Abstract
This article describes the contents of banking regulations that address ESG (environmental, social and governance) issues globally, analyses them critically, points out some inconsistencies and remaining gaps, and concludes with recommendations for further improvement. It includes only regulations or guidance issued by banking regulators/supervisors, not market self-regulatory initiatives. The topics addressed by banking regulations herein described include: (a) the definition of relevant environmental, social and climate issues; (b) the characteristics of a sound environmental and social and climate risk management (encompassing the definition of the universe of relevant transactions and customers, criteria for the identification of the risks, due diligence processes and data sources for the identification of risks, consequences of risk assessment, risk mitigation, monitoring, classification and reporting, risk management at portfolio level and scenario analysis, integration into traditional risk categories, risk assessment for new financial products); (c) the definition of positive environmental and social impacts that can be generated by financial products (without approaching green taxonomies); and (d) governance issues that are required from financial institutions to manage environmental and social risks and opportunities properly (including the definition of roles and responsibilities, staff dimension and capacity-building, budget, integration of ESG factors into compensation schemes, mapping and communication with stakeholders, business strategy and target-setting, principle of proportionality, timeframe for implementation of policies, effects of voluntary commitments, periodic review of policies, environmental and social impacts of banks own operations). It concludes with recommendations for further regulatory actions and for a minimal content of a sound ESG banking regulation.
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Notes
- 1.
Unfortunately, it is quite common that self-regulatory mechanisms are distorted to work as greenwashing—what Wörsdörfer and others call “free-riding” and “adverse selection”. The free-riders, he says, enjoy the [reputational] benefits without facing the costs of effective implementation—that end up harming those that really make the efforts associated with implementation while, at the same time, harming the global credibility of the initiative because the free-rider behaviour is unmasked after a while. Cf. Wörsdörfer (2013).
- 2.
For example, the State Bank of Vietnam reported that: (a) in the period 2017–2020, there was an average growth of green credit balance of 22.97% per year; (b) most credit institutions have issued guidelines for the implementation of environmental and social risk assessment in credit granting activities; and (c) the number of outstanding loans assessed for environmental and social risks in 2020 was 5.59 times higher compared to 2017.
- 3.
Lodge and Wegrich (2012), p. 25.
- 4.
Haines (2010), p. 3.
- 5.
Haines (2010), p. 5.
- 6.
Haines (2010), p. 6.
- 7.
Haines (2010), p. 6.
- 8.
Haines (2010), p. 12.
- 9.
Haines (2010), p. 29.
- 10.
- 11.
Nepal Rastra Bank. 2018. Guideline on Environmental & Social Risk Management (ESRM) for Banks and Financial Institutions, 18. Available at: https://www.nrb.org.np/contents/uploads/2019/12/Guidelines-Guideline_on_Environmental__Social_Risk_Management_for_Banks_and_Financial_Institutions_2018-new.pdf.
- 12.
In a research interview with this author in 2021, China Banking and Insurance Regulatory Commission (CBIRC) reported that “competent authorities provide CBIRC with a list of companies that violate environmental and labour health and safety legislation every 6 months. This list is shared with banks.”
- 13.
Bank Negara Malaysia. 2019. Value-based Intermediation Financing and Investment Impact Assessment Framework, 31. Available at: https://www.bnm.gov.my/-/value-based-intermediation-financing-and-investment-impact-assessment-framework-guidance-document.
- 14.
BIS. “Principles for the effective management and supervision of climate-related financial risks”. Available at: https://www.bis.org/bcbs/publ/d532.htm.
- 15.
The source of this information is a bilateral meeting between the Central Bank of Brazil and the China Banking Regulatory Commission (CBRC), in November 2015, when CBRC stated that, in the previous 2 years, while market default rate was around 2%, for green loans it was around only 0.4%.
- 16.
This database clearly shows the role of palm oil in deforestation, especially in Southeast Asia: https://ourworldindata.org/drivers-of-deforestation.
References
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Moessa de Souza, L. (2024). Benchmarking of National ESG Banking Regulations: State of Art and Remaining Challenges. In: Saraiva, R., Pardal, P.A. (eds) Sustainable Finances and the Law. Economic Analysis of Law in European Legal Scholarship, vol 16. Springer, Cham. https://doi.org/10.1007/978-3-031-49460-4_2
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