight the path towards Green Banking adoption. The various industry associations and regulators may focus on creating environmental social risk awareness among the industry players through training session, conferences, and seminars. It is vital to understand that the various industrial sectors of Pakistan cannot embark on the ‘Net Zero’ path without managing mitigating the concerned environmental social risks.

The banking sector can lead the country’s economy on the path of sustainable development. There is no one silver bullet solution to these challenges. It is time that all stakeholders recalibrate and align their business ideology compasses and prioritize the mitigation of relevant environmental social risks hindering the achievement of sustainable development goals in Pakistan.