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Chapter VI - Banking as environmentally constrained profit maximization
International capital flows
Domestic and international environmental law
We have shown clearly that banks operate in an industry that mitigates against environmental cost accounting. This is a fact in all developing countries. It does not follow that banks have no role to play in environmental protection and preservation, although it must be recognized that their ability to modify practices is restricted.
Banks are con strained in their operations in numerous ways. Many cannot charge the rates of interest they desire. Most are constrained by prudence and by law to retain certain capital levels and reserves. Banks are not free to collect loans in whatever manner they might desire (seizure of assets without recourse to the courts, for example). In fact, the whole corpus of banking law outlines the constraints under which a banking system operates. While banks may seek to maximize profits (and/or minimize risks), they are constrained as to how they may pursue these goals. They are, in a word, Constrained Profit Maximizers. They seek maximum profits within the parameters imposed by legal, economic, social and political systems.
The reasons that banks recognize that their lending decisions need to incorporate environmental concerns are not entirely altruistic. While it is true that bankers as citizens are exposed to the consequences of their decisions, it is rather unlikely that this exposure will have a great effect on lending decisions. Instead, there are two sets of considerations that argue strongly that banks should begin to build the capacity to carry out environmental evaluations as part of their routine operating practices.
The developing countries are first, almost by definition, capital importers. This capital comes in the form of direct and indirect foreign investment, international loans and, infrequently, grants. The sources of capital, principally in the developed world, have become increasingly concerned about the effects of their activities in the developing world and are imposing (or having imposed upon them legally or politically) additional constraints on their activities in these countries.
A good example of this process is the recently adopted World Bank screening procedure for its loans to a broad variety of financial intermediary lending institutions (FIL's) , including central banks, sectoral credit agencies, commercial banks, development finance corporations, rural credit cooperatives, and nongovernmental organizations (NGO's). Under the recently adopted procedures, these loans must be screened and assigned a classification ranging from A to D, depending upon the impact the project has on the environment. An example of the former would be a land clearance project, while the latter would be a project whose major objective is environmental improvement. Furthermore, the World Bank now requires an assessment of the borrowers' institutional capability to carry out an environmental impact review. 20 Those borrowers are required to ensure that if they on-lend, the sub-borrower has environmental impact assessment capabilities. In addition, several major regional development banks have recently developed or strengthened environmental impact screening systems for their lending programs.
20 World Bank, Environmental Assessment Sourcebook, Policies. Procedures and Cross Sectoral Issues. Vol. 1.
Some borrowers have responded by setting up extensive programs of sectoral environmental impact assessment. For example, Pakistan, with Japanese grant funding, is carrying out an environmental impact assessment of the national drainage program to relieve waterlogging and salinity problems.
Thus, international lenders are beginning to assess the impact of their lending upon the environment in a systematic way and to require borrowers to develop the ability to carry out environmental impact assessments. Likewise, international corporations are being called to account before the courts for the damage caused by their activities, or are being denied access to sensitive areas. These legal challenges are not entirely centred on the developed countries. Some developing countries are beginning to bring before the courts corporations that have damaged human health and the environment. The clearest case is perhaps the Bophal tragedy in India. The environmental cost of lending to projects that have a negative impact on the environment is becoming an issue for the institutions that provide both sources of loan capital, and direct and indirect investment in developing countries.
Domestic and international environmental law
A second reason for banks in developing countries to begin to develop in-house environmental impact assessment capabilities is that to do so may be in their enlightened self-interest. There is growing awareness in broad public sectors, as well as in government, that the present attack upon natural capital cannot be sustained indefinitely. In some countries, there is a growing consensus that the destruction of natural resources must be slowed; in other countries, the awareness is in the initial stages. This concern is increasingly embodied in both national and international law. At the national level, in the Philippines for example, new agribusiness projects are required to obtain an Environmental Compliance Certificate issued by the Environmental Management Bureau. 21
21 Gilberto M. Llanto, "Lending Policies Geared to Sustainable Agriculture and Forestry: The Philippines", Paper prepared for FAO, Rome, 1991.
At the international level, a number of treaties require national governments to protect and preserve natural resources. For example, the Convention on International Trade in Wild Flora and Fauna (CITES, 1975) restricts commerce in endangered species. The Vienna Convention for the Protection of the Ozone Layer (1985) links domestic CFC and halon production with the global issues of altered weather patterns. Several other conventions, such as the UN Convention of the Law of the Sea (1982) (not yet in force), and the Convention of Transfrontier Movements of Hazardous Substances (1989),also have extensive environmental provisions. A far-reaching treaty on Biological Diversity, opened for signature in 1992, and a framework Convention on Climate Change also impose important environmental obligations on governments.
Other regional agreements such as the ASEAN Agreement on the Conservation of Nature and Natural Resources (1985) and the African Convention on the Conservation of Nature and Natural Resources (1968) incorporate the obligation of signatories to protect and preserve natural resources and to ensure the sustainable harvesting of these resources.
This list is by no means exhaustive.
Although the obligation is most often imposed upon governments under international agreements, the increasing pervasiveness of such agreements into national systems will at least make it a sound practice for banks to have regard to the obligations set out in these agreements. Whether or not an agreement imposes obligations specifically on the banks themselves will depend on the precise provisions of the agreement, the constitutional arrangements in the particular country by which such an agreement can have force in national law, and the terms of any legislation implementing that agreement.
Banks provide one of the principal sources of development capital; thus, their lending practices should increasingly incorporate environmental concerns if national governments are to comply with an increasing body of international law.