Contributing towards a paradigm shift
A case study on providing guidance for improved environmental and social regulations in the banking sector
Background
The client is an international developmental institution that aims to promote responsible financing by incorporating environmental and social risk management in the operations of financial institutions of developing nations.
Pain points
There was a need to review and upgrade the hitherto Environmental Risk Management (ERM) guidelines of the central bank in a neighboring country with an aim to better assess the environmental and social risk exposure of loan applications from across all industrial sectors in that country that would be evaluated by all nationalised banks and financial institutes of the country before taking a decision on loan approval.
- Lack of focus on social and climate change related risks
- Absence of an institutional mechanism to integrate environmental and social (E&S) risks into overall credit risk of a bank
- Generic nature of the guidelines, lack of sector specific focus for resource intensive sectors
- Absence of a quantitative approach towards risk assessment
Our solution
PwC reworked the guidelines of a Central Bank to have equal focus on environmental and social risks. The revised guidelines provide a comprehensive institutional mechanism to ensure that E&S risk consideration is an integral part of decision making of any nationalised bank. They also ensure that for all loan applications with high E&S risks, the decision (of loan disbursal or rejection) will be taken by the apex authority of the bank.
The revised guidelines provide the following:
- Definition of E&S Risks
- Management System
- Institutional Structure
- Risk Mitigation
- Due Diligence Questionnaire
- E&S Risk Scoring Tool
The revised guidelines drafted by PwC have become a regulatory mandate, notified by the Central Bank in February 2017. PwC has thus contributed towards a paradigm shift in environmental and social regulations in the banking sector. With this, the central bank of the neighboring country has become one of the first in the world to have such forward-looking regulations.
Client benefits
Before the guideline came into force, there was a disparity in the way E&S risks were evaluated by different banks. The guidelines, declared as a regulatory mandate, will lead to uniform evaluation of loan transactions by all nationalised banks and financial institutes in the neighboring country creating a level playing field. The benefits include:
- E&S risk scoring in low, medium and high categories for all loan transactions
- Reduced non-performing loans due to E&S risks through implementation of proper mitigation measures
- Awareness generation among clients across all sectors on E&S risks and its mitigations
Fulfilling the PwC Purpose of contributing to environmental and social well-being of the society at large
The guidelines provide solutions to all possible E&S issues to help banks and their clients mitigate the E&S risk exposure of a loan transaction. They also indicate incentive schemes for clients that have been successful in mitigating the E&S risks. This way the guidelines contribute to preventing greater harm to the environment and people.
Contact us
Yasir Ahmad
Partner and Leader, Sustainability and Responsible Business Advisory, PwC India
Tel: +91 124 330 6491
