Environmental Management in the Financial Sector
“Responsible, entrepreneurial businesses are the driving force for sustainable economic development and provide the managerial, technical and financial resources to contribute to the resolution of environmental challenges. Many challenges remain and industry must continue to improve performance and keep stakeholders informed of its policies and practices.… A particular challenge in pursuit of responsible entrepreneurship will be bringing SMEs into the mainstream of good environmental management, and using investment…to carry good practices, technologies, and expertise to developing countries and countries with economies in transition.”
“Responsible entrepreneurship,” Paper No. 1, Sixth Session of the United Nations Commission on Sustainable Development, provided by International Chamber of Commerce and the World Business Council for Sustainable Development.
As a multilateral institution mandated to further sustainable development in Latin America and the Caribbean by financing small and medium-size companies, the Inter-American Investment Corporation is in a unique position. It can help the companies that it funds become environmentally responsible businesses and thus position them to reap the competitive advantages that the sustainable use of natural resources provides on the global marketplace. These companies can be models that prove that business growth in developing economies need not destroy the natural resources on which sustainable development is built.
Promoting environmental responsibility on the part of projects that the IIC finances directly is relatively straightforward. First, the IIC will not approve a project if the project company does not meet the host country's and the IIC's environmental and labor standards or commit to allocating resources for coming into compliance. Second, the IIC discloses summary environmental information for public comment before the Board of Directors (representing the IIC's member countries) meets to vote on a project. Third, subsequent loan disbursements are tied to continued compliance. Adherence to this environmental and labor commitment is verified by project supervision visits.
But the IIC makes indirect investments as well, working through local financial intermediaries and targeted private equity funds. Working through such financial intermediaries presents a challenge: ensuring environmental compliance by thousands of recipients of subloans and equity investments made with IIC funds.
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ne of the environmentally innovative projects financed directly by the IIC is Fábrica de Papel Santa Therezinha S.A. (Santher), a Brazilian producer of tissue and packaging paper. Santher, which received an $8 million direct loan from the IIC in 1993, uses recycled paper in its manufacturing process. It also has water treatment facilities that return water to the local river in a cleaner condition than when it was drawn. These practices are followed by many paper mills around the world. Not so widespread, though, is the way Santher uses the sludge from its papermaking operations. Paper mill sludge is an organic waste product that is usually disposed of by incineration or landfilling, both of which can be sources of pollutants. But Santher uses its sludge as a raw material for making bricks. Bricks made with Santher's papermill sludge weigh less, break less easily, and are better insulators than plain clay bricks.
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Addressing the Challenge: Building Regional Capacity
Since it began operations in 1989, the Inter-American Investment Corporation has built up a financial intermediation program that has made financing available to a large number of small and medium-scale enterprises while supporting the development of sound domestic financial institutions. The program has proven to be a cost-efficient way for the IIC to reach more small and midsize companies by leveraging the available financial resources while ensuring that solid project financing and environmental protection requirements are met.
When operating through such intermediaries, the IIC not only seeks to foster the development of small and medium-size private enterprise in Latin America and the Caribbean by reducing the high cost of banking and other financial services that has made project finance inaccessible to small borrowers and seekers of equity capital. It also seeks to improve the intermediary's managerial and operational structures, including credit analysis, administration, and supervision, as well as the adoption and promotion of responsible environmental practices in their lending.
This institution-building process has the added advantage of turning local financial institutions into agents of the IIC, overseeing compliance with its investment and environmental guidelines. By establishing maximum loan amounts, strict financial and environmental standards, and limits on subborrower company size, assets, and sales, the IIC promotes the development of financial systems that support companies that have the potential to contribute to the region's sustainable economic growth, utilizing human and material resources in ways that benefit the local economy and expanding the economic base of its member countries.
Environmental Management Training for Financial Intermediaries
The IIC requires that each financial intermediary or investment fund that on-lends or invests IIC funds undertake or certify an environmental review of each subborrower's or investee's environmental performance. These reviews cover compliance with the relevant country's environmental, workplace safety, and labor laws and regulations and IIC's environmental and labor review guidelines. Since June 1999, the IIC has required that its client financial intermediaries send representatives to its financial intermediary environmental training seminar. These representatives should be senior officers, loan officers, or analysts who influence or participate in strategic planning and have direct line responsibility for the IIC funding.
The purpose of the seminar is to increase the capacity of IIC's clients in the implementation of IIC's environmental and labor standards when utilizing IIC resources. It provides an overview of current environmental, workplace health and safety, and labor issues as well as IIC policy requirements. It also provides instruction on how to apply the IIC's environmental risk classification system, how to comply with IIC annual environmental reporting requirements, and how to develop corrective action plans for subprojects if necessary.
Seminar participants are exposed to
- a basic understanding of the likely environmental and related issues that they may encounter when utilizing the IIC's funds;
- an understanding of IIC's policies in these areas;
- the knowledge necessary to screen and review projects;
- the basic components and tools for implementing an environmental management system;
- the IIC's environmental screening and reporting requirements; and
- concepts and tools that will enable them to recognize and evaluate environmental risk so as to position their clients to achieve a competitive advantage.
Follow-up
Financial intermediaries that have attended the environmental training course receive guidance on how to implement an environmental management system for the utilization of IIC funds. They will ultimately be required to submit annual environmental supervision reports on the companies that receive subloans out of funding provided by the IIC.
Managing Change: Positioning Latin America and the Caribbean's small and medium-size companies for competitive advantage
The union of positive environmental and commercial results has a demonstration effect that can help foster the transition to more environmentally responsible business practices. To this end, the IIC seeks to be proactive in carrying out its member countries' instructions to widen compliance with environmental protection standards among the region's small and medium-size enterprises. When possible, it will provide its borrowers and investees with information on low-cost and no-cost ways to be ecoefficient, i.e., to provide competitive goods and services through cleaner production, better process control, equipment modification, technology change, on-site recovery and reuse, production of useful by-products, and product modification. And the IIC will seek to make available funding for the more innovative ways to preserve productive natural resources that will enable the countries of the region to continue to develop.
A unique opportunity for sustainable development
Ecoefficiency is not only a global imperative. It is a real opportunity for Latin America and the Caribbean to derive significant added value from their abundant natural resources without the serious and seemingly irreversible environmental cost incurred over the past one hundred years by other countries as they industrialized.
Small and medium-size companies provide a large part of the employment, goods and services, and entrepreneurial and investment opportunities in Latin America and the Caribbean. They can also be the force behind sustainable economic development, to their own immediate and long-term benefit and to the benefit of the region as a whole. The IIC will seek to fulfill its developmental mandate by striving to help them achieve that goal.
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