Manual on the Development of Cleaner Production Policies ... - Unido

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DEVELOPMENT OF CP POLICY MODULE 5: POLICY TOOLS AND INSTRUMENTS Environmental considerations at international financing institutions The attitude of international financing institutions (IFIs) towards the environment has been changing since the beginning of the nineties. Most IFIs, such as the Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, or the World Bank, have built strong environmental appraisal procedures into their lending process. This was done partly as a result of some highly publicized projects that resulted in environmental and social damage (e.g. largescale dams, retention reservoirs, etc.) and partly thanks to a number of international initiatives, starting with the Statement by Banks on the Environment and Sustainable Development. EXAMPLE Statement by Banks on the Environment and Sustainable Development Protecting the environment cannot be achieved by Governments alone, and the private sector has a particular perspective on environmental issues. The finance sector could play a strong role in promoting Sustainable Development, through its link with commercial activities, including some activities that damage the environment. In preparation for the 1992 Rio Conference, the “Statement by Banks on the Environment and Sustainable Development” was signed by some 30 banks, expressing their environmental commitment. The banking statement was revised in 1997, and took the form of a “Statement by financial institutions”. To date, 170 financial institutions worldwide, with more than 500,000 employees, are signatories. In a separate development, a Statement of Environmental Commitment by the Insurance Industry was signed by 90 insurers and reinsurers, within a programme of cooperation that has been in existence since 1996. The key component of both statements is a commitment to sustainable development and support for the precautionary approach to environmental management, which aims to prevent environmental damage. The signatories also undertake to promote public awareness and communication. Given the stronger market position that enterprises are in a position to enjoy as a result of preventive environmental management, financing institutions could build environmental requirements into their credit evaluations of firms, and thereby include environmental aspects in the evaluation of all lending. This is already being done at the European Bank for Reconstruction and Development (EBRD), which requires its financial intermediaries (smaller national banks, managing credit lines of EBRD for small projects in a given country) to carry out an environmental due diligence analysis before lending. Interestingly, this approach may represent a risk for certain enterprises that find themselves unable to obtain loans. Most commercial banks, however, fail to consider environment at all in loan appraisals, and the abovementioned statements have not been translated into a common practice of lending for CP projects. Wherever the environment is taken into account, it is typically addressed using end-of-pipe technologies. PAGE 128
DEVELOPMENT OF CP POLICY MODULE 5: POLICY TOOLS AND INSTRUMENTS SLIDE: Barriers to financing Cleaner Production Access to financing identified as a barrier for implementation of more advanced CP measures: • Unfamiliar topic to credit officers; • Lack of specialized credit schemes for CP; • Poor project preparation capability; • High (perceived) cost of CP implementation; • Lack of enabling environment. With this slide, present the main obstacles to a more widespread financing for CP. While both the lender and the borrower can benefit from the application of CP, there are certain problems that need to be addressed to take advantage of this opportunity. Background More often than not, the current skills among borrowers and technical CP consultants are insufficient to prepare bankable loan applications. The implementation of CP measures—beyond the low-cost, good housekeeping measures—calls for a customized approach to lending, as well as financial officers trained to evaluate the benefits of Cleaner Production. Strengthening the capacity of the financial sector in developing countries is thus an important prerequisite to foster cleaner and more efficient production. There are several obstacles to easier availability of financing for CP, including: • Inability of financial institutions to assess the technical and financial components of CP investment proposals. This results from the fact that the impact of CP on the profitability of investments and the creditworthiness of borrowers is not understood by credit providers, who also lack the technical knowledge to assess the CP content of investment proposals; • Absence of credit schemes customized to Cleaner Production investments. The key problems here are the focus on traditional collateral value, short repayment periods and high interest rates, as well as a tendency to provide working capital only; • Poor project preparation capability, and inability to develop creditworthy CP investment proposals. This is reflected in the fact that most CP assessments undertaken are technical and do not aim to result in creditworthy investment proposals, including business plans; • High cost of implementation of Cleaner Production, combined with the common perception of the risk associated with CP investment, as well as limited local availability of CP-driven technology and devices as well as engineering and installation services; • The absence of an enabling environment for Cleaner Production, which means lack of conducive policy environment for Cleaner Production and a low demand for CP from the industrial community. There are no easy solutions to these problems. However, financial institutions should familiarize themselves with the economic advantages of Cleaner Production, and loan officers should receive training in evaluating such factors. This implies improving their knowledge about the concept of Cleaner Production, environmental management systems, material losses and specific environmental costs. Banks could be encouraged to stipulate environmental conditions when giving credits. PAGE 129
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