SBP’s framework to induce environmental, social risk management

KARACHI: The State Bank of Pakistan (SBP) is formulating a regulatory guidance with assistance from the World Bank's private sector arm to enhance knowledge and capacity of banks on environmental and social risk management, people familiar with the matter said on Wednesday.

The framework will offer guidance on how banks integrate climate change and other sustainability concerns into their risk management systems. Pakistan sustainable banking project, the first of its kind, is in progress and is the SBP’s important initiative around green finance.

“The SBP is now working with IFC on the Pakistan sustainable banking project,” a SBP’s spokesperson confirmed with The News.

The SBP and International Finance Institution (IFC) of the World Bank have already formed a steering committee as well as a technical working Group, comprising of representatives of the SBP, IFC and the Pakistan Banks Association to provide guidance to the project, the SBP's spokesperson said.

In October 2017, the SBP launched green banking guidelines (GBGs) to promote environmental risk management within banks and encourage climate finance which aims at reducing environmental vulnerabilities.

The latest endeavor focuses on providing regulatory guidance and enhancing knowledge and capacity through training programs on environmental and social risk management, said the SBP.

The interview with some banks showed they are addressing climate change and adopting policies that are aligned to the goals of IFC’s sustainability framework, performance standards and the SBP’s green banking guidelines.

According to estimates, banks are giving out large portions of loans to the environmentally hazardous industries such as textile and chemicals. The banking sector is also financing the transport and the construction sectors, which are not in line with the green standards.

Out of total Rs171 billion loans to private sector businesses, banks lent Rs82.9 billion to the manufacturing sector in July-January fiscal year 2020/21, according to the SBP’s data.

“The project’s goal is to increase the share and volume of bank loans screened against improved GBGs and increase the number of intermediaries able to provide training to banks after the IFC engagement concludes,” said the SBP’s official.

The program will focus on developing implementation tools to support the effective use of the SBP GBGs by financial institutions. It will raise awareness and build capacity of the banking industry in this critical area, and create market capacity for local training intermediaries, according to the SBP.

Yaseen Anwar, former SBP governor, said the program is precisely to develop and implement the technical aspects of evaluating risk for the banking industry that is subject to climate risk to their balance sheet.

“We are doing this with SBP along with Representatives of the banks in the Working Group. Several Central Banks of ASEAN countries are at an advanced stage, particularly China and Singapore,” said Anwar, who is senior banking policy adviser to IFC/World Bank for Pakistan sustainable banking project.

"This program will be long term and be implemented over the course of a year or so,” he said. “Banks globally do not currently have a standard regulatory approved framework. SBP, with its foresight in recognizing the importance of this program, is well on its way in its partnership with IFC and has already formulated TORs and strategies to train and develop the awareness and knowledge base in the financial services sector.”

Anwar said central banks should not be mandated or assume the responsibility of enforcement and oversight of climate risk and most central bank governors agree as their mandates are price stability and financial stability. Central banks should require data from the banks that in itself will highlight the importance of ensuring appropriate Risk premiums are applied to the loans subject to climate risk.

“That formula will be developed by SBP and the IFC team going forward via various training programs in this partnership,” he said.