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Monica_55905 Jul 08

Climate change - The role of banks in this challenge

 Climate change - The role of banks in this challenge  image
SARAS (Environmental and Social Risk Analysis System) contributes to sustainable financing, as it is responsible for identifying and reducing the inherent risks of the economic activity of financed activities and companies and seeking opportunities to generate positive impact.
For banks, these benefits translate into a decrease in portfolio risk, in the verification of new financing opportunities and greater access to funding.

Several environmental and social factors can affect companies. For example, the impacts of the El Niño phenomenon, strikes, regulatory changes, etc. On the other hand, companies can affect the environment and society, through the indiscriminate use of resources, non-compliance with labor laws, among others. In the context of transition to a low-carbon economy, companies must be prepared on how to address, reduce and manage these risks and how to promote more sustainable businesses. In this sense, banks play a fundamental role, mainly because they are autonomous entities in making decisions to finance or not a project and fundamental to make the different economic activities viable. For some years now, banks have been carrying out detailed evaluations of the activities carried out by their clients. This in order to mitigate and prevent environmental, social and economic risks that they face on a daily basis. This practice has benefited the prevention of the materialization of operational, market, reputational and, in some cases, legal risks. Among the main motivations that have led banks to involve these analyzes in their credit operations are: regulatory demands, as is the case in Brazil with Resolution 4,327 of 2014; market demands, mainly from international funders or multilateral banks; and, more broadly, an increasingly clear understanding - and supported by research - of the correlation in companies between financial and socio-environmental performance.

In practice, banks in Latin America have been establishing internal policies, mechanisms and procedures that lead to a systematic risk assessment. This evaluation has allowed these institutions to have a comprehensive knowledge of customers in sustainability matters, fostering collective responsibility and building a virtuous circle in the customer-bank relationship. The mechanism used to apply these assessments is the Environmental and Social Risk Management System - commonly called SARAS. The SARAS is the set of policies, practices, procedures and tools that allow the identification, categorization, evaluation and management of environmental and social risks that may arise in a sector, project or financed company. An SARAS must comply with 5 fundamental characteristics for it to be an efficient system. The first is related to the regulatory compliance of each country, taking into account that the evaluation process must be aligned with the regulation. The second has to do with the design, which always depends on the reality of each financial institution: it must be developed in such a way as to be integrated into the credit process and not as a parallel process, so as not to generate inefficiencies and bottlenecks.

Third, the complete design of the system and its consistency, which should avoid significant changes in credit granting procedures in short periods of time. Related to that, the fourth point is the need for transversality of the system, sharing roles and responsibilities to facilitate its implementation and maintenance. Finally, the system must be thinking in the sense of identifying possibilities for improvement and encouraging the adoption of good environmental, social and economic practices by the client - and not as a business filter. In order for the financial institution to have a SARAS that meets the aforementioned characteristics, an initial diagnosis must be carried out that includes sensitivity to the environmental and social risks of its clients' activities. Later, in the design, the necessary policies, procedures and tools are established. Finally, the implementation must be carried out, accompanied by training and a pilot that shows real results of the application. The implementation of these systems has allowed bank clients to implement measures that protect the environment in the execution of their daily activities, contributing significantly to the fight against climate change and the care of ecosystems. On the one hand, this favors banks to protect their investments and reduce the possibility of loss of their resources. On the other, it also generates new business possibilities: access to other types of funding, by complying with the requirements of multilaterals and funds focused on ESG issues; identification of green businesses that can be financed by sustainable credit lines, and even the issuance of sustainable bonds.

There are initiatives that seek to promote the inclusion of these systems in the banking sector. One of these is led by UNEP FI, ​​the Finance Initiative of the United Nations Environment Program. Worldwide, UNEP FI develops a training program supporting financial institutions to implement effective systems that allow them to carry out effective environmental and social risk management: the virtual course on Environmental and Social Risk Analysis (ARAS). Another example is the Practical Manual for the implementation of SARAS in financial institutions prepared by the Fund and SITAWI. The manual seeks to guide Financial Institutions in each stage of development of an ESMS: diagnosis, design and implementation. This is an important moment in the implementation of SARAS, since Sustainable investment has been gaining prominence throughout the world and it is necessary for financial institutions and investors to demonstrate the integration of ESG issues in their investment processes from a point of view integral.

Article originally written by Aura Paola Moreno Monsalve - Sustainable Finance Analyst LAC - SITAWI Finance for Good, published in the original Spanish in Gerencia Ambiental Magazine, media partners of EnergyNet.