Ways to mitigate banks' social risks

Speaking at a recent IFC workshop on “Environmental and Social Risk Management” in Bangkok, Simon Andrews, IFC regional manager, said banks and companies investing in projects, particularly in the extracting sector, which has a large and potentially irreversible environmental impact, are paying more and more attention to environmental and social issues.
“These are risks. They need to be understood and mitigated,” he said.
The IFC’s Equator Principles are a way to bring banks and financial institutions into that process and help them to understand and mitigate the environmental and social risks, said Andrews, who oversees operations in Thailand, Vietnam, Cambodia and Laos for the IFC, a branch of the World Bank.
The Equator Principles, which are a set of standards for managing environmental and social risks, could be used more actively and widely in helping banks mitigate their risks in emerging markets if market drivers were strengthened through a policy and regulatory push to promote responsible lending and investment, and if market capacity were to be increased with direct technical support for financial institutions, said Rong Zhang, the IFC programme manager.
Andrews said: “Signing up for the Equator Principles is a purely voluntary decision. In some countries, these standards exceed what is required by local law, but governments are seeing these [environmental and social impacts of projects] as important issues. So they are also looking at how they can implement environmental and social regulations.”
The number of institutions participating in the Equator Principles has reached 76, representing more than 85 per cent of global project financing and more than 70 per cent of project financing in emerging markets.
“This is the fundamental we have to pay attention to in regard to the environment and society. Studies on the impacts have been done in several projects, and will likely increase,” said Chartsiri Sophonpanich, chairman of the Thai Bankers’ Association.
Thai commercial banks are alert to the standards for managing environmental and social risks as they have confronted obstacles in some already-invested projects.
“The investors suffered damages, and so did the lenders,” said Twatchai Yongkittikul, secretary-general of the association.

CHALLENGES
One of the challenges for Thailand lies on the side of the project owner, as project costs will be increased if the Equator Principles are adopted, he said. One of the requirements of the principles is compensation, such as relocation costs for communities that are negatively affected by projects.
Looking ahead, large projects with financial institutions as a lead may set a condition that co-investing parties, both private corporations and the government, are required to sign up to the Equator Principles, Twatchai said.
Hydropower, mining and infrastructure projects may require greater use of the environment and social risk management standards in future, he added.
The bankers’ chief said that while Thailand’s assessment |of environmental impacts may |be practical, “we do not have |adequate experience in solving problems related to impacts on communities”.
The choice of whether to follow the Equator Principles is one that governments and investors need to consider at an early stage of a project’s development, said Ian Mathews, regional head of project and structured finance at Australia and New Zealand Banking Group, which has adopted the principles.
This should lead to more success in managing environmental, social and reputational issues, Mathews said.
The IFC will conduct environmental and social risk management surveys in the Philippines, Indonesia and Thailand this year. “We are at the design stage of the surveys, which will be conducted by consulting firms,” Zhang said.