The Central Bank of Nepal issued updated Environmental and Social Risk Management guidelines in February, 2022. After that, Financial institutions started to develop the outline of Environment and Social Risk Management guidelines aligned with the Nepal Rastra Bank’s guideline of ESRM. For this, banks are compelled to think once more about the aspects of environmental and social before the execution of banking activities. Banks should address environmental and social risks prevailing in the market. Potential environmental risks are damage to the environment and ecosystem because of air, water, land, and sound pollution due to industrial activities. Do banks think about Mother Nature before investing in projects? Likewise, social risks such as adverse impacts like damage, injury, or loss of persons. Societal people can be employees, customers, social activists, and the overall community. Social risk can prevail in different terms such as public health and sanitation, the safety of employees, customers, and local people, unsafe working conditions, discrimination between employees and customers, impact on indigenous citizens, and their cultural impact.
The business environment is full of Environmental and Social risks. Hence, if a bank ignores those existing risks it should face loss in their business in terms of bad reputation, legal dispute, and loss in revenue. ESRM has a bundle of responsibilities such as mitigating the risks, operational hazards, fines and unnecessary penalties, loss of market scope, devaluation of the market, bad reputation, low brand loyalty, low switching cost, etc. ESRM is responsible for analyzing the credit risk, legal risk, operational risk, and reputation risk due to environmental and social context. ESRM should analyze the client and their business, and find out if are they facing social and environmental risks in day-to-day operations. If they are facing environmental and social risks they might not be able to pay back credit on time. Hence, the E and S risk manager is liable to closely monitor the nature of the business, daily activities, and legal requirements of the business to minimize the credit risk. Likewise, some activities of clients against the environment and social obligations such as fines, penalties, and claims of third-party damages and negligence create legal risk. In addition, sometimes E and S risks create disruptions in clients’ operations. Disturbances in operations affect the stability of clients to meet the financial obligations to the bank. Moreover, Environmental and Social problems are directly related to mortgages. Hence, E and S Risk managers are always judgmental to clean up the collateral. Sometimes, due to the client’s poor E and S activities bank may lose brand value and brand loyalty from the media and public. Hence, ESRM is responsible to manage credit risk, legal risk, operational risk, liquidity risk, and reputation risk of the bank.
What are the main purposes of hiring ESRM at a bank? ESRM is responsible for the functioning of the Bank’s credit for sustainable risk and appropriate business environment. ESRM should function in close collaboration with credit units to assess the environmental, social, and climate risks. These E and S risks comply with the banking industry, and ESRM should play a role in the interest of banks to recognize E and S risks. To make sure that clients are complying with national and international standards of environmental and social risk. Therefore, in a hierarchical position, ESRM plays the role of intermediary between the risk officer and the head of different units of credit such as department head, divisional head, and branches.
ESMR job is the most challenging and professional job role in Financial institutions. You may wonder about who is suitable for this. To answer this question precisely we can say that an environmentalist and social activist can do this role perfectly. However, this might not be practical for banks and financial institutions. Hence, we can say that an experienced relationship officer can be the better option for the role of ESRM. Since the world continuously ignores the SDGs in practice, E and S risk managers should be cautious about the critical sectors such as washing, dyeing, and finishing units of Readymade Garment Industries. Chinese and Bangladeshi readymade Garment industries are facing the issue of overuse of water for washing and dyeing clothes in the garment industry. According to a 2019 report, the World Bank stated that “some studies have shown that the textile industry is responsible for about one-fifth of global water pollution.” It takes about 20,000 liters of water to produce a cotton T-shirt and jeans. Hence, cotton production is responsible for 2.8% of the annual global water consumption and is dependent on pesticides, herbicides, and fertilizers used in its production.
On the other hand, steel re-rolling mills create social risks and environmental risk such as operation health and safety of employees, thermal and air pollution, and others. In addition, we find brick kilns and cement industries near the residential society and they are responsible for the contamination of air, sound pollution, substantial use of child labor, and extensive burning of fossil fuel. Hence, the E and S risk manager should do a detailed study of those prospective clients before facilitating the credit and any other banking services and products.
Recent buzzing words EV (Electric vehicle) and EV loan in the market. At the same time are we analyzing the batteries and accumulators manufacturing units which are highly responsible for chemical pollution. Are we losing the opportunity cost of electric batteries, if we consider the level of pollution they create in this Mother Nature? Not only these, but different sectors are creating E and S risk such as chemical and chemical products, Rubber and plastic manufacturing, paper manufacturing and paper pulp processing units and small metal shops, etc.
Nepal as a sovereign country has done numerous memorandums of agreement and treaties to comply the environmental and social risks such as treaties with the International Labor Organization (ILO), Save the Children, World Health Organization (WHO), World Trade Organization (WTO), Sustainable Development Goals (SDGs) in under developing countries and many more national and international environmental and social organizations. Therefore, E and S Risk manager should be aware of these types of national and international organizations and their treaties within the national and international arena.
To sum up, the ESRM seems really important position in Banking and Financial Institutions. In this dynamic business age, changes are unpredictable and threatening. So, to proactively analyze them and mitigate threats E and S risk manager has a crucial role in the bank. Some banks already hired E and S Risk Managers and have been gaining experience and others are in line to announce the vacancy for this ESRM. Therefore, we can say that in the coming days, we can meet and talk with ESRM in every bank and financial institution. We believe that they will play a crucial role to mitigate different sorts of risks they are responsible for the revenue of the financial institutions and banks.