Environmental and Social Risk Management: Integral for Risk-Resilient Financial Institutions

This article was written by Sustainable Finance Advisory associate Swe Thant and Managing Director Carey Bohjanen for CSR Files, a ThistlePraxis Consulting publication. Read the full edition here. Carey and team served as the Independent Advisor to the Nigerian banks during the yearlong process of developing the NSBPs and Guidelines and provide sustainability and risk management advisory and consulting solutions to a wide range of financial sector clients around the globe as well as in Nigeria, including recently serving as an advisor to the Central Bank of Nigeria.

In May of this year, carbon dioxide levels in the earth’s atmosphere reached four hundred parts per million. Experts aren’t sure when levels were last historically this high – they are guessing that it was about 3 million years ago. But in case the implications aren’t clear, a marine geologist neatly summed up the situation: “It’s the inevitable march to disaster.” [1]

Climate change is only one of the global “megatrends” driving the changing landscape of risk and creating potential instability. Consider population growth: By 2030 our “global village” will reach 8 billion people – 2 billion more than today.[2] We have a declining natural resource base coming up against increased demand rates in the next 15 to 20 years: 30%, 40%, and 50% respectively for food, water and energy.  Urbanization, once seen as a contributor to economic growth, increasingly poses major challenges as the pace of urbanization and the growth of megacities[3] have created a new front in the battle against pollution, congestion and the swelling of slums.

These trends present key challenges to sustained development and progress. In particular, countries in Africa and the Middle East are expected to run the most risk in terms of food and water shortages in the coming years with potential for a collision on three fronts: shifting climate patterns, declining water resources, and the continuing problem of food-insecurity.  The growth rate for urbanization is forecast to be the highest in Africa, shifting the focus from Asia for the first time. Such growth will bring heavy demands for infrastructure and services. Altogether, it has been said that the urban explosion around the world is expected to generate a need that will equal 40% of all the construction the world has seen to-date throughout its history. Overlaid on existing challenges – poverty, unemployment, the “youth bulge,” conflict and instability, and demands for inclusion and empowerment – these trends call for a balancing act among all key players of the economy. This balancing act presents a number of risks and opportunities for businesses.

The megatrends have varying implications for business, with one aspect in particular worth highlighting: materiality. Consider, for example:

  • The economic costs of extreme weather related to climate change. Insurance providers have been writing checks for storm and water damage after a number of fast and furious weather events in recent years, estimating it will cost insurers and reinsurers USD25 billion altogether for damage caused by Hurricane Sandy in the US alone and a total of USD65 billion for all storms including Hurrican Sandy.[4]  A report commissioned by European governments last year estimated USD1.2 trillion in annual cost to the global economy or 1.6% of global GDP. [5]  China spent USD1 billion in 2011 to alleviate the impacts of an extended drought in its primary wheat belt.[6] Drought and shifting rainfall in 2011 drove record high food prices and severe food shortages in Kenya, Djibouti, Ethiopia, and brought famine to parts of Somalia.[7] The 2011 Thai floods tallied 1,000 factories lost and USD45.7 billion in economic damages. [8]
  • Costs that come with business impacts on the communities and the environment where companies operate. In its last 2011 report, the United Nations Environment Programme estimates that it will cost USD1 billion and 30 years to clean up the oil spills that have happened in the Niger Delta in the previous decades. There are no estimates for spills that have occurred since. Last year, violent community protests in Peru, over water and the environment, suspended or put major projects on hold for international mining giants such as Newmont, Barrick Gold and Xtrata. It forced others, such as Bear Creek Mining Corporation, to quit. And it left government and industry scrambling for solutions to the issue of overwhelming poverty in a resource and growth-rich economy.
  • The consequences of the worst disaster in the garment industry supply chain. Lax authorities in Bangladesh and negligent plant owners may legally be held accountable for the safety violations in a fire that claimed 1,127 lives. But the public and the media put the responsibility squarely in the hands of global retailers, Walmart and H &M among them. And it’s the retailers to whom they are looking to pay for the consequences.

Sustainable growth in Africa – i.e. development that is economically profitable, environmentally sound and socially relevant – is no longer a choice. The role and indeed societal expectation for business is increasingly clear: to improve performance by managing and mitigating the risks of their operations on people and the planet.

For banks and other financial institutions, the environmental and social risks associated with a client’s business can seem one step removed. But failure to understand and adequately manage these issues expose financial sector players to the risk of: non-performing or under-performing loans/assets/investments; loss of investor/shareholder confidence; loss of access to international markets and capital; and of reputational damage.

The financial sector has responded by signing onto international principles and frameworks; adopting sustainable finance policies and practices; and engaging in multi-stakeholder platforms for dialogue and collaboration on good practices. Industry-led voluntary initiatives such as the Equator Principles have driven sector response and progress by implementing standards such as the International Finance Corporation (IFC) Performance Standards. Increasingly, environmental and social risk management has become mainstream practice across a range of finance institutions including: commercial banks, private equity houses, investment banks, retail banks and development finance institutions. Sustainable finance and environmental and social risk management are operative words as evidenced by the study we just completed for the OECD Working Party on Responsible Business Conduct that mapped environmental and social risk management practice of financial institutions around the globe. Central banks in key emerging markets are also responding with policy requirements; with Nigeria leading the way in Africa.

In 2012 Nigeria’s banking sector broke new ground among peers in emerging markets when the commercial banks developed and adopted the Nigerian Sustainable Banking Principles (NSBP) and three sector guidelines for investing and lending activities relating to agriculture, oil & gas and power. The banking sector recognized its unique position to help drive balanced economic development and make a contribution to the real economy.

We all worked together to ensure that the NSBPs and the sector guidelines draw on international standards and good practice while recognizing the particular needs and realities of Nigeria’s operating environment. We wanted an approach that was by Nigerians, for Nigerians and would “move the sector as one”. The Central Bank of Nigeria in September 2012 issued a circular requiring adoption and implementation of the NSBPs and guidelines by all banks in Nigeria.

Among other responsibilities, the NSBPs commit the banks to:

  • Manage environmental and social impacts of their lending and investment decisions;
  • Manage their own environmental and social footprint from day-to-day operations;
  • Safeguard human rights;
  • Promote women’s economic participation and empowerment;
  • Promote financial inclusion for people and communities with little or no access to banking services and products;
  • Meet the imperatives for good governance, transparency and accountability;
  • Collaborate and work together as a sector and with international partners; and
  • Report their progress on all of the above.

The three sector guidelines address the needs for incentives and safeguards; identifies key sector risks and impacts to avoid or manage; and provides guidance for implementing environmental and social risk management procedures – including ways to categorize risk exposure, client engagement practices on sustainability issues, and monitoring and reporting procedures.

These steps in Nigeria are consistent with a much longer journey to build a healthy and risk-resilient banking sector and enterprises that are fit-for-purpose in a complex, fast-evolving, modern economy poised for continued growth. There will be limits to how quickly, robustly and effectively these standards can be implemented. There will be capacity constraints, information and data needs that can’t be met, lack of action that will satisfy all stakeholders, and other hurdles. It will take buy-in and long-term commitment at top senior levels, dedicated staff and resources to carry out robust environmental and social due diligence, engagement at the client level, as well as support from the Central Bank and government. This is all part of an incremental journey and the dynamics of a changing risk landscape. Progress can be dubious at times; but the pay-off will come to those who persevere. The question is: can banks in Nigeria and other parts of Africa really afford not to try?

[1] Talk of the Town, The New Yorker, May 27, 2013.

[2] Global Trends 2030, National Intelligence Council. At

[3] Depending on the source, megacities are defined as urban areas with populations in excess of 10 million or 20 million.

[4] Wall Street Journal, Sandy’s Insurance Bill Estimated at $25 Billion for Industry, January 2013.

[5] DARA, Climate Vulnerability Monitor,

[6] New York Times, Climate Wire, China: Drought Leaves 14 Million Chinese and Farmland Parched”, September 2011.

[7] UN News Centre, High Food Prices Exacerbate crisis in drought-affected Horn of Africa, 10 August 2011.

[8] 2011 Thailand Floods: Event Recap Report, AON Benfield, March 2012.

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