Responsible capitalism and sustainable banking (1)



The Akans in Ghana have a proverb that goes like this, “se wo twa wo ketrema toto we a, na wo nwee nam biara”. This loosely translates as “if you cut, roast and chew your tongue, you cannot boast of having enjoyed any worthy or delicious meal”. Similarly, another proverb translates literally as” it is for the sake of posterity that when we eat a banana, we leave its peel”.

These proverbs forcefully remind us all that immediate gratification should not becloud our sense of judgement as we live to encounter another day when we shall depend on the same organs and resources to survive.

This sums up the theme of this write up on responsible capitalism and the imperative for sustainable banking within the context of environmental and social risk management.
Sustainable banking is an integration of sustainability- the environmental and social considerations and best practices in a bank’s business activities within the context of profitability and business growth.

Al Gore, a former vice president of the United States summarizes the concept clearly when he likens sustainable banking to sustainable capitalism. The import of this view is that it is in the financial communities’ enlightened self-interest to look beyond profitability as they perform their roles as catalysts for development. Project financing objectives must therefore align with resource sustainability, responsible business practices, just as the global community must ensure that current business objectives would not jeopardize the planet and its resources.

The average investor expects higher returns on their investment. There is often a temptation to ignore how the returns are generated without regard to how the firm’s activities impact the environmental and social aspirations of the larger community.
This parochial sentiment that focuses primarily on returns relative to other investment vehicles solely, cannot find space in modern business. Now, emphasis is placed not only on profits but on ethically sound practices by which firms generate them in the context of sustainability and regard for the sentiments of communities in which projects are sited.

For instance, it would be economically suicidal to establish a piggery project in a predominantly Muslim community without considering the religious sensibilities of adherents of the Muslim faith. This is irrespective of whether the investor has obtained all the necessary permits from Environmental Protection Authority and other Regulators; or per calculations, the return on capital employed could exceed three hundred per cent.
A financial institution that finances such a project must be sensitive to what community engagements need to be undertaken and the likelihood that the project may suffer potential communal agitations or possible future sabotage from aggrieved adherents of the faith. Ultimately the bank may suffer losses when the borrowing client becomes incapacitated to repay borrowings, following stoppage of the project.

The broader question, therefore, will be “why should a financial institution be concerned with environmental and social considerations when its shareholders hold their stakes in the firm in expectation of growth in returns generated from its core business of financial inter-mediation?’

In contemporary times the answer is grounded on the self-interest of the financial institution itself as it strives to comply with environmental and social concerns. It aims to avoid legal fines and possible brand damage from local and global NGOs who may instigate a boycott of its products and services if it tramples on societal interests.
In my undergraduate days, I used to think (wrongly from hindsight now) that the World Bank epitomized capitalism and was concerned primarily with profits for investors and other capital providers.

Decades later, I have grown to be reasonably enlightened to appreciate that the institution and its affiliates are avid protagonists of environmental and social issues. This aligns with the opening proverbs in this article that suggest that there is more to business and economic development than immediate and exclusive gratification. Indeed, I have matured to purge myself of the wrong notion that capitalism is all about profit generation and business growth.
It is equally gratifying to observe that the World Bank and its affiliates, capitalist oriented as they are, are the very institutions that are in the forefront of embedding environmental and social concerns in their investment portfolios. The International Finance Corporation’s eight Performance Standards and the Exclusion Lists that debar recipients of the IFC’s funds from financing certain projects, although they could be profit generating attests to this. Some of these excluded activities are;

 Production or trade in any product or activity deemed illegal under host country laws or regulations or international conventions and agreements, or subject to international bans, such as pharmaceuticals, pesticides/herbicides, ozone depleting substances, PCB’s, wildlife or products regulated under CITES.

 Production or trade in weapons and munitions.1
 Production or trade in alcoholic beverages (excluding beer and wine).1
 Production or trade in tobacco.1
 Gambling, casinos and equivalent enterprises.1
 Production or trade in radioactive materials.

This does not apply to the purchase of medical equipment, quality control (measurement) equipment and any equipment where IFC considers the radioactive source to be trivial and/or adequately shielded.

 Production or trade in unbounded asbestos fibers. This does not apply to purchase and use of bonded asbestos cement sheeting where the asbestos content is less than 20%.
 Drift net fishing in the marine environment using nets in excess of 2.5 km. in length.
A reasonableness test will be applied when the activities of the project company would have a significant development impact but circumstances of the country require adjustment to the Exclusion List. list

The IFC Performance Standards have birthed various sustainability initiatives across the globe; Bank of Ghana’s Sustainable Banking Principles launched in 2019 being no exception. These initiatives have the common objectives of;

(a) ensuring that economic activities do not jeopardize planetary resources which must be preserved for future generations,
(b) guaranteeing human rights and ensuring that the dignity and well-being of people are not compromised.

The desire to champion the awareness of our collective responsibility to sustain the environment and address vital social imperatives like the United Nation’s Sustainable Development Goals while pursuing profits, creates the impetus for this and subsequent articles.

So, what is sustainable banking and what has given impetus to the integration of environmental and social concerns into mainstream project financing? As financial intermediaries, banks are strategically positioned to influence the allocation of finance for specific projects in the wealth creation and distribution chain.
Environmental and social risk management for financial intermediaries has become a discipline which involves the incorporation of the environmental and social risks and impacts of clients’/investee companies’ activities into the credit /investment decision making.

The processes involve integrating environmental and social risks into financing considerations. These are aimed at avoiding or mitigating financial losses, reputational risk or harm to the environment and people which may be caused by projects, businesses or activities financed by such entities.

By implementing sound environmental and social risk management, financial institutions can reduce the level and frequency of their clients having negative impacts, while also reducing their overall risk exposure. Ultimately, this leads to improved corporate citizenship, the preservation of natural resources and enhancement in the dignity of labour and communities.

Specifically, a financial institution engages in environmental and social risk management with the objective of avoiding or mitigating three key risks. The success in meeting these objectives ultimately improves profitability, enhances the quality of labour and harmonious relationships with regulatory bodies and the communities in which projects are sited.
These key risks are;

1. Loan default may arise from a client’s inability to repay loans as scheduled on account of environmental and social issues not previously considered. A case in point may be where a leather factory is sited without consideration of where and how its effluent may be disposed of. Residents may rise up against the pungent stench emanating from the waste disposal. Communal agitations may force regulatory bodies or the city authorities to act in ways detrimental to the company’s operations, and thus risk or weaken the prospects of loan repayment.

2. Escalation of project costs- This may come in the form of delays in project completion, additional investments required to put the facility in a form acceptable to Regulators, or unfavourable exchange rate fluctuations occasioned by delayed project completion. Developments may occur during project execution which may force contractors to re-design the initial project or recognize other social partners’ agitation for changes arising out of environmental concerns.

3. Fines/Penalties may be imposed due to non-compliance with environmental and social requirements of statutory bodies like Ghana’s Environmental Protection Authority, the Ghana Standards Authority, the Municipal and District Assemblies, inter alia.
4. Loss of production capacities may arise from natural disasters that ruin production facilities, a typical example being the floods that inundated several factories in the North and South Industrial Areas of Accra on June 3rd 2015.
5. Low efficiencies leading to poor competitiveness/low sales.

6. Increased insurance costs, especially where the Insurance company has had to pay for damages not foreseen.
7. Relocation of project or complete re-design. This would entail additional cost burden and affect the profitability of the project

• Legal complications emanating from direct liability in the case of strict tender liability.
• Class action suits if made responsible for negative impacts.- British Petroleum’s liability in the oil spill in the Gulf of Mexico in the US is a typical example.
• Obtaining ownership of now contaminated collateral as a result of local authorities’ new development plans affecting the area or litigation not previously foreseen. This may arise where a financial institution has previously taken buildings and other facilities as collateral but which suddenly become the subject of re-zoning for other purposes like rail or road construction. Even for prime properties taken as collateral, forced evictions by city authorities may result in squatters pitching camps in or close to these prime areas with the disadvantages of noise, filth and dust pollution emanating as a result. Attempts at evicting such illegal settlers may equally incur the wrath of Human Rights activists amidst reputation crisis. This would diminish the value of collateral previously taken.

• Negative reportage could emanate from aspects of a project and its impact on a financial institution’s image. Environmental NGO’s and other civil society groups’ agitation may court massive public outcry against the bank’s well- preserved brand.
• Governmental investigations which may arise from perceived corruption in the granting of approvals for project construction may similarly dent hard won reputation.

Various institutions exist globally that have dedicated themselves to ensuring that in the quest to create wealth, the planet and its resources are judiciously utilized for current and future generations. This gives rise to the concept of responsible investment which has permeated global corporate governance initiatives

In 2006 the United Nations Environment Program  Financial Institutions and the UN Global Compact launched the Principles For Responsible Investment. The aim is to provide a framework to help investors build environmental, social and governance considerations into the investment process, thereby achieving better long-term returns and more sustainable investment markets.

Over 800 signatories from 45 countries with roughly US$ 22 trillion of assets under management signed to commit themselves to incorporating environmental and social governance issues into investment analysis and decision -making processes.
They agreed to embrace ownership of policies and practices, appropriate disclosure, working together, promoting principles and reporting on their compliance to this accord. (

The International Finance Corporation’s (an arm of the World Bank) Sustainability Framework articulates the Corporation’s strategic commitment to sustainable development.
As the strategic private sector lending body of the World Bank, it integrates environmental and social risk management into its direct lending and equity investments in firms across the globe.

By principle, any firm which becomes a beneficiary of its lending activities must necessarily subscribe to environmental and social risk management encapsulated in the eight Performance Standards in their respective operations and report on these principles periodically.

The Policy on Environmental Sustainability describes IFC’s commitments, roles and responsibilities related to environmental and social sustainability.
The Performance Standards are directed towards IFC’s clients. They provide guidance on how to identify risks and impacts and how these manifest in the client’s mainstream operations or a financial institution’s on- lending activities.

These standards which would be summarized in the next article are designed to avoid, mitigate and manage risks and impacts as a way of doing business in a sustainable way. They include stakeholder engagements and disclosure obligations of the client in relation to project level activities. The IFC requires clients to apply the Performance Standards to manage environmental and social risks and impacts so that development opportunities are enhanced.
The 8 Performance Standards establish standards that the client (party responsible for implementing and operating the project or the recipient of the financing) is to meet throughout the life of the investment. They cover areas such as labour and working conditions, resource efficiency and pollution prevention, how to manage the aspirations of indigenous persons, community health, security and safety measures, bio-diversity conservation, protection of natural heritage monuments/sites, responsible land acquisition and resettlement of affected communities in project execution.

The next article will be devoted to explaining the internal mechanisms by which banks and their clients fulfill these requirements in their routine project appraisals and execution and what informs these measures. The ultimate objective is how to make the world a better place and shift emphasis away from just profit making. Hopefully, in the end, there will be a better appreciation of responsible investments which will also help us to refrain from judging a book by its cover.
The writer is a Fellow of the Chartered Institute of Bankers and an adjunct lecturer at the National Banking College, and the Chartered Institute of Bankers, a farmer and the author of “Risk Management in Banking” textbook.

Email; [email protected] Tel. 0244 324181 / /0576436414
This piece is dedicated to my course mates at the IFC ESRM Experts Forum, Cohort 2019/2020


Leave a Reply