State Bank of Pakistan (2015) Concept Paper On Green Banking

Concept Paper on Green Banking
Infrastructure,
Housing and SME
Finance Department
CONCEPT PAPER ON GREEN BANKING February 26, 2015
Team Leader
Syed Samar Hasnain samar.husnain@sbp.org.pk
Executive Director (Development Finance Group)
Members
Prepared by:
Mr. Saeed Afgan saeed.afgan@sbp.org.pk
Joint Director (infrastructure, Housing and SME Finance Department)
Reviewed by:
Dr. Muhammad Saleem saleem.zia@sbp.org.pk

Additional Director (infrastructure, Housing and SME Finance Department)
Mr. Ghulam Muhammad Abbasi ghulam.muhammad@sbp.org.pk

Director (infrastructure, Housing and SME Finance Department)
For feedback/queries: ihfd@sbp.org.pk
DISCLAIMER
Whilst every effort has been made to ensure the quality and accuracy of the data/information
provided in this document, State Bank of Pakistan makes no warranty concerning the contents of
this paper. In no event will the State Bank, its affiliates or other stake holders be liable for any
mistakes.
i
Table of Contents
EXECUTIVE SUMMARY .................................................................................................................................. a
1. DEFINITION OF GREEN BANKING .......................................................................................................... 1
2. WHY GREEN BANKING?......................................................................................................................... 4
2.I. Regulatory perspective on Green Banking ................................................................................... 4
2.II.a. Systemic Risk Factors: ........................................................................................................... 4
2.II.b. Environmental Considerations .............................................................................................. 5
2.II.c. Sustainable Energy ................................................................................................................ 5
2.II. Banking Perspective on Green Banking: ....................................................................................... 6
2.II.a. Corporate Social Responsibilities .......................................................................................... 6
2.II.b. Economic Benefits ................................................................................................................. 7
2.II.c. Sustainability Risks ................................................................................................................ 7
3. CAUTION IN INTERVENING IN THE FINANCIAL SYSTEM........................................................................ 9
4. TOOLS OF GREEN BANKING .................................................................................................................. 9
4.I. Greening of banking operations & infrastructure: ..................................................................... 10
4.I.a. Green Buildings ....................................................................................................................... 10
4.I.b. Paperless Banking: .............................................................................................................. 11
4.I.c. Green IT Infrastructure: .......................................................................................................... 12
4.II. Conforming/ Complying regulatory and society expectations ................................................... 14
4.II.a. Environment & Social Assessment in financing .................................................................. 14
4.II.b. Paperless Banking Operations: ........................................................................................... 15
4.II.c. Green Products: .................................................................................................................. 16
4.II.d. Renewable Energy & Energy Efficiency Financing: ............................................................. 16
4.III. Proactive Greening Banking Products/ Services and Delivery Channels .................................... 17
4.III.a. Green Street Lending .......................................................................................................... 17
4.III.b. Generous and Strategic Charity .......................................................................................... 18
4.III.c. Carbon Offset Business ....................................................................................................... 19
4.III.d. Green Climate Fund ............................................................................................................ 19
4.III.e. Brownfield Financing .......................................................................................................... 20
4.IV. Green Marketing and Awareness Building ................................................................................. 20
4.IV.a. Green Marketing ................................................................................................................. 20
Table of Contents ii
4.IV.b. Awareness Building: ............................................................................................................ 21

5. INTERNATIONAL DEVELOPMENTS ...................................................................................................... 21
6. REGULATORY INITIATIVES BY CENTRAL BANKS .................................................................................. 24
6.I. China ........................................................................................................................................... 24
6.II. Bangladesh .................................................................................................................................. 25
6.III. Brazil............................................................................................................................................ 27
6.IV. Nigeria ......................................................................................................................................... 28
6.V. India ............................................................................................................................................ 28
6.VI. Netherland .................................................................................................................................. 30
7. SBP’S INITIATIVES ON GREEN BANKING................................................. Error! Bookmark not defined.
8. RECOMMENDATIONS FOR SBP .............................................................. Error! Bookmark not defined.
9. REFERENCES ........................................................................................................................................ 31
Table of Contents iii

EXECUTIVE SUMMARY
A number of terms share meanings/ concepts implied by ‘green banking’ and most popular, among
these, are ‘Environmental, Social & Governance (ESG)’, ‘Corporate Social Responsibility (CSR)’ and
‘Sustainable Banking’. The core objective of these concepts is to capture non-financial performance and
understand its bearings on the financial performance of an organization. A plethora of research studies
over the years have shown that governance, social, and environmental performance directly effect
financial performance and viability of an organization as a going concern.
The CSR is a management concept whereby companies achieve a balance of economic, environmental
and social imperatives, while at the same time addressing the expectations of shareholders and
stakeholders. The CSR perfectly correlates with the ideas of Corporate Citizenry implying responsibilities
of businesses to their countries. The importance of corporate governance in the performance of a
company leads to the evolution of term ESG (Environmental, Social and Governance). ESG has emerged
as an all encompassing measure of performance of a company on non-financial parameters.
Sustainable Banking, which is derived from the definition of Sustainable Development given by
Brundtland Commission Report, is a broad term encompassing sustainability issues material to a vast
range of stakeholders including social economic and environmental. The term green economy and its
adjunct green banking have also been used broadly but the more popular lexicon implies green banking
as a means to promoting environmentally friendly practices that aid banks and customers in reducing
their carbon footprint.
The motives for adaptation of green banking exists both from the perspective of the regulators and the
banking industry itself. For the banks, reasons for going green include economic benefits (green
measures like on-site electricity generation, resource efficiency, paperless banking are supposed to
reduce costs), imparting corporate responsibilities, avoiding negative reputation among potential
clientele and compliance with the regulations. The improvements in lending practices also help to
reduce credit, legal and reputational risks. From the regulators’ perspective, green banking helps to
banks more vibrant/ sustainable reducing systemic risks. On the climate front, Green Banking is
considered a key component of international efforts for transition to resource-efficient and low carbon
industries i.e. green industry and green economy in general. From Pakistani perspective, green banking
may help to address the energy crisis by supporting government efforts to change energy mix and
promote electricity generation from renewable sources.
Dr. Katrin Käufer of MIT has succinctly put this forward: “If banking 1.0 is characterized by a focus on
high profitability, and banking 2.0 is characterized by regulations that respond to the negative
externalities of banking 1.0, then banking 3.0 is characterized by the potential of banks to leverage their
position in an economic system to address societal challenges. To deal with the challenges of this century
more effectively, economic institutions will need to move from a 2.0 to a 3.0 approach”. The adoption of
green banking is basically a cultural shift within a bank and is, by definition, supposed to affect all
aspects of doing business. The green banking activities may be grouped under four categories.
 Greening of banking operations & infrastructure: The category includes measures for converting
office building and branches into resource efficient (Green Buildings), adopting modern
infrastructure and reducing printing and papers (paperless banking).
EXECUTIVE SUMMARY a
 Conforming/ Complying regulatory and society expectations: This category implies passive
approach primarily to comply with regulatory requirements or avoid negative publicity of societal
groups. This category also covers risk mitigation measures to avoid investments in potentially
environmentally hazardous businesses through lending etc and capturing business opportunities in
high potential business segments like renewable energy & energy efficiency. The measures may
include incorporation of Environment & Social Assessment in financing and developing energy
financing and other green products (Environmental Index linked investments & deposits, Social
Responsibility deposit accounts and services, Charity Contributions etc).
 Proactive green Banking initiatives: The banks may go a step ahead and implement products and
services that may be distant ideas viewed from the mirror of current operations of banks. The banks
can introduce green bank loans with financial concessions for environment friendly products and
projects such as fuel efficient vehicles (Green Vehicles financing), green buildings and house
furnishing loans to install solar energy system (green mortgages) and strategic generous charities
etc. The banks may also proactively follow businesses arising from international efforts like carbon
credit offsetting and green climate fund businesses.
 Awareness and training of Stakeholders: Building market for environmental friendly products and
services entails creating green image of the banks through green marketing, creating awareness of
bank staff to ‘think green’ in day to day activities and creating awareness among the potential
clientele for resource efficiency and its adjunct economic benefits.
On international front there have been considerable efforts for promoting environment friendly banking
practices. The key initiatives include agreements/ protocols like Collevecchio Declaration of (signed in
2003 by civil society organizations), Equator Principles (signed by IFC and leading banks in 2003) and
Natural Capital Declaration (NCD) (signed by IFC and leading banks in 2012). IFC has also established
Sustainable Banking Network (SBN) as an informal and exclusive group of banking regulators and
associations that are interested in sustainable banking policies, guidelines and practices. Many
regulators/central banks are taking measures for green banking. For examples, China has issued green
credit guidelines in 200, Bangladesh Bank has established Green Banking and CSR Department and
issued green banking guidelines, Brazilian Central Bank (BACEN) requires banks to have environmental &
social risk management system, Nigerian Central Bank has adopted quasi mandatory Nigeria Sustainable
Banking Principles (NSBP) and Reserve Bank of India (RBI) issued its sustainable development
instructions to banks in 2007. The Indian Institute of Development and Research and in Banking
Technology (IDRBT) which is a subsidiary of RBI, has also produced established guiding reports/
statements on green banking.
There have been efforts on part of State Bank of Pakistan on energy front generation in the form of
Refinance Scheme for Renewable Energy; there is a strong need for sustained and coordinated efforts
for promoting green banking and environmental considerations of banks. The recommended measures
for State Bank are summarized below:
 Guidelines on Green Banking: State Bank may issue Green Banking Guidelines for the banks/DFIs
encouraging the banks/ DFIs to adopt green banking practices.
 Environmental Safeguards in Lending: State Bank may encourage the banks to incorporate
provisions for assessment of environmental implications/ risks in evaluation of credit proposals of
their prospective customers.
 Credit Enhancement Facility: State Bank may establish a credit enhancement facility for renewable
energy and energy efficiency products.
EXECUTIVE SUMMARY b
 Model Green Financial Institutions: State Bank may coordinate with the banks/ DFIs for selection of
a Bank/ DFI that is willing to reorient itself as a model of green banking.
 Setting up sustainable energy financing as separate segment: State Bank may also encourage banks
and DFIs to set up sustainable energy financing as a separate segment within their overall portfolio
of financing.
 Green Banking Unit: In order to coordinate initiatives on green banking, State Bank may establish a
green banking unit in infrastructure, Housing & SME Finance Department.
 Sustainable Energy Financing Group: State Bank may establish a Focus Group on Sustainable Energy
Financing comprising of representatives from banks, IFC and other stakeholders for suggesting
policy measures to promote green banking and financing.
 Green Climate Fund & Carbon Offsetting Business: Being a developing country, Pakistan has huge
potential for attracting carbon off-setting business and Green Climate Fund. State Bank may,
therefore, encourage willing banks/ DFIs to develop their capacities on environment related matters
and develop their businesses through the use of these international funding pools.
 Indicative Targets for Renewable Energy Financing: A collaborated targets mechanism with
separate targets for agriculture, housing, SME and sustainable energy may be established as this
single platform streamline reporting set-ups and also help to increase focus of senior management
of banks/ DFIs.
 Awareness Programs on green banking practices: State Bank may initiate a series of awareness
sessions for front end bankers and their potential clients on green banking.
EXECUTIVE SUMMARY c
1. DEFINITION OF GREEN BANKING

The term ‘Green’ has a wider usage and covers social responsibility of banks as corporate citizens and
the term ‘green banking’ means developing inclusive banking strategies which will ensure sustainable
economic development. There are a number of terms with overlapping meanings/ understandings with
the term ‘green banking’; most popular of which are Environmental, Social & Governance (ESG),
Corporate Social Responsibility (CSR), Sustainable Banking. These terminologies have direct bearing on
the kind and scope of initiatives/ activities undertaken by the banks. These terms are briefly explained
below with a view to set context and scope of term Green Banking used in this Concept Note.
The oldest and broadest of all these terms is the CSR (Corporate Social Responsibility) and its related
term of Socially Responsible Investing (SRI). The origins of Socially Responsible Investing (SRI) dates back
to the 1950s as investors started using screening to restrict investments in ‘non-ethical’ businesses in
line with religious beliefs (later on concerns on war in Vietnam and apartheid movement in South Africa
further intensified use of screening). The SRI eventually evolved a separate breed of an investment
strategy incorporating environmental, social and corporate governance factors into investment
decisions. SRI Strategy uses a mix of negative (values-driven) and positive (risk and return driven)
screening techniques to maximize financial return. The SRI ultimately encompasses triple bottom
approach of ecological, social and economic criteria. The CSR may be considered as the corporate side of
SRI and is driven by a combination of civil society, government, NGOs, investors and voluntary efforts of
companies themselves. Mercer (2007) defines CSR as an ‘approach to business which takes into account
economic social, environmental and ethical impacts for a variety of reasons, including mitigating risk,
decreasing costs and improving brand image and competiveness. […..] Often policies and procedures
encompass a wide range of practices related to all levels of business activity including corporate
governance employee relations supply chain relations, customers relationships, environmental
management, philanthropy and community involvement’. A related concept is that of the corporate
citizenship which gained popularity in USA in early 1980s and 1990s.
The United Nation’s Industrial Development Organization defines Corporate Social Responsibility (CSR)
as a management concept whereby companies integrate social and environmental concerns in their
business operations and interactions with their stakeholders. CSR is generally understood as being the
way through which a company achieves a balance of economic, environmental and social imperatives
(also called People, Plant and Profit Approach or Triple-Bottom-Line- Approach), while at the same time
addressing the expectations of shareholders and stakeholders. The Tripe Bottom Line approach is used
as a framework for measuring and reporting corporate performance against economic, social and
environmental performance. It is an attempt to align private enterprises to the goal of sustainable global
development by providing them with a more comprehensive set of working objectives than just profit
alone. The perspective taken is that for an organization to be sustainable, it must be financially secure,
minimize (or ideally eliminate) its negative environmental impacts and act in conformity with societal
expectations.
The key CSR issues include environmental management, eco-efficiency, responsible sourcing,
stakeholder engagement, labor standards and working conditions, employee and community relations,
social equity, gender balance, human rights, good governance, and anti-corruption measures.
The importance of corporate governance in the performance of a company lead to the evolution of term
ESG (Environmental, Social and Governance).The term traces back to the initial work of United Nations
Global Compact on financial markets and sustainability issues and now is widely used in capital
DEFINITION OF GREEN BANKING 1
markets/by investors. ESG (environmental, social and governance) factors are considered as a subset of
non-financial performance indicators, which serve to evaluate corporate behavior and determine the
future financial performance of companies.
The concepts of Sustainable development also developed

during the early 1980s and works of the World Commission
on Environment and Development (WCED) – commonly
referred as Brundtland Commission – popularized it as an
international agenda. The Brundtland Commission defines
sustainable development as ‘development that meets the
needs of the present without compromising the ability of
future generations to meet their own needs’. Sustainability
emerged as a generic concept used a number of business
activities and domains including banking with a view to
‘support the worldview that economic, social and
environmental issues are fundamentally interlinked and must
therefore be considered in unison’. As a concept,
sustainability is often elaborated in terms of three pillars of
sustainability, though the most popular depiction of three
pillars is not in the form of ‘pillars’ but as three colorful
balloons, primarily because intersection area of three
balloons is easily understood as ‘sustainable’.
There are tradeoffs between financial and nonfinancial (e.g.,

environmental, social, and governance — or ESG)
performance. These tradeoffs can be particularly
consequential in large financial institutions, such as huge
employee incentives for financial performance combined
with poor risk management practices. Here comes the role of
such non-profit organizations like Sustainability Accounting Standards Board (SASB) [named similar to
International Accounting Standards Board (IASB)] in promoting the culture of reporting both financial
and nonfinancial ESG performance to provide a fair idea to the stakeholders to assess the
‘sustainability’. Such broad performance evaluation also puts pressure on banks to better manage
nonfinancial ESG performance through innovation in new products, processes, and business models
rather than limiting themselves to “financial innovation” that focuses only on one dimension of
performance.
‘Sustainable Banking’ is a broad term encompassing sustainability issues material to a vast range of
stakeholders (shareholders employees, customers, counterparties, and society). Sustainable banking is
not limited to commitments to sustainability by focusing on such environmental issues as energy and
water. The stakeholders need is transparent information about their true source of sustainability: their
social and governance performance, and how it relates to financial performance. Examples of social
performance include talent recruitment, employee compensation, customer security and privacy,
customer transparency, responsible products, and financial inclusion. Examples of governance
performance include management of the legal and regulatory environment, systemic risk management,
and managing conflicts.

The green economy emerged as a concept in the later years of 1980s although ‘green growth’ became
popular in late years of the first decade of this century. Some experts1 attribute this reemergence and
popularity of green economy to lessening political support of sustainable development due to its
negative framing with focus on costs and limits and need to constrain growth in a world where GDP
growth remains core interest of voters, businesses and policy makers. Green growth not only insists on
fundamental compatibility of growth and environmental protection, but claims that protecting
environment can actually yield better growth. United Nations Environment Programme (UNEP) defines a
green economy as an economy that results in “improved human well-being and social equity, while
significantly reducing environmental risks and ecological scarcities” (enthused UNEP has published a
600+ page report on Green Economy in 2011). The Green Economy Coalition (a group of NGOs, trade
union groups and others doing grassroots work on a green economy) succinctly defines green economy
as “a resilient economy that provides a better quality of life for all within the ecological limits of the
planet.” World Bank report defines green growth as a growth that is efficient in its use of natural
resources, clean in that it minimizes pollution and environmental impacts, and resilient in that it
accounts for natural hazards and the role of environmental management and natural capital in
preventing physical disasters. Thus green is a more focused term underscoring environmental
considerations and protection of earth and its ecosystems. ‘Green’ is becoming a symbol of Eco
consciousness in the world.
In its simplest expression, a green economy is low-carbon, resource efficient, and socially inclusive. In a
green economy, growth in income and employment are driven by public and private investments that
reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of
biodiversity and ecosystem services.
The green banking is a way of juxtaposing green concepts into the realms of banking. According to
Indian Banks Association “Green Bank is like a normal bank, which considers all the social and
environmental / ecological factors with an aim to protect the environment and conserve natural
resources”. The Indian Institute for Development and Research in Banking Technology, however appears
to broaden the concept by defining Green Banking as ‘an umbrella term referring to practices and
guidelines that make banks sustainable in economic, environmental, and social dimensions’.
For the purpose of this concept paper, Green Banking is defined as promoting environmentally friendly
practices that aid banks and customers in reducing their carbon footprint. Green banking thus involves
a two pronged approach. Firstly, green banking focuses on the green transformation of internal
operations of all banks. It means all the banks should adopt appropriate ways of utilizing renewable
energy, automation and other measures to minimize carbon footprint from banking activities. Secondly,
all banks should adopt environmentally responsible financing; weighting up environmental risks of
project, before making financing decisions; and in particular supporting and fostering growth of
upcoming ‘green’ initiatives and projects. It is a smart and proactive way of thinking with a vision of
future sustainability.
This Concept frequently uses the broader term of sustainability at places where the discussion is more
general and corporate social context also. However, in order to keep the readers entrenched with the
core theme, it is forewarned that use of term ‘sustainability’ and for that matter other related terms
may be perceived as another way of saying ‘green’.
1
Robert Falkner (2013)

2. WHY GREEN BANKING?

The motives for adaptation exist both from the perspective of the regulators and the banking industry
itself. The banking industry has its own cogent reasons for going green which includes economic
benefits, avoidance of undesired negative publicity from societal groups and compliance with the
regulations. From the regulatory perspective green banking entails long term benefits in the form of
resilience of banking system and the sustainable growth.
2.I. Regulatory perspective on Green Banking
There are three primary reasons for State Bank of Pakistan, being regulator of banking system, to
encourage green banking practices in banks:
2.I.a. Systemic Risk factors

2.I.b. Climate Change Concerns
2.I.c. Sustainable Energy
2.II.a. Systemic Risk Factors:
From the regulatory perspective, it is suggested that financing institutions are faced with higher legal
and credit risks on their financing to unsustainable business activities and this may lead to enhance
systemic risk in the financial system. In the wider context, the financial institutions and their borrowing
entities may not directly bear consequences of environmental risks but these risks may ultimately
threaten financial stability because of the devastating or destabilizing effect they have on society at
large. For example, investments in mining and forestry companies may deprive large population groups
of their land and means of living, which can strongly increase political tensions and regional instability.
Further investments in companies/ projects which adversely affect the environment/ climate may
increase operational costs of not only their own but also other companies operating in the region
limiting their capacity to repay loans.
The proponents of sustainability and environment issues advocate that financial regulations should
explicitly aim to guide the banking sector on green banking and finance as a necessary component of
other financial tools for maintaining a healthy and stable financial system. Capital requirements and risk
management regulation in particular should ensure that banks strive to minimize sustainability risks in
all their lending, financing and investment decision making processes. The banking regulators have the
responsibility of providing regulatory guidance to the banks to integrate sustainability factors in all their
lending, financing and investment decision making processes.
BASEL III and Green Banking: At a further higher level, Basel Capital Accord should also integrate
sustainability and green banking considerations in their financial framework. However, a recent study2
finds that the systemic environmental risks appear to be in the collective blind spot of bank supervisors
and Basel III does not take explicit account of, and therefore, only marginally addresses, these issues.
The study concludes that Basel III is overlooking an important source of risk to the financial system and
suggests mechanisms/ solutions that are within the reach of regulators and industry practitioners for
working together proactively.
2
CISL & UNEP FI (2014)
WHY GREEN BANKING? 4

Taking cognizance of this scenario, a number of countries around the world have already engaged in a
variety of regulatory and market practices to assess systemic environmental risks and adopt practices to
mitigate the banking sector’s exposure to environmentally unsustainable activities. Notable examples
include China, Bangladesh, Brazil and Peru. The regulations of these countries increase interaction
between the regulator and the bank in assessing wider portfolio level financial, social and political risks,
and increases requirements for disclosure to the market regarding their exposures to systemic
environmental risks.
2.II.b. Environmental Considerations
Environmental considerations hinge on protection of environment and thereby quality of human life by
controlling negative implications of human activities. Within this broader context, there are two primary
areas of concern for regulating entities and the government; degradation of natural resources and
climate changes.
Natural resources are materials that occur naturally and are used by humans to make more complex
human-made products. Natural Capital is the world’s stocks of natural assets which include geology, soil,
air, water and all living things from which humans derive a wide range of services, often called
ecosystem services, which make human life possible. The problem of natural capital arises from its very
nature of being freely available creating the classical economic issue of free ride. A continuous
drawdown on natural capital, without allowing the nature to recoup, creates the risk of ecosystem
collapse. The regulators and governments are, therefore, concerned to put a price on use of natural
capital as a measure to promote resource efficient businesses. The primary areas of concern include air
pollution, water pollution and scarcity, encroachment of rivers, improper disposal of industrial medical
and house-hold waste, deforestation, loss of open space and loss of biodiversity.
Put forth simply, the climate change is a measure of shifting weather patterns. It refers to significant
changes in the measures of climate (average weather conditions or time variation of weather around
longer-term average conditions) that last for extended periods of time. It includes major changes in
temperature, precipitation, or wind patterns, among other effects, that occur over several decades or
longer. The shifting of weather patterns has occurred historically due to natural phenomena out of
human control like variations in solar radiation, movement of plate tectonics, and volcanic eruptions
etc. However, evidence is building up that current climate change is due to the global warming caused
by release of large amounts of carbon dioxide and other greenhouse gases into the atmosphere. The
greenhouse gases act like a blanket around Earth, trapping energy in the atmosphere (greenhouse
effect) and causing it to warm (global warming). The climate changes have direct effect on biodiversity,
agriculture, forestry, dry land, water resources and human health. Pakistan is considered very high on
vulnerability scale. The climate changes are already causing erratic monsoon rains, recessions of glaciers,
intrusion of saline water into Indus delta and reduced agricultural output.
Green Banking is considered a key component of international efforts for transition to resource-efficient
and low carbon industries i.e. green industry and green economy in general.
2.II.c. Sustainable Energy
Pakistan is facing severe energy shortages, with electricity shortages sometimes reaching at 7,000 MW
and this seemingly unavoidable energy crisis has started to take a serious toll on economic growth.
Estimates show that energy shortfall causes an annual loss of 4-7% in GDP with an estimated 2%
reduction in GDP Growth. Burdened with high energy costs, businesses (corporate, SME and
agricultural) are forced to transmit high cost to buyers of their products adding to the inflation.
Residents are suffering as an ever increasing consumable income is being spent on purchase of energy
leaving behind small pockets for other household necessities. Much of the current crisis may be a bi-
product of heavy reliance on traditional sources of energy which are both expensive and their supply is
also unreliable (recent petroleum crisis, though idiosyncratic, warns of possible breakdowns if disruptive
factors (either internal or external) are not properly managed).
The Government is striving to change the current energy mix and increase share of alternative/
sustainable energy. There is a strong need to increase exploitation of sustainable energy resources and
also encourage measures to increase energy efficiency.
The commercial banks, as intermediaries, are well positioned in aligning their customers’ preferences
towards green energy sources. The overarching networks of financial institutions and their linkages with
the potential investors/ beneficiaries place them at a vantage point to capture this potentially huge
market for sustainable energy solutions. The promotion of green banking is poised to encourage banks
to explore available options, conduct research for assessing the market size of different viable niches
within the ambit of renewable energy and energy efficiency and develop customized products that are
well taken by the industry. The emphasis on green banking initiatives will also encourage banks to
incorporate a specific sustainable energy and green financing as a sub-component in their financing
portfolios. Although the banks will ultimately optimize their allocations to the sustainable energy and
green financing within their desired framework of risk and return objectives from the financing segment
of their business, creation of a separate sustainable energy and green financing will increase focus of
banks towards this segment and ultimately result in increased lending to this segment.
2.II. Banking Perspective on Green Banking:
The banks as commercial entities strive to maximize wealth of their shareholders while remaining
sustainable on long term basis. Although the move towards ethical banking has been adopted by some
banks around the world, the banks have dragged behind and diffidently implemented sporadic
measures only to avoid negative consequences. It is understood that green banking will keep gaining
momentum in the coming years as public becomes aware of environmental concerns, civil society and
consumer groups exert pressure, climate concerns become universal and technological improvements
cut down costs of alternatives.
In a pragmatic view, banks have at least four cogent reasons to go for green banking:
2.II.a. Corporate Social Responsibilities

2.II.b. Environmental Considerations
2.II.c. Economic Benefits
2.II.d. Sustainability Risks
2.II.a. Corporate Social Responsibilities
The concept of green banking emanates from the basic principle that recognizes all businesses as
corporate citizens and requires them to have responsibilities towards the society just like the normal
citizens. This deviates from the traditional school of thought that considers businesses as entities
organized to maximize profits on the investments of their shareholders.
The financial institutions, being the financial intermediaries, play a crucial role in allocating financial
resources in the present, globalizing world. As a large majority of all companies and governments in the
world is dependent on the financial services of private banks, these financial institutions play a key role
in every segment of human activity. The banks, therefore, stand at an important juncture where they
can be powerful agents of change towards a more sustainable future by responsibly diverting their
financial services to such activities/ businesses which are conducive to the environment, human rights,
and social equity. The banks have long been perceived to have little sustainability considerations in their
financial services particularly lending to the businesses and, many believe, these are still not fully
incorporated in their systems and procedures. For example, environmental activists consider proposed
financing of State Bank of India for a new mega coal complex in Australia to have the potential to wreck
Great Barrier Reef and increase chances of runaway climate changes.
2.II.b. Economic Benefits
Economic benefits are attached with green banking initiatives in terms of building market image as
socially responsible bank to attract socially motivated breed of customers and savings on operational
activities.
The use of energy efficient technologies, in-site renewable power generation and paperless banking are
conceptually expected to reduce the business operation costs of banks. The technological developments
in IT systems have increased productivity of bank staff and also reduced costs of banks. In a paperless
environment, storage, handling, retrieval and sharing of documents become quite efficient increasing
speed, security and accuracy of banking operations. An electronic storage in the form of centralized hard
drive requires much less space than the cumbersome physical files. The in-site power generation from
renewable resources is becoming cost effective and uninterrupted source of power supply especially
with the new innovations in photovoltaic cells technology.
The climate changes and the adjunct campaign run by nongovernmental organizations are increasing
inclination of public towards environment friendly banking operations. Though socially responsible
investment is being practiced for a long time now, this has gained momentum in the recent years. Even
more concerning is the trend of general public to link such granular and apparently non-environmental
products like savings and current account deposits with sustainable banking issues. In this world of
branding and image building, any reputation of irresponsibility may have serious implications for the
banks in terms of attracting customers and investors.
A leniency in considering sustainability factors can also lead to increased credit risk of the lending banks
and is discussed in the next section.
2.II.c. Sustainability Risks
Taking sustainability risks into account can, for part of a bank’s credit portfolio, improve the bank’s
understanding of its financial risks and its capacity to deal with these risks. The level of sustainability of
the project’s/ company’s operations has a direct correlation with the probability of default (PD).
Ignoring sustainability risks can lead to increases in raw material prices, plant diseases and other
environmental problems, conflicts with workers, civil society organizations and the local population,
reputational damage, buyers severing ties, public prosecution and court cases. All these events are likely
to affect the credit rating of the client and the probability of default (PD). Specifically, a failure to

incorporate prudent environmental criteria in the financing models of banks may lead to three types of
risks namely, credit risk, legal risk and reputational risk.
 The credit risk may arise if expected obligations of the borrowers in relation to social and
environmental safeguards are not properly considered at the time of approval of the project. In
such an instance, the increased costs of complying with mandatory standards may severely
hamper cash flow/profitability position of the borrower and thereby reduce his/her ability to
repay the borrowed amount. The credit risk may also arise if changes in environmental
regulations affect the profitability and repayment capacities of the borrowing entity. For
example, some of the businesses/ technologies may become infeasible after incorporating new
regulatory provisions and the business may not have capital funding to relocate to the
technologies/ businesses allowed in the new environment regime. Financing to the businesses
on real estate may become delinquent if the property value of the real estate falls significantly
due to environmental issues in the area. The banks should, therefore, account for possible
changes in environmental regulations and account for the possible stringent measures on the
borrowers’ repayment capacity. The credit risk may even manifest in the form of market risk if
the market value of the borrowing company or the underlying collateral it holds as security falls
due to environmental incidence like discovery that the contamination at production site exceeds
allowed limits.
 The legal risk arises from the fact that the lending bank may end up in possession of collaterals
which is contaminated or pollution causing and could not be easily disposed. A company
engaged in exploration/ extraction may be legally obliged to clean up site for possible damages.
The society and community in the surrounding areas may engage the borrowing company in
legal battles for remedies on the ecosystem and environment in the area. If the FI is a principal
shareholder, it may become directly liable for all remedial costs.
 The reputational risk has in the recent years become a primary concern for the banks as
environment and human rights groups have become much more active in digging out unethical
practices of the projects and companies and sensitizing the public regarding inadequate
safeguards of lending banks. Banks, almost certainly, lose their reputation if they are involved in
some big projects which adversely affect the environment and causes pollution.
Integrating sustainability factors in all lending and investment decision making processes is, therefore, in
the direct interest of banks to avoid aforesaid risks. In developed market, the lending institutions have
openings to transfer their risks to other parts of the financial system (for example, through underwriting
and placing securities, securitization of loans, purchase of credit default swaps, etc) and are not faced
with sustainability risks. But in a market like Pakistan, where such products of ‘financial engineering’ are
not well developed (CDS are not available altogether and securitization is not a common practice), banks
have to be more vigilant in identifying sources of risks and undertaking mitigating measures.
Dr. Katrin Käufer of MIT aptly puts this new perspective on banking:
If banking 1.0 is characterized by a focus on high profitability, and banking 2.0 is

characterized by regulations that respond to the negative externalities of banking 1.0,
then banking 3.0 is characterized by the potential of banks to leverage their position in
an economic system to address societal challenges. To deal with the challenges of this
century more effectively, economic institutions will need to move from a 2.0 to a 3.0

approach—…..…… It requires the players to evolve from initial ego-system awareness to

an eco‐system awareness that includes the health and well‐being of the whole.
3. CAUTION IN INTERVENING IN THE FINANCIAL SYSTEM

Though regulatory push for and voluntary adoption of green banking is strongly advocated, it is
cautioned that all of these efforts must not un-proportionately stifle the profitable opportunities or
create excessive burdens for banks. There are three key areas of possible repercussions of green
banking measures which must be considered before implementing green policy regulations.
Disproportionate impacts: Regulatory measures for green banking may have disproportionate impact
on banks depending upon their size and businesses strategies. For example, while larger commercial
banks may have financial muscles to undertake green banking initiatives, strict regulatory measures may
become particularly burdensome for smaller banks. A fascination with green banking may potentially
stifle desired market diversity and innovation and, thus, defeat its very objective of ‘greening the
economy’.
Unintended consequences: The green banking policy may have unintended consequences which may
not be fully captured and effectively mitigated at the time of designing such a policy measure and during
its implementation. For example, excessive emphasize on lending to ‘green’ businesses may affect
quality of lending portfolio or a strategy of green banking operations may force to deploy unviable,
expensive IT infrastructure. If green products are not at par with their traditional counterparts in terms
of pricing or flexibility, banks opting for green banking may see their good customers to move to
‘traditional’ banks.
Impact avoidance: The banking initiatives and regulatory measures may encourage vested groups to
promote their own agenda of wealth creation by way of tweaking regulations in their own favor. The
dynamic and complex structure of the economy increases potential of propping up of such vested
groups. For example, un-attentive application of E&SG measures and their incorporation on proposal
evaluation may benefit so-called environmentally friendly projects which are not otherwise viable.
To sum up, there should be a win-win situation for all parties involved when it come to green and eco-
friendly initiatives i.e. three parties, the bank, the environment and the customers must win for a long
term viability of such measures and sustainable development of the economy.
4. TOOLS OF GREEN BANKING

The adoption of green banking is basically a cultural shift within a bank and is, by definition, supposed to
affect all aspects of doing business. In this situation, the objective categorizing of green banking
activities into separate and disjointed groups does not remain very insightful. The groups of activities are
interlinked with each group having direct bearing on outcomes of activities in others. Nonetheless, for
understanding perspective, green banking activities may be grouped under four categories.
4.I. Greening of banking operations & infrastructure

4.II. Conforming/ Complying regulatory and society expectations
4.III. Proactive green Banking initiatives
4.IV. Awareness and training of Stakeholders
CAUTION IN INTERVENING IN THE FINANCIAL SYSTEM 9

4.I. Greening of banking operations & infrastructure:
A bank is a major user of energy through its head office, regional offices and branch network. The
computer systems, ATMs and other technological setups form a big chunk of resource utilization
including electricity consumption by the banks. A number of banks have adopted measures to reduce
their environmental resource consumption. These measures may be adopted as part of corporate social
responsibility measures or out of concerns to reduce costs/ improve service delivery efficiency. The
adoption of green banking in operations involves complete Business Process Re-engineering (BPR) i.e
rethinking and radically redesigning the bank’s existing resources. This process involves commitment at
the highest level (in the form of organization's mission, strategic goals etc), which trickles down with
cultural assimilation of green banking measures in day to day activities.
There are three types of initiatives under this category:
4.I.a. Green Buildings

4.I.b. Paperless Banking
4.I.c. Green IT Infrastructure
Major measures adopted on this front are summarized below:
4.I.a. Green Buildings
The construction and building accounts for more than half of all resources consumed globally and these
buildings account for 15 percent of worldwide greenhouse gas emissions and growth in emerging
market countries is expected to increase significantly in coming years.
The idea of green buildings covers a broad spectrum of resource conservation and compliance with the
corporate social responsibilities. Green building is defined as ‘a practice of creating structures and using
processes that are environmentally responsible and resource-efficient throughout a building's life-cycle
starting from siting to design, construction, operation, maintenance, renovation and deconstruction’.
Green buildings are meant to have trimmed down consumption of natural resources of energy, water,
and other resources as well as reduced waste, pollution (Air pollution, Water pollution, Indoor pollution,
Noise) and environmental degradation. The emphasize on green building has increased in the recent
years primarily due to increased regulatory requirements, NGO and civil society pressures and reducing
costs of resource efficient building technologies.
There are technologies providing feasible alternatives for efficient lighting, computing systems, and
heating, ventilation, and air conditions systems (HVAC). Similarly, banks can adopt practices to reduce
waste (paper, packaging, plastics, electronic equipment, print cartridges, etc.) and recycle these
materials. Prudent management and contracts obtaining consent from suppliers of supply on adoption
of efficient practices can also help reduce environmental impact of a bank site. Apart from emphasizing
on resource efficiency, green buildings, also includes, within its ambit, energy self- sufficiency through
sustainable and renewable energy generation like installation of photovoltaic cells and wind panels. In
fact, many organizations in the world have installed LED lights and solar systems to reduce or altogether
do away with their dependence on gridline supply of electricity.
On the international front, World Green Building Council is an umbrella platform covering a number of
country specific non-profit green building councils in many countries around the world. A number of
TOOLS OF GREEN BANKING 10
green building councils have also adopted voluntary green rating/certification mechanisms for the
buildings. Among the most popular of these ratings and certification systems include BREEAM, USGBC’s
LEED, Australian GBC’s Green Star, DGNB (Germany) and CASBEE (Japan). The Building Research
Establishment Environmental Assessment Methodology (BREEAM) is the pioneer and probably one of
the most popular buildings rating method which was launched in 1990. BREEAM encourages designers,
clients and others to think about energy efficient, low impact designs and low carbon technologies. The
US Green Building Council’s Leadership in Energy Efficiency and Environmental Design (LEED) provides
third-party verification of green buildings at every phase of the building lifecycle; including design,
construction, operations and maintenance and is flexible enough to address a wide variety of buildings
types, including commercial buildings, homes, neighborhoods, retail, healthcare and schools. Asian
Development Bank’s (ADB’s) Head Office in manila is certified Gold- the highest rating under the LEED
ratings.
The World Green Building Council is also partnering with the International Finance Corporation for
introducing its own building certification system to be called EDGE (Excellence in Designs for Greater
Efficiencies), which assesses the financial viability of green building projects at the early design stage.
EDGE certification has been rolled out in 8 selected countries (Colombia, Costa Rica, Indonesia, India,
Panama, the Philippines, South Africa, and Vietnam) with plans for expansion to other countries in
coming months.
Although not very active, Pakistan also has a Green Building Council which comes under the World
Green Building Council. The PGBC strives to assist in presentation and implementation of sustainable
technologies and practices for consumers and industry professionals as well as contribute towards the
establishment of Pakistan specific standard for certification of Green Buildings and Communities.
The banking industry in Pakistan is also considering green buildings practices. Allied Bank is already
working to convert its branches into green branches.
4.I.b. Paperless Banking:
The paperless banking can be defined as a way to eliminate or at least significantly reduce use of paper
is the daily operations of the bank as well as delivery of financial services to their clients. The
proponents claim that paperless environment, apart from eco-friendly; have other advantages in the
form of less use of office space (for record keeping), cost savings, easier data retrieval and sharing and
enhancing reputation among the clientele.
There are two facets of going paperless for the banks:
Paperless Office Operations: In terms internal operations, an ideal bank is one that uses electronic
hardware for storing of its records and retrieves and transfers stored data through
applications and computers. Although, paperless banking is already being implemented through use of
computers in accounting, and customer dealings for reasons of efficiency and cost savings, the banks are
still one of the major users of paper among businesses. After identifying the need and type of
documents which are to be stored electronically, a bank has to go through a planning process for
deciding the data storage disks, scanners, OCR applications (optical character recognition), data storage
file structures, searching/ retrieval applications and data encryption/ backup planning etc. These
measures also include use of e-signatures.

The paperless office operations also include changing culture of the organization. For examples, in areas
where full adoption of paperless environment is not possible/desirable, the banks may educate their
staff on reducing use of paper through such practices as printing of absolutely necessary documents and
using both sides of paper etc.
Paperless Banking Operations: In terms of dealings with the clients, the paperless banking may be
considered as a way of delivering customer services to the banking clients through electronic means.
The paperless banking operations are further elaborated below under the heading of Green Banking
products/ services and delivery channels.
Although, as suggested earlier, paperless banking is becoming norm of banking due to environment
concerns and cost efficiency, the alternatives also entail heavy costs in the form of changing behaviors
and culture of staff, customizing clients regarding paperless working, procurement of expensive
hardware and software and the on-going energy costs of data storage set-ups (data centers). From the
environmental perspective, a shift from the use of paper to electricity with all of its negative
environmental repercussions/ consequences is not a desirable outcome. The banks, therefore, have to
think of adopting ways and mechanisms to reduce their use of energy reliant equipments. There are
ways available for the banks to reduce environmental impact of their IT infrastructure in economical
ways making this paperless alternative more attractive.
4.I.c. Green IT Infrastructure:
The concepts of green buildings and paperless banking may be extended to the adoption of energy
efficient IT infrastructure. The green IT infrastructure may also be economically prudent choice similar to
green buildings because of significant cost savings. And similar to green banking and paperless banking,
the adoption of green IT infrastructure also requires shifting organizational culture and modifying and
adopting the behaviors of the staff.
Green IT Infrastructure Measures

The Indian Institute of Development and Research in Banking Technology provides an excellent review of possible
measures for the bank and its employees for resource efficient working of its IT infrastructure in its study on Green
Banking for Indian banks. Their recommendations/ guidelines are summarized below:
Green Chargers
 Use green chargers that can detect whether a charger is connected to a notebook computer or any other
device, and reduce the power consumption when a charger is not connected to a device.
Monitors:
 Replace old CRT monitors with LCD and LED monitors that are energy efficient and small in size.
 Reduce the brightness of the monitor to the appropriate level.
 When the monitor is not in use, switch it off instead of using screen savers.
 When an application is not in use, close the application and also stop the background processes that are
not being used.
 Use power saving profiles in the computer systems to reduces energy consumption.
Laptops and Processors:

 Use power management features and power management software to optimally regulate use of battery
and electric power. The processor and hard disk power optimization techniques are equally useful for
laptops and computers.

 Multitasking is a tradeoff between CPU time spent executing tasks and inefficiencies brought in by context
switching. It is advisable to reduce the number of tasks when task slowing down is noticed.
 Keep the number of processes that start at the startup of the computer to a minimum. The required
applications can be started when needed.
 In case a desktop has to be kept on for remote access to the system, use remote wake up methodologies
to avoid waste of a lot of energy.
 Use management tools like 'Night Watchman' allow enterprises 'securely, remotely and centrally', power
down desktops and also allow to apply power schemes at different times in multiple locations, globally
from a single console, maximizing power savings without impacting users.
Peripheral devices:
 The peripheral devices that are connected to the computer also consume energy, even though they might
not be in active use. For example, devices connected to the USB ports in a computer draw power even
when the device is not in use.
Servers and Centralized Data Centers:

 The case for onsite generation of renewable electricity is becoming increasingly strong due to increasing
costs of electricity and improvements in technology.
 Equipment with energy-efficiency star ratings should be the qualifier for procurement, or where these are
still not widely available, should give the supplier an added advantage during the evaluation process.
 To the maximum level possible, hygiene in maintaining data cables under the raised floor should be done
so as not to reduce air-conditioning efficiency.
 Enabling the power management system in servers to reduce consumption of energy when idling is a
must.
 Banks should use collocated data center instead of Enterprise Data Centers to benefit from their
efficiency. A collocated data center should closely monitor its energy consumption and actively apply
efficiency measures for improving their profitability.
 The cloud computing offers similar benefits as cloud service provider may be residing in cooler climes or it
may generate cheap clean energy due to geographical advantage.
 Banks may set up renewable power generation in remote areas and wheel electricity to the national grid
for banking at the data center location.
 Consolidating many servers into one, and vitalizing the application and data can lead – to reduced server
count, also reducing the overall server sprawl, and further leading to efficient space, power and cooling
requirements.
 Banks may use IT servers bundled with virtualization technologies, which enable consolidation of
thousands of application into one single server without any performance overheads. Banks may use
servers with provisions for creating logical domains, using hyper visor technology, and enabling
installation and configuration of heterogeneous operating environments, running variety of applications
in a space and power efficient single server.
 In a running data center, banks need changing attitudes for identifying and exploiting opportunities.
Examples of these opportunities are:
o Cold and hot aisle arrangement

o Blanking panels in racks
o Partitioning (including plenum) out unused data center areas
o Regular cleaning
o Detangling under raised floor
o Shutting down excess capacity in site infrastructure (UPS, PAC, etc.), without compromising
redundancies
o Variable capacity cooling
o Correct placement of vented tiles in cold aisle, not in hot aisle
o Sealing of air leakages.

 Organizational policies sometimes drive or constrain green initiatives in a data center.

 Green procurement policies can help green a data center even during hardware refreshes.
 Banks can use a good DCIM (Data Center Infrastructure Management) application, available off-the-shelf
from many providers and integrating it with site infrastructure equipment for energy efficiency.
4.II. Conforming/ Complying regulatory and society expectations
This category implies passive approach primarily to comply with regulatory requirements or avoid
negative publicity of societal groups. This category also covers risk mitigation measures to avoid
investments in potentially environmentally hazardous businesses through lending etc and capturing
business opportunities in high potential business segments like renewable energy & energy efficiency.
4.II.a. Environment & Social Assessment in financing

4.II.b. Paperless Banking Operations
4.II.c. Green Products
4.II.d. Renewable Energy & Energy Efficiency Financing
4.II.a. Environment & Social Assessment in financing
Environmental impact of large projects with Environmental and social risk management (ESRM):
potentially inter-country environmental concerns A Guide to Banking & Sustainability by the United Nations
is probably one of the biggest concerns in the Environment Program Finance initiative (UNEP-FI) provides a
international arena which has prompted civil summarized review of ESRM System and the tools used by the
banks under the heading of ‘How do they implement our ESRM
societies and non-profit environmental system and what tools do they use?’.
organizations to build a strong pressure on the
banks to incorporate environmental and social Risk Identification
• Verification against external guidelines (see boxed information)
parameters in their evaluation of a project before • Use of internal guidelines
underwriting any investments for that project. • Collection of key information through questionnaire applied to
client
Environmental review of loan transactions
• Verification of compliance with legal requirements applicable
requires procedures indicating the overall to the operation
environmental requirements, procedures for • Further legal verifications (eg. review of environmental fines or
review of any sustainability-related lawsuits)
collecting information, reaching decisions, • Consultation of sustainability indices and ratings (see Table III)
mitigating or transferring risk, monitoring use of • Verification of adherence to relevant initiatives (see Table II)
funds, and reporting results. Risk Analysis
• Verification against external/international policies, standards
and exclusion lists (e.g. EPs, MFI guidelines)
A bank’s exposure to the environmental risk in a • Verification against internal policies, standards and exclusion
lists
lending transaction is directly linked to the • Further information collected via dialogue with relevant
inherent nature of the business (some are more authorities and NGOs
resource inefficient/ polluting than others), the • Further information collected via sustainability report (if
available)
amount and terms of the loan and awareness/ • Further information collected via site visits
determination of the borrower to address natural Risk Categorization
resource degradation. Thus any review process • Application of Equator Principles and/or multilateral/bilateral FI
categorization systems
should also incorporate these factors in the • Application of own categorization systems
environmental impact assessment of a loan Risk Mitigation
• Environmental Impact Assessment
transaction. The environmental risk assessment is
often clubbed with social risk assessment which is
• Environmental audit
recognition of the fact that, with increasingly • Environmental action plan
broader implications of the climate change on • Public consultation and disclosure plan
development and security of populations in many Risk Monitoring
• Monitoring, evaluating and reporting of client performance and
countries, humanitarian and social issues are compliance against agreed action plans
becoming primary concerns of international
agenda. The environmental and social risk management (ESRM) serves as a tool to identify potential ER
risks associated with borrower’s activities, assessment of potential impact on the environment and
bank’s exposure, taking risk mitigation measures (decline loan request, apply qualifying conditions for
the borrower etc ) and following up with the borrower. International organizations, NGOs, Multilateral
and Bilateral Finance institutions have developed a wealthy corpus of guidelines and tools on how to set
up an ESRM.
The International Finance Corporation (IFC)3 has, at the request of Pakistan Banks Association (PBA),
prepared Guidelines to Build Environmental and Social Capacity in Pakistan’s Financial Sectors in 2010.
The report provides a general approach for developing a E&S Risk Management System. The report
outlines a checklist, organized by type of risk and phase of processing, as a sample guideline for the
banks to develop their own policies for environment impact assessment. On International front, IFC has
also setup a dedicated website for sustainability issues called First for Sustainability.
4.II.b. Paperless Banking Operations:
A number of banking services may be considered to qualify as viable candidates for the delivery through
electronic means instead of physical routing through papers. These services may include:
• Deposit account fulfillment and maintenance

• Mortgage, consumer, commercial and small business lending operations
• Treasury management activities
• Trade finance operations
The banks have a number of product options and delivery channels for paperless/ green banking
services. Primary delivery channels for paperless banking services include Automated Teller Machines
(ATMs), mobile (telephone) banking and on-line banking. The banks can provide following services to
their clients through these means:
 Online/ Mobile Funds Transfers  Setting up Standing Instruction

 E-Account Statements  E-Tax Payment
 Checking facilities  E-ticketing
 Online/ mobile utility bills payments  Online Applications for IPOs
In a broader context the use of Automated Teller machines (ATMs), the Point of Sale (POS) machines
and Debit / Credit Cards may also be considered as green alternatives to the traditional paper based
banking. Similarly the Real Time Gross Settlement System (RTGS) and Electronic Clearing Houses
including NIFT are innovative ideas that can help reduce excessive use of paper. There is, however, a
caution that this shift to technology based systems should not prove to be equally disastrous shifting
from one environmentally hazardous activity of paper-based banking to another relying heavily on use
3
IFC (2010)

of electricity. Fortunately, options are available for banks to reduce their energy consumption as new
technologies make electronic equipment energy efficient.
4.II.c. Green Products:
The banks can develop specific products for promoting activities that reduces carbon foot-print of the
economy. Exemplary products developed by the banks include Green mortgages, Green loans, Green
credit cards, Green savings and checking accounts, Green CDs and Green money market etc. By
restricting its services, the bank does not necessarily optimize its potential profit but balances objectives
of sustainable/ green banking with product development.
Environmental Index linked investments & deposits: Within the category of investments under
structured deposits, bank may offer deposits accounts whose return is linked to the performance a
selected environmental index. For example, RBS offers environmental deposits which are linked to the
performance of RBS Environmental Strategy Index (an index which tracks performance of a global basket
of environmental market sector companies operating in the areas of solar energy, wind energy, blue
energy and waste management)
Charity Contributions: The bank can contribute to an environmental trust fund on banking activities in
its specific green banking products (without any cost to the client). The bank can offer green current,
savings or investment accounts, credit cards and a range of insurance products. The contributions to the
trust fund are determined on purchase of the banking product (e.g opening of a green banking account)
and ensuing business activities in the account (number and amount of purchases from the green credit
card).
Social Responsibility: The current and savings accounts products may be linked with the socially
responsible investment activities also. The bank can assure its customers that the funds deposited in
these accounts will be used only for supporting leading innovators in green and socially responsible
areas. These accounts provide full range of usual banking services. The consumer lending facilities may
also be structured in such a way to reduce unsustainable consumption patterns.
Reduced Paperwork Products: This is adjunct to the paperless banking initiatives in the sense that
products and services are intentionally structured to reduce use of paper. For example, the bank may
give extra points to the clients for use of debit cards/ credit cards instead of cheques etc.
A related measure on proactive social responsibility ladder goes one step ahead and the bank reduces
its potential of profitability by offering subsidized green loans, higher mark-up on green deposits and
similar products with the motive to encourage green objectives in the decision making of their clients.
The proactive responsibility models are discussed in further detail in the next section.
4.II.d. Renewable Energy & Energy Efficiency Financing:
Within the renewable energy and energy efficiency, there are a number of niches that offer lucrative
pay-offs for the investor and the lending banks. These niches may range from small consumer/
agricultural clients to large commercial set-ups and industrial level energy generation plants. Such
segments are particularly abundant in Pakistan. There are around 177,000 tube-wells connected to
national power grid that are using 10 % of total electricity. The conversion of these tube-wells to solar
power is both financially viable for the farmers and also provides potential of saving approximately
1,000 MW of electrical power. The replacement of incandescent light bulbs with efficient LED lights in
both the residential as well as commercial buildings is an economically viable option of investment for
the banks. The commercial buildings offer other alternatives of energy efficiency in their HVAC systems.
The financing for the solar rooftop can enable houses to generate enough electricity for lighting,
ventilation, cooling etc even without connection to the national grid.
Apart from these small scale initiatives, Pakistan has huge potential of industrial level power generation
from solar, wind and biomass etc. Surveys reflect huge renewable energy potential of more than 3,200
GW, including some 340 GW from wind (50GW from Sindh alone) and 2,900 GW from solar. Even
bagasse, a bi-product of sugar industry, has a potential of 50 GW through high pressure cogeneration.
The hydropower potential of Pakistan is estimated to be over 40,000 MW, of which 24,000 MW could be
easily harnessed while only 6,550 MW is actually being exploited.
On the energy efficiency front, low energy productivity compared to neighboring countries is a negative
factor affecting industrial competitiveness and the cost of doing business. Pakistan uses 15 % more
energy than India and 25 % more than Philippines for each dollar of GDP produced. On energy efficiency
side, there is a potential of reducing production costs by 12% in the cement sector. Paper, Textile and
fertilizer sectors also have significant potential of reducing production costs by adopting energy
efficiency technologies.
A general understanding, however, suggest that banks could not build necessary momentum primarily
due to insufficient focus of senior management. Nonetheless, the potential is there and some banks are
already working to tap on this lucrative segment.
4.III. Proactive Greening Banking Products/ Services and Delivery Channels
Banks may go a step ahead and implement products and services that may not be profitable ventures
from the banking perspectives or may be distant ideas viewed from the mirror of current operations of
banks. Nonetheless, these initiatives have been taken by banks in countries and have potential of
adoption in Pakistani environment as well. The following activities may be clubbed under this category:
4.III.a. Green Street Lending

4.III.b. Generous and Strategic Charity
4.III.c. Carbon Offset Business
4.III.d. Green Climate Fund
4.III.e. Brownfield Financing
4.III.a. Green Street Lending
Banks can also introduce green bank loans with financial concessions for environment friendly products
and projects such as fuel efficient vehicles, green building projects, housing and house furnishing loans
to install solar energy system etc.
Green Mortgages: Green mortgage is a term used for mortgages extended to green buildings. The
lending bank may add an additional sweetener for the home builders/ developers to build green
buildings by offering special discounts on their financing for the building which qualify for being ‘green’.
One of the reasons for the push for green mortgages is that green building and rebuilding tends to

incorporate more energy-efficient materials and building plans. The green mortgages are prevalent in
USA where a number of banks offer this product.
There are two types of green mortgages: the Energy Improvement Mortgage – it’s like a second
mortgage that is to be used to upgrade a home or building to energy efficient by installing energy saving
items such as solar panels and improved insulation - and the Energy Efficient Mortgages for the
construction of new energy efficient homes and buildings.
Although not very profitable at the outset, the lending bank may approach various government and
multilateral resources for the subsidized component of the loan portfolio. For example the renewable
energy is subsidized in the United States through cash rebates and tax incentives. The lending bank only
has to educate the home builders on availability of these options and in the process the bank succeed in
providing lending to the borrower. The Indian Ministry of Non-renewable Resource offers, in association
with some nationalized and scheduled banks, home improvement loans at low interest rate of 4% p.a to
the customers for purchase of solar equipment. State Bank of India offers concessional loans to
environmentally friendly residential projects rated by the Indian Green Building Council (IGBC). The
concessions include a 5 percent concession in margin, 0.25 percent concession in interest rate and
processing fee waiver.
Green Vehicles financing: The banks are offering green auto loans to their customers for purchase of
fuel efficient vehicles. This type of loan is offered to Hybrid vehicles, Electric vehicles, Fuel cell and
alternative fuel (ethanol, natural gas, propane, hydrogen) powered vehicles and High fuel economy
rated vehicles. The vehicles must have demonstrated fuel efficiency characteristics including
certifications from relevant environmental agencies (e.g. in USA, EPA's Green Vehicle Guide) to qualify
for the loans. As an incentive, these loans carry lower interest rates and longer repayment tenors. The
banks in developing countries like USA and UK have offered such products.
4.III.b. Generous and Strategic Charity
Charitable programming within best practice CSR financial institutions is often benchmarked against,
and frequently exceeds, national giving standards. Additionally, their charitable investments are
frequently aligned with the organization’s business development goals and core competencies, as is
evident from the following list of common charitable activities:
 Financial inclusion
 Financial literacy and empowerment
 Urban regeneration
 Non-profit capacity building
 Environmental improvement
Many banks operate their charitable programs through arms length foundations endowed by the bank
and a number also encourage volunteering efforts of their employees. Affinity partnerships are a
common means of supporting charitable organizations, as are efforts to facilitate charitable donations
and promote public and employee awareness of community services and volunteer opportunities.

4.III.c. Carbon Offset Business
A carbon offset is a compensatory measure of greenhouse gas emissions that is reduced, avoided, or
sequestered usually through sponsoring activities or projects to compensate for emissions occurring
elsewhere. Carbon Credit is the obverse measure of carbon emissions representing the right to
emit greenhouse gas. One Carbon Credit or Carbon Offset represents the reduction of one metric ton of
carbon dioxide or its equivalent in other greenhouse gases. Carbon emissions trading is a trading in
carbon credits (representing carbon emission permits) and is used by developed countries to meet their
carbon emission obligations. Offsets are typically achieved through financial support of projects
(renewable energy, energy efficiency, destruction of industrial pollutants or agricultural byproducts,
destruction of landfill methane, and forestry projects) that reduce the emission of greenhouse gases in
the short- or long-term. There are three carbon offsets markets two of which are offshoots of carbon
emission obligations (Kyoto Protocol and the EU Emission Trading Scheme) and third market is a
voluntary market created by companies taking responsibilities for their credit emissions.
The Kyoto protocol was based on the assumption that the human activities resulting in greenhouse gas
emissions are causing global warming. The Clean Development Mechanism (CDM), one of the three
mechanisms under the Protocol, provides for co-operation between annexure –1 and non annexure-1
countries (Annex I countries are developed countries that have committed themselves to national or
joint quantified emission limitation and reduction objectives. The non-Annex I countries are mostly low-
income developing countries). The operational mechanism of CDM involves an investment by an
annexure-1 country in a greenhouse gas reduction project in non-annexure-1 country (presumably, cost
of greenhouse gas reduction project in a developing country is usually much lower).
These emission reductions have to be certified by an appropriate authority and these Certified Emission
Reductions (CERs) which are commonly known as carbon credits can be used to meet the commitments
of annexure-1 countries under Kyoto protocol. The developing country on the other hand receives
capital investment and clean technology or beneficial change in land use. THE Kyoto Protocol was
completed in 2012 and new agreement has not been reached till date. Similar mechanism exists for EU
ETS but with tighter regulations.
The banks have the potential to become involved in different aspects of this business segment including
identification and funding of CDM projects, advisory services for registration of CDM projects and
commercialization of CERs under different structures to meet the requirements of its customers.
4.III.d. Green Climate Fund
The Green Climate Fund was established to contribute to the achievement of objective of United
Nations Framework Convention on Climate Change (UNFCCC). The objective of the fund is to promote
paradigm shift towards low-emission and climate-resilient development pathways by providing support
to developing countries to limit or reduce their greenhouse gas emissions and to adapt to the impacts of
climate change. The GCF is designed to serve as the focal point for the purpose of raising climate finance
and aims to raise funds of $100 billion a year by 2020. The Fund, so far, received pledges of more than
US $ 10 billion. The fund has received National Designated Authority (NDA) or Focal Point designations
from 96 countries. The funds under the GCF are accessible through two tracks namely direct access track
for regional, national and sub-national entities and International access track for international entities.
An entity desirous of receiving the funds may approach country’s NDA/ focal point for nomination and
then apply for accreditation through online application process. The accreditation process for selection
of the implementing agencies has three areas of evaluation: fiduciary functions of the entity, size of
project/activity within a programme, and environmental risk category. After accreditation, an accredited
entity can submit project and program proposals for funding. Funding proposals will be evaluated
against the Fund’s investment criteria.
The fund structure is still in evolutionary stages, however much of the work on formalization of
operations of the fund have been completed during 2013 & 2014. The emerging structure reflects that
the banks & DFIs are well positioned to become accredited entities for onward financing to their eligible
clients.
4.III.e. Brownfield Financing
The US’s Environmental Protection Agency (EPA) defines Brownfield as real property, the expansion,
redevelopment, or reuse of which may be complicated by the presence or potential presence of a
hazardous substance, pollutant, or contaminant. Cleaning up and reinvesting in these properties
protects the environment, reduces blight, and takes development pressures off green spaces and
working lands. The banks can invest in these projects as they contribute to reduce negative effects of
human activities on the environment. In USA, there are funding programs for investment in brownfield
projects managed by Brownfields Economic Development Initiative (BEDI), EPA and Department of
Housing and Urban Development.
4.IV. Green Marketing and Awareness Building
Building market for environmental friendly products and services entails creating green image of the
banks through green marketing, creating awareness of bank staff to ‘think green’ in day to day activities
and creating awareness among the potential clientele for resource efficiency and its adjunct economic
benefits. Within this category, banks can take two types of initiatives:
4.IV.a. Green Marketing

4.IV.b. Awareness Building
4.IV.a. Green Marketing
Green marketing is defined as a normal marketing with all four P’s (product, price, promotion and
placement) of traditional marketing dually considered but with a specific emphasize on development of
new, green financial products, such as loans that finance cleaner technology, and environmental
strategies, such as energy efficiency and waste management programs, that improve banks’
environmental performance and helps it to build a green image among its potential clientele. For
building a green image of a bank, every instrument of communication has to feature no-harm to
environment in operational activities and reflect environmental friendly nature of products and services
offered by the bank.
With an increasing interest of potential clientele of banks, particularly large corporate clients, green
marketing seeks to bridge gap between current marketing practices and current environmental realities.
More specifically, bank may build a green image of its environmental commitments by developing
credibility of its green products and undertaking other measures that helps to build its reputation of
professionalism on environmental concerns.

The green banking may be built as a differentiation strategy for the bank and some banks like Triodos
Bank of Netherland have very successfully followed this strategy. The green banking can offer higher
margins for the banking services from green conscious customers. Islamic banking has similar customer
inclinations due to its religious connotations. Although Islamic Banking still has a lot of potential for
growth, this market has developed to a maturation stage with its own well developed range of Islamic
banking products offered by Islamic banks and Islamic banking branches of conventional banks and
sizeable segment well above the breakeven clientele population interested in such Islamic banking
products. The banks, therefore, have necessary motivation factors to market their Islamic image. On the
other side, environmental inclinations of population are still in nascent stages although these are
expected to gain strength with better awareness. Banks have to carefully workout possibilities of
generating excess margins through the green differentiation strategy and its related higher costs of
developing and marketing green products and services.
4.IV.b. Awareness Building:
The promotion policy within green marketing strategy also includes creating awareness of the banking
staff and potential clientele regarding environmental implications of day to day activities as responsible
citizens. The potential clientele includes both human citizens and the corporate citizens. Awareness
building can take the form of:
 building environmental concerns in the strategy of banks,

 seminars/ workshops for the staff and the general public,
 informational brochures; and
 adding performance measures of eco-friendly activities in branch operations evaluations.
5. INTERNATIONAL DEVELOPMENTS
The Concepts of Corporate Citizenship and Environmental and Social Responsibilities of banks dates
back to the 1950s and 1960s when the investors started considering social and environmental factors in
their investment strategies. The two important changes in this area occurred in early 1990s which
brought up a greater focus on environmental concerns in investments of the banks. The changes in
regulations particularly relaxations on capital flows, harmonization of tax regimes, encouraging
investment policies and privatization of traditionally public domain activities lead to multilateral
agencies including IFC, World Bank and ADB and investors to start investing in large infrastructure
projects in countries.
At the same time, the civil society and non-profit organizations started exerting pressure on the banks to
incorporate environmental considerations in their lending programs. A series of well-publicized civil
society campaigns accused a number of large commercial banks of financing projects that were violating
rights of local communities and harming the environment. Numerous controversies in such investments
as Chilean Hydropower Project, Papua New Guinea’s mines underscored importance of environmental
issues in commercial financing decisions.
The World Bank hired its first environmental specialist in 1971 and International Finance Corporation
(IFC) began using environmental review procedures and started adding a number of environmental
specialists to oversee the due diligence process in early 1990s. IFC adopted most of World Bank’s
Environmental and Social Safeguard Policies in 1998. IFC attributes this change in policy perspective to
INTERNATIONAL DEVELOPMENTS 21
internal learning and strategic desire for sustainable development, growth in scientific knowledge about
environmental issues, regulatory developments in many countries and influence of NGO community.
The Intergovernmental Panel on Climate Change (IPCC) was established in 1988 by the World
Meteorological Organization (WMO) and United Nations for Environmental Protection (UNEP) as a
scientific intergovernmental body to provide comprehensive assessments of current scientific, technical
and socioeconomic information worldwide about the risk of climate change.
In the early 1990s, the United Nations Environment Programme (UNEP) launched what is now known as
the UNEP Finance Initiative (UNEPFI). Some 200 financial institutions around the globe are signatories of
this initiative statement to promote sustainable development within the framework of market
mechanisms towards common environmental goals. The objective is to integrate environmental and
social dimension to the financial performance and risk associated with it in the financial sector. As the
commitment of this UNEPFI statement goes, sustainable development is regarded basic to the sound
business management. It advocates for a precautionary approach towards environmental management
and suggests integrating environmental considerations into regular business operations, asset
management, and other business decisions of the banks.
A major step in these collective efforts on environmental concerns was the issuance of international
environment standards by the International Organization for Standardization in 1996. These standards
are collectively known as ISO-14000.
The Kyoto Protocol is a protocol to the UN Framework Convention on Climate Change (UNFCCC), aimed
at fighting global warming. The Protocol was initially adopted in 1997 in Kyoto, Japan, and entered into
force in February 2005. Under the Protocol, countries commit themselves to a reduction of four
greenhouse gases (GHG) produced by them. Emission limits do not include emissions by international
aviation and shipping. Developed countries are given credits for meeting emission reduction targets
while developing countries would receive the capital investment and clean technology.
BankTrack is a global coalition launched by twelve civil society organizations in 2003 nearly a year after
the release of Collevecchio Declaration at the World Economic Forum in Davos to track operations and
investments of private sector banks (commercial banks) and their effect on people and planet. The
network consists of 40 organizations, including Greenpeace International, Rainforest Action
Network and various national Friends of the Earth groups. BankTrack focuses primarily on the work of
private banks and their involvement in projects that are a risk to the environment, society or human
rights. BankTrack releases research reports focused on sustainability in the banking sector, used by
many organizations, banks and analysts.
A small group of banks along with IFC came together to initiate the process of designing common
guidelines in October 2002 and came up with a guidelines in June 2003 that is known as Equator
Principles with 10 leading commercial banks adopting these voluntary set of principles. The Equator
Principles (10 principles in total) serve as benchmark for determining, assessing and managing social &
environmental risk in financing worldwide across industry sectors. The member financial institutions are
required to provide Project Finance and Project-Related Corporate Loans to only those Projects that
meet the requirements of Principles. The EP Association currently (as of January 20, 2015) has 80
member institutions most of which (48 in total) are from Europe and North American Countries. The
Association has adopted third version of Equator Principles in June 2013.
The Sustainable Banking Network (SBN) is an informal and exclusive group of banking regulators and
associations that are interested in sustainable banking policies, guidelines and practices. The Network is
based on the idea that an enabling regulatory environment that ensures a level playing field and
provides right economic incentives is a preliminary and necessary requirement to shift the focus of
banks to sustainable banking practices. The network was launched by IFC in September, 2012 after the
Beijing International Green Credit Forum in May 2012. IFC also hosts the secretariat of the Network in its
Environment, Social and Governance Department in its Washington DC office. The network is entirely
voluntary and participating regulators themselves decide their level of involvement considering their
own regulatory and economic environment. The network has Core members who are banking regulatory
bodies and associate members, which are such organizations as environmental regulators and industry
associations. Currently, banking regulators of Bangladesh, Philippines, , Mongolia, Morocco, Nigeria,
Brazil, China, Nepal, Indonesia, Vietnam, Peru and Lao People's Democratic Republic are members of the
Network [State Bank of Pakistan is also weighing to become member of the Network].
The United Nations-supported Principles for Responsible Investment (PRI) is an international network of
investors, established in 2005, as a joint initiative of UNEP FI and with UN Global Compact. The PRI
formed a 20-person Investor Group drawn from institutions in 12 countries to join a process to develop
the Principles. This Group was supported by a 70-person group of experts from the investment industry,
intergovernmental organizations and civil society. The six Principles were launched in 2006. The PRI
defined responsible investment as an approach that explicitly acknowledges the relevance to the
investor of environmental, social and governance (ESG) factors, and the long-term health and stability of
the market as a whole.
There has been a considerable debate on the shortcomings of the traditional measures of economic
development like GDP and GNP. The key limitation of these measures is their inability to incorporate
environmental, human and social implications of the economic development. The growth is inevitably
accompanied by the deterioration in natural resources and quality of citizen’s living conditions but this
degradation of the ecosystem is not captured by the traditional measures. Ignorance of ecological
considerations has implications in economic policies of the government and the operational
organizations of corporations. A number of indices have been proposed to supplement or replace GDP
as a measure of economic development. These measures include Happy Planet Index (HPI), Genuine
progress Indicator, Social Progress Index, Green gross domestic product, Index of Sustainable Economic
Welfare, Living Planet Index and Gross National Happiness Index.
In the new developments, Natural Capital Declaration (NCD) was officially launched at UN Conference
on Sustainable Development, Rio de Janeiro, Brazil – better known as Rio+20 - in June, 2012. NCD is a
joint initiative of the United Nations Environment Programme Finance Initiative (UNEP FI), the Global
Canopy Programme (GCP), and the Getulio Vargas Foundation with the objective to integrate natural
capital considerations into loans, equity, fixed income and insurance products, as well as in accounting,
disclosure and reporting frameworks. It has been signed by the CEOs of more than 40 financial
institutions (including International Finance Corporation and internationally operating banks like
Nedbank, National Australia Bank, Standard Chartered, Rabobank, Unicredit, etc).
At the same time, the UNEP FI and Civil Society organizations are building pressure on the Bank for
International Settlements (BIS) to incorporate environmental concerns in its BASEL Accords. These
concerns have attracted muted attention in the BASEL accords until recently.
Along -side efforts to incorporate sustainability in organizational strategies, a number of initiatives have
been taken for developing guidelines to report on sustainability issues in an integrated way with the
financial reporting of businesses. The core theme is that companies and organizations must consider and
report on four key areas of their performance: economic, environmental, social and governance
(bundling up financial profitability and interrelated governance with sustainability concerns of
environment and social). Among these initiatives is Global Reporting Initiative (GRI) formed in 1997 by
CERES (a US based non-profit organization), Tellus Institute (a US based an interdisciplinary not-for-
profit research and policy organization) and United Nations Environment Programme (UNEP). The GRI,
which has now entered into fourth generation (the framework is called ‘G4’), seeks to make
sustainability reporting by all organizations as routine as, and comparable to, financial reporting.
GRI produces a comprehensive sustainability reporting framework that along-with its Reporting
Guidelines, sets out principles and indicators organizations can use to report their economic,
environmental, and social performance. On accounting & reporting front, a number of organizations
have propped up in the recent years; prominent of them are Sustainable Accounting Standards Board
(SASB), Climate Disclosure Standards Board (CDSB) and International Integrated Reporting Council
(IIRC).
6. REGULATORY INITIATIVES BY CENTRAL BANKS

The Governments around the world have taken a number of initiatives for sustainable growth and
protection of environment. These measures start with the legal cover in the form of separate legal
provisions acknowledging environmental protection a right and responsibility. Adjunct to this, the
Governments have established environmental protection ministries/ agencies (like China’s Ministry of
Environmental Protection, U.S. Environmental Protection Agency, and European Environment Agency
etc). The measures by the Governments include investments in renewable energy, national parks,
protection sites/ indigenous territories (e.g. Amazon protected areas), directives on environmental
impact assessment, access to environmental information for citizens and other fiscal measures including
tax rebates/ deductions and fees/ rehabilitation requirements etc.
Pakistan has also enacted Pakistan Environment Protection Act of 1997 and established Pakistan’s
Environment Protection Agency with the roles to establish National Environmental Quality Standards,
promote research and development of environmental science and technology, initiate legislations and
specify safeguards for environmental protection where required, provide guidance and information to
the public and promote formation and working of nongovernmental organizations. The provinces have
also established their own Environmental Protection Departments (e.g. Punjab Environment Protection
Department).
Nonetheless, in order to avoid digressing from the core theme, below are listed key initiatives for the
banks which can serve as a role model of possible SBP initiatives on green banking.
6.I. China
China is the world’s largest emitter of greenhouse gases (GHG) after United States and India and Chinese
banks are primary source of funding to enterprises, accounting for 2.7 times more than finance from
issuing stocks and bonds in capital market. The role of Chinese banks has, therefore, remained under the
radar of United Nations agencies and such society groups as Backtrack.
REGULATORY INITIATIVES BY CENTRAL BANKS 24

In 2007, the People’s Bank of China (Central Bank), the China Banking Regulatory Commission and the
Ministry of Environmental Protection of China jointly launched the Green Credit Policy. The Policy urges
FIs to integrate environmental issues in their activities, especially in the form of withdrawing lending
from high-pollution and high energy consumption industries while facilitating financial support to green
industries.
In 2012, China Banking Regulatory Commission (CBRC) issued the green credit guidelines, which provide
a leading regulatory framework in green lending. These guidelines are general in nature providing space
for banks to develop at their own pace. The guidelines, which apply to both national and overseas credit
by Chinese financial institutions, acknowledge the essential role of the banking sector in promoting a
green and sustainable economy, as well as the risks presented by activities that are detrimental to the
environment and local communities. China has, previously, required approval of Ministry of
Environment Protection before issuance of environment protection but this requirement has been
annulled considering it as an excessive restriction on capital market development.
The recent establishment of Asian Infrastructure Investment Bank (AIIB) has also given rise to the
concerns of lax environmental protection safeguards and diluting strength of social and environmental
protections implemented by existing multilateral agencies like World Bank and Asian Development
Bank. China, which is expected to be major shareholder of AIIB with more than 50% ownership stake as
per suggested permutations of purchasing power GDP or Current Price GDP in the formula for equity
contributions, has responded that AIIB will “adopt and learn from the existing multilateral development
banks’ good practices in governance structure and guarantee policy, paying attention to issues such as
environment.”
6.II. Bangladesh
Bangladesh is one of
the most vulnerable
countries due to
environmental
changes and
Bangladesh Bank
(Central Bank of
Bangladesh) has taken
up environment issues
as one of its key
responsibilities with
the establishment of a
separate department
of Green Banking and
CSR in 2013. The
Department has three
wings namely green
banking Wing, CSR
Wing and Financial
Inclusion Wing. The
department is
responsible to
develop sustainable banking framework and to integrate it into core business operation of banks and FIs
through efficient and effective implementation of green banking, CSR and financial inclusion. The
Bangladesh Bank publishes annual as well as quarterly review on green banking activities of banks and
financial institutions. The last annual green banking report was published in 2012.
The Annual Report provides a good summary of initiatives of Bangladesh Bank for greening its own
operations and that of the banks. As of March, 2012, Bangladesh has established a centralized computer
network (LAN/WAN) connecting almost 3,100 PCs in its departments at the head office and nine branch
offices under its networking program.
In 2011, Bangladesh Bank issued guidelines for Environment Risk Management (ERM) for promoting the
management of environmental and social issues by the country’s financial sector. These guidelines make
it obligatory for banks to address environmental and social issues in their lending processes, develop
internal frameworks, introduce sector-specific policies, train staff and start reporting on environmental
and social issues.
Immediately after these Green Banking

guidelines, Bangladesh Guidelines 2013 Implementation
Bank issued Policy Deadlines
Guidelines for Green
Banking which provided an
indicative Green Banking Phase I
Policy and Strategy June 30, 2014
framework for banks. These
guidelines call on the banks
to ‘to adopt a Phase II
comprehensive Green Dec. 31, 2014
Banking Policy in a formal
and structured manner in
line with global norms so as
Phase III
to protect environmental June 30, 2015
degradation and ensure
sustainable banking practices. The green banking policy also provided an indicative Green Banking Policy
and Strategy Framework in 2011 that requires banks to implement a wide range of green banking
activities in a three-phased approach with specific timelines for implementation of each phase (final
phase to be implemented by Dec. 2013). The guidelines were revised in 2013 with revised
implementation deadlines (given in figure).
In line with the instructions, all banks have taken initiatives to formulate their green banking
policies with an aim to inculcate practices towards optimum usage of natural resources and make
every effort for environmental friendly activities. The Bangladesh Bank incentivizes banks complying
with framework by giving preferential treatment in permission for opening new bank branches,
providing award points in management component of their CAMELS rating and inclusion among Top
Ten banks with green banking activities (list of top ten banks is published in reports and on
Bangladesh Bank’s website). In 2012, banks were provided with a uniform reporting format for
reporting green banking activities in a structured manner.

Indicative Targets: Furthermore, Bangladesh Bank has set minimum target of direct green finance as
percentage (%) of total funded loan to be disbursed/invested in each year from January 2015 onwards4.
For 2015, the targets are in the range of 3-5% of total funded disbursement/ investment in 2015 (3% for
banks scheduled in 2013, 5% for banks scheduled before 2013 and 4% for other financial institutions).
The target will be 5% of the total loan disbursement/investment from January 2016 onwards for all
banks and FIs.
Refinance Scheme: Bangladesh Bank has also established three Refinance Schemes with a view to
promote green financing of banks:
 A revolving refinance scheme was issued in 2009. The Scheme was issued with a fund of Taka 2
billion from Bank’s own sources. In its updated version the Scheme covers 47 products under 11
categories.
 In 2012, a refinance scheme namely “Financing Brick Kiln Efficiency Improvement Project”, was
established with Asian Development Bank loan of USD 50.00 million. The Scheme aims to reduce
greenhouse gas emissions, refine particulate pollution from brick fields throughout the country
and buildg environment friendly brick fields through usage of appropriate technology and
energy.
 In September 2014, a refinance scheme funded by liquidity of Shariah based banks and FIs in
excess of their requirement was introduced for explicit utilization for direct green finance of the
said banks and FIs.
All 47 banks have their own Green Banking Policy Guidelines approved by their respective Board of
Directors/Competent authority as well as have Green Banking Unit (GBU) for pursuing Green Banking
activities. In September 2014 quarter, direct green finance by banks and FIs is 7.84% of total green
finance and 0.60% of total funded loan disbursement.
6.III. Brazil
The Brazilian Banking Association Febraban and Ministry of Environment developed voluntary guidelines
titled Green Protocols for Public Banks in 2008 and Private Banks in 2009. Commitments made under
the Protocol include the promotion of green/social financing, ESRM, internal environmental
management, and awareness-raising. A set of indicators on compliance with the Protocol were
developed jointly by the banks, the government and NGOs, under the auspices of the banking
association. Banks have started to report on the basis of indicators. It may be mentioned here that, in
2012, Colombian banking association Asobancaria has also developed and adopted its own Colombian
Green Protocol as a set of voluntary guidelines for major commercial banks in Colombia.
In 2011, Brazilian Central Bank (BACEN), as part of implementation of Basel III, asked banks to
demonstrate how they consider exposure to socio-environmental damage in the Internal Capital
Adequacy and Assessment Process (ICAAP) (available in Portuguese). In April 2014, BACEN issued a new
resolution requiring banks to have an environmental & social risk management system. Other measures
include Amazon Resolution, Sugar Cane Resolution, Slave Labor Resolution.
4
GBCSRD Circular No. 04/2014
6.IV. Nigeria
The United Nations Environment Programme Finance Initiative (UNEP FI), Access Bank Plc, a pioneer on
Sustainability banking in Africa, and Netherlands Development Bank (FMO) convened a CEO roundtable
on ‘Moving Frontiers in Sustainable Finance’ in Nigeria in September 2011. During the roundtable,
leading commercial banks showed commitment to integrating Sustainability in their business operations
while also influencing public policy and developing an industry standard as a guide for responsible
lending activities in Nigeria.
In order to drive the process, a Strategic Sustainability Working Group (SSWG) was constituted under
Bankers’ Sub-Committee on Economic Development and Sustainability to immediately commence the
work on the agreed initiatives. One year later in July, 2012, the Banker’s Committee approved adoption
of Nigeria Sustainable Banking Principles (NSBP) by banks, discount houses and DFIs. The Nigerian
Central Bank applauded this initiative as a commitment to deliver positive development impacts to
society and issued these principles through a Circular in September, 2011 to facilitate their
implementation. The principles were developed with support from Dutch FMO Entrepreneurial
Development Bank (FMO), International Finance Corporation (IFC) and an independent adviser.
The principles have been adopted to drive long-term sustainable growth whilst focusing on
development priorities, safeguarding the environment and delivering measurable benefits to society and
the real economy. The NSBP comprises of 9 over-arching principles for:
1. Managing environmental and social risk in business decisions

2. Managing the bank’s own environmental and social footprint
3. Safeguarding human rights
4. Promoting women’s economic participation/empowerment
5. Promoting financial inclusion of communities and groups with limited or no access to the formal
financial sector
6. Meeting the imperatives for good governance, transparency and accountability
7. Supporting Capacity Building in the sector
8. Promoting collaborative partnerships to accelerate sector progress
9. Reporting to take stock of sector progress and attendant needs
In addition to the guidelines, sector specific guidelines have been developed on agriculture, power and
oil & gas sectors. Going forward sector specific guidelines for mines and steel industry are also to be
developed.
The central bank issued sustainability reporting formats in March, 2014 as a uniform format to monitor
progress of implementation at individual bank and industry levels, ensure appropriate intervention to
help resolve implementation challenges and provide an objective, fair and equitable basis for possible
incentives. The CBN’s decision to supervise the implementation of the Principles has made adoption of
NSBP as quasi-mandatory.
6.V. India
India’s central bank, the Reserve Bank of India (RBI) produced its first statement on the role of banks in
financing sustainable development in 2007. The RBI provided an overview of the issues on sustainable

development, CSR and related matters and advised banks to put in place a suitable and appropriate plan
of action towards helping the cause of sustainable development, with the approval of their Boards. The
RBI also advised banks to dovetail/modify their strategies/plans, etc. in the light of on-going
developments in this area and apprise their stakeholders on their initiatives through their annual
accounts.
A major policy tool of RBI with respect to development finance is the directed credit regime whereby
40% of loans are allocated to key sectors (such as agriculture, SME and Housing). Direct Loans to
individuals for setting up off-grid solar and other off-grid renewable energy solutions for households has
been included under the others category of priority Sector lending. The Federation of Indian Chambers
of Commerce and Industry has recently recommended that RBI may include loans for solar projects
under the priority sector similar to the case of education and housing sector. They maintain that
inclusion of renewable energy projects in the priority sector will give a boost to both on-grid and off-grid
applications.
The RBI has instituted specific relaxations in the CRR/SLR and priority sector lending on issuance of Long
Term Infrastructure and Affordable Housing Bonds by Banks vide its circular dated July 15, 2014. This
new regulatory structure is also expected to provide a platform to the banks to issue green bonds. In
fact, YES Bank has floated first green infrastructure bonds of Rs 5 billion in February 2015. The bonds will
be of ten year tenor and their proceeds will be invested in renewable energy projects such as solar
power, wind power, biomass and small hydel projects.
The new Government in India is also heavily inclined to deliver on key sustainable development
priorities such as financial inclusion, clean energy, clean water and access to sanitation. Leading banks
are also exploring the need for a
common approach to environmental and
social risk to establish a level playing field
in credit appraisal. Reserve Bank of India
(RBI) has established Institute of
Development and Research and in
Banking Technology (IDRBT) in March
1996 as an autonomous centre for
development and research in banking
technology. In one of its major initiative,
the IDRBT started a Series on Best
Practices. Focusing studying particular
issues from relevant perspectives on the
systemic requirements of the banking
system, studies the, various
developments and best practices
globally, understands the specific
requirements of the Indian Banking and Financial System, and publishes a set of recommendations on
each of these areas for use by the Banking Sector. As part of this series, Green Banking Best Practices
were published in August, 2013. The IDRBT has proposed introduction of standard rating for green
efficient banks and banking practices among Indian Banks. Under this rating system, both the
infrastructure and operations of the banks are being considered. IDRBT has coined the term of Green
Rating Standard as “Green Coin Rating”. Banks’ primary business must not be money making only, but it
should also keep in mind social and environmental issues relating to its operations. Green Coin Rating

will be in line as energy star rating given for appliances. Banks will be judged based on the rate of carbon
emission out of their operations, the amount of reuse, refurbish and recycling concept being used in
their building furnishings and in the systems used by them such as computers, servers, networks,
printers, etc. They will also be evaluated on the number of green projects being financed by them and
the amount of rewards and recognition they are paying for turning businesses green.
6.VI. Netherland
The Netherland has been included as a model country as it is host country of Triodos Bank - a pioneer on
green banking which has overturned spectrum of banking since its establishment in 1980. The Bank has
established green funds and instituted a number of measures in its banking products to promote green
banking. The bank claims to be world's most sustainable bank and has been a leading inspiration on
sustainable banking for nearly 35 years.
The Green Funds Scheme is a tax incentive scheme launched in 1995 by the Dutch government to
encourage green initiatives. The Scheme comprises of three components, namely, Green Projects
Scheme (which
establishes the
conditions governing
the projects), Green
Institutions Scheme
(which regulates the
role played by the
financial institutions)
and finally the tax
incentive for individual
investors (which gets
the flow of funds
moving). The majority
of banks maintain a
‘green fund’ or have
established ‘green
bank’ (quite similar to Islamic Banking model in Pakistan) which meets the strict requirements imposed
by the Green Institutions Scheme. The banks offer private savers and investors two options: green
savings accounts and green investments. The money generated from these options is labeled as green
money and banks are liable to invest a minimum of 70% of this money on ‘certified’ green projects
(government evaluates and issues these certificates to projects and these certificates ate are valid for 10
years). The banks offer a lower return to the investors on their investments in green options and in
return charge lower interest to the green projects financed under the Scheme. The savers/investors of
green options are compensated with tax incentives in the form of tax reduction of around 2.5%. So
private savers and investors still make a good return on their money.
---------------------------------------------------------Concluded-------------------------------------------------------------------

7. REFERENCES
Amazon Fund – Project Document v. 28-february-2013
Anne E. Egelston (2006). Sustainable Development A History. Springer
Bangladesh Bank (2011). Environmental Risk Management (ERM) Guidelines for Banks and Financial
Institutions in Bangladesh
Bangladesh Bank (2013). Policy Guidelines for Green Banking
Bangladesh Bank (2014). Quarterly Review Report on Green Banking Activities of Banks & Financial
Institutions and Green Refinance Activities of Bangladesh Bank July-September 2014
Banktrack on BASEL (2010). Submission to the Basel Committee Comments on the documents:
Banktrack on Collevecchio Declaration. Collevecchio Declaration The role and responsibility of financial
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Concept Paper on Green Banking

Dr. Muhammad Saleem saleem.zia@sbp.org.pk

Mr. Ghulam Muhammad Abbasi ghulam.muhammad@sbp.org.pk

For feedback/queries: ihfd@sbp.org.pk

4.IV.b. Awareness Building: ............................................................................................................ 21

Table of Contents iii

1. DEFINITION OF GREEN BANKING

The concepts of Sustainable development also developed

There are tradeoffs between financial and nonfinancial (e.g.,

DEFINITION OF GREEN BANKING 2

DEFINITION OF GREEN BANKING 3

2. WHY GREEN BANKING?

2.I. Regulatory perspective on Green Banking

2.I.a. Systemic Risk factors

2.II.a. Systemic Risk Factors:

WHY GREEN BANKING? 4

2.II.b. Environmental Considerations

2.II.c. Sustainable Energy

2.II. Banking Perspective on Green Banking:

2.II.a. Corporate Social Responsibilities

2.II.a. Corporate Social Responsibilities

2.II.b. Economic Benefits

2.II.c. Sustainability Risks

WHY GREEN BANKING? 7

If banking 1.0 is characterized by a focus on high profitability, and banking 2.0 is

WHY GREEN BANKING? 8

approach—…..…… It requires the players to evolve from initial ego-system awareness to

3. CAUTION IN INTERVENING IN THE FINANCIAL SYSTEM

4. TOOLS OF GREEN BANKING

4.I. Greening of banking operations & infrastructure

CAUTION IN INTERVENING IN THE FINANCIAL SYSTEM 9

4.I. Greening of banking operations & infrastructure:

There are three types of initiatives under this category:

4.I.a. Green Buildings

Major measures adopted on this front are summarized below:

4.I.a. Green Buildings

4.I.b. Paperless Banking:

There are two facets of going paperless for the banks:

TOOLS OF GREEN BANKING 11

4.I.c. Green IT Infrastructure:

Green IT Infrastructure Measures

Laptops and Processors:

TOOLS OF GREEN BANKING 12

Servers and Centralized Data Centers:

o Cold and hot aisle arrangement

TOOLS OF GREEN BANKING 13

 Organizational policies sometimes drive or constrain green initiatives in a data center.

4.II. Conforming/ Complying regulatory and society expectations

4.II.a. Environment & Social Assessment in financing

4.II.a. Environment & Social Assessment in financing

4.II.b. Paperless Banking Operations:

• Deposit account fulfillment and maintenance

 Online/ Mobile Funds Transfers  Setting up Standing Instruction

TOOLS OF GREEN BANKING 15

4.II.c. Green Products:

4.II.d. Renewable Energy & Energy Efficiency Financing:

4.III. Proactive Greening Banking Products/ Services and Delivery Channels

4.III.a. Green Street Lending

4.III.a. Green Street Lending

TOOLS OF GREEN BANKING 17

4.III.b. Generous and Strategic Charity

TOOLS OF GREEN BANKING 18