Green banking

Recent rains in Karachi and its aftermath has made climate change a topical subject, both among Karachiites and Pakistanis at large. One subject that seems to be missing in that tiny constituency of those seriously concerned with climate change, however, is the subject of green banking.

Globally there is a growing trend towards green banking, which may be loosely defined as banking practices that not only abstain from financing or otherwise supporting projects that pose risk to environmental health but also actively promote environment sustainability.

Perhaps recognizing these trends, the central bank had issued Green Banking Guidelines (GBG) in 2017. The document is not mandatory upon banks to date, as the guidelines were conceived as a first step towards a series of interventions leading to a sustainable economic environment in the banking sector. The idea was to gradually add various components to the guidelines in a phased manner, allowing banks/DFIs adequate time to adapt before the GBG evolve into regulations.

It should be kept in mind that these guidelines run parallel to other guidelines such as the Code of Corporate Governance and Corporate Social Responsibility Voluntary Guidelines issued by the Securities and Exchange Commission of Pakistan, albeit it’s another thing that those are voluntary too, whereas the state of implementation of various federal and provincial laws and regulations relating to environmental protection is also rather poor.

Since the issuance of the GBG 2017 by the central bank, a host of commercial banks have been encouraged to incorporate various aspects of the guidelines in their banking practices. These aspects include: setting up a green banking office at the bank; set up environment risk managers in risk management departments; set up green business facilitation wings; adoption of sustainable practices in their own operations and so on and so forth.

Whilst a comparative evaluation of the adoption rate of GBG 2017 by banks is not available, a quick review of the annual reports (ending December 2019) of leading banks shows that most banks have not yet taken the guidelines seriously. Most of the so-called green measures adopted by banks are either superficial or CSR oriented affair that looks good as a branding pitch.

For instance, having a grand total of 3-4 solar powered ATM machines; or a decision to print fewer copies of annual reports; or adopting green-ish slogans; or financing one-off green projects. Few have set up green banking office; fewer have set up environment risk managers in risk management departments or prepared a green checklist for credit approval process; and none seem to have environment risk in terms of reference of their board level risk management committees.

Given Pakistan’s pressing need to solve far more immediate problems such as proper taxation, affordable energy, increasing SME finance, and financial inclusion and so forth, the agenda of green banking and environmental sustainability understandably doesn’t get the spotlight until and unless a disaster hits the country.

But in order to at least keep the flame alive, the central bank would do well to start monitoring the adoption of GBG 2017 by banks, including monitoring of the nature of loans, and publish the report on at least an annual basis. Such a report will not only help global and local climate change policy wonks to monitor and evaluate progress enabling them to make better decisions, but it may also encourage banks into healthy competition.

Need one remind that such a report will be in line with the GBG 2017, which states that the central bank “will monitor progress of implementation on a regular basis” and that “standard reporting procedures will be developed in coordination with banks/DFIs”.