Banking sector and challenge of climate change

The international community and the national government are trying to respond to the existing and potential devastating impacts of climate change. All other stakeholders including banks are    working to mitigate its adverse effects and to cope with the upcoming challenges of global warming and energy deficiency. It is recognised that in socio-economic adjustments to climate change, the financial sector, especially banks, can play an important role. Banks are not generally exposed to weather stresses nor are they heavily dependent on fossil fuels in their operations. Over the years, climate change has come up as one of major business challenges that pose threats to banks and corporate houses. The developments are also providing opportunities to banks in their business operations.
Bangladesh is a low carbon-dioxide emission country, even among developing countries. However, it is likely to be one of the worst sufferers of climate change. The UNDP has identified Bangladesh to be the most vulnerable country in the world to tropical cyclones and the sixth most vulnerable country to floods.  There are reports that climate change would enhance the frequency and intensity of floods, droughts and cyclones in Bangladesh and would have impact on water resources, land, crop agriculture and food security, fisheries and livestock, forestry and bio-diversity and human health. Considering the severity of potential adverse impact, the responses of the policy-makers of Bangladesh have remained very limited.
In connection with climate change-related challenges, the biggest risk to banks is credit safety and security. Retail, wholesale and investment banking could be directly linked to the climate change impact. With regard to retail and wholesale banking, lending volumes and revenues might be contracted to the extent that climate change or carbon restrictions lead to lower levels of economic activities. Overall default may go up with increasing physical damages due to extreme weather patterns and unanticipated mitigation costs due to regulatory changes. Climate change not only creates new risks, costs and liabilities for banks, it also generates economic opportunities such as investments in renewable energy technologies, energy efficiency projects, emission trading and weather markets, and climate change- related small finance. Accordingly, banks are in a unique position to either finance business as usual and be complicit in causing further climate change, or help catalyse necessary transition to a new economy, with minimal GHG emissions resulting from wholesale energy efficiency and use of renewable energy as replacement for fossil fuel. Certainly, there are substantial opportunities to profit from investments in renewable energy production and energy efficiency. Emission trading offers new client service opportunities for banks.
Climate change is a rapidly-growing issue of concern and interest for the banking community. In many instances, the issue is handled as part of banks' environmental or green banking practices. European banks are at the forefront of integrating climate change into environmental policies, risk management and product development, and  many of the leading US banks are working towards better disclosure of climate risks as an essential first step toward embracing a changing regulatory and economic environment. Even environmental or green activities of a large number of local level small banks in developed countries have been very inspiring and replicable. A good number of global banks have installed in-house environment management and many of them have gone beyond conducting GHG emission inventories to setting emission reduction targets. Big banks are also engaged in carbon offsetting which refers to the efforts of cancelling out the climate-changing effects of its own greenhouse gas emissions by funding emission reduction in other places.
The HSBC is the leader in carbon offsetting in financial industry that became carbon neutral in 2006 and finances wind farms, pig and cattle farms, waste-burning power stations and rubbish dumping among many other companies which are considered environmentally sustainable. Since 2006, ABN AMRO has initiatives to decrease its carbon dioxide emissions by installing new solar panels. Banks that are engaged in commodities trading and brokerage services are recognising a huge growth opportunity presented by GHG emissions trading.
In emission reduction and conservation, different stakeholders have been contributing in different ways. And there is no doubt that stakeholders' roles are crucial for development of climate strategy by banks or other corporate in any country. The most relevant part of the impact of climate change is the exposure of banks' business areas to climate risks and opportunities. Each business area of a bank has a different (positive or negative) exposure to climate change. As a whole, banks are exposed to climate change through its financing and investment decisions, credit risk management policies and lending practices, and the development of risk-mitigation products. Climate change policies pose new risks and offer new opportunities to banks.
The Bangladesh Bank (BB) has issued a number of circulars/guidelines on environmental, online banking and CSR issues that are directly or indirectly related to climate change. Considering the adverse effects of climate change, banks have been advised by the BB to be cautious about the adverse impact of natural calamities and to encourage the farmers to cultivate salinity-resistant crops in the salty areas, water-resistant crops in the water-logged and flood-prone areas, drought-resistant crops in the drought-prone areas, using surface water instead of underground water for irrigation and also using organic fertiliser, insecticides by natural means instead of using chemical fertiliser and pesticides.  The BB has also been taking initiatives for the rehabilitation of cyclone and other natural disaster-affected people of the country from time to time. Moreover, banks were asked to undertake CSR activities in the areas of the affected people for their rehabilitation.
Energy efficiency has received attention of the BB in recent years. The comprehensive circular of the BB on 'Policy Guidelines for Green Banking' issued in 2011 is a remarkable step on the way to develop GB (green banking) practices in the banking sector of the country that are also relevant for climate change.
The climate change strategy of a commercial bank should be comprehensive and issues related to both direct and indirect impacts of climate change should find place in its framework. A well-governed strategy consists of three dimensions covering governance, operations and business. Each of these should contain several components for expected outcome. Being the core component of financial industry of Bangladesh, the banking sector's roles in handling climate change vulnerabilities are crucial both for the economy and for other stakeholders. Effective banking climate strategy is expected to complement the efforts of other stakeholders and to help attain the national action plan. For that matter, an internal environmental and climate mechanism approved by the bank boards is crucial. In response to the BB's policy circular, banks of the country have already formulated green banking policies. Climate change related issues and risks like disaster and carbon risks should get particular focus in the environment and green banking related policy documents of banks. Banks should review and optimise their own carbon risk management, and banks need to set absolute GHG emission reduction targets for facilities, energy use and business travel.
The green banking policy guideline of BB mentioned about the necessity of the formation of climate risk fund by banks. This fund could prove to be crucial to finance the economic activities of the flood, cyclone and drought-prone areas at regular interest rate without charging additional risk premium. Banks should take necessary steps to use the fund effectively in the climate disaster-prone areas.
As part of climate strategy, commercial banks should consider environmental risk as part of its risk management process in financing project activities. Climate risk should specifically be a component of environmental risks. More specifically, development of a customised assessment tool of disaster risk and carbon risk is crucial for environmental risk management by banks. In the process of formulation of risk assessment framework of tools, Equator Principles may be used as a guiding document. Banks may also offer advisory services to clients with regard to carbon-risk reduction and market strategies.
Commercial banks of the country should actively promote energy conservation and promote low carbon technology. Though some banks have already undertaken inspiring steps, they need more initiatives to finance/invest in the renewable energy sector and energy efficiency measures available to clients. Banks may facilitate finance for public programmes that foster  introduction or promotion of low carbon technologies.
Banks may help improve the opportunities of CDM (Clean Development Mechanism) project development in Bangladesh to generate carbon dioxide emission reduction certificates for optimising the cash flow of project financing. With an increasingly growing carbon finance market, banks can employ and use experts to look for target areas and customers for the CDM projects, and offer professional help to follow up their design, project, registration, monitoring, verification and issuance of CERs in the entire process. As part of supporting climate change challenge, banks may also design and support tree plantation. A number of environmental NGOs are engaged in plantation activities in Bangladesh. These initiatives may receive support from banks.    
The climate initiatives can be implemented and targets can be achieved when the main internal stakeholder i.e. bankers or employees of banks know about it, have belief in it and act for it. So, awareness and motivation of bankers are crucial. Consumers remain the most vulnerable stakeholders and development of consumer awareness is among the most critical tasks of policy-makers and banks for effective implementation of climate initiatives. Simple awareness and conscious lifestyle can contribute greatly to the cause of climate and environment.
Dr Shah Md Ahsan Habib is Professor and Director [Training], BIBM. ahsan@bibm.org.bd)