Ms. Courtney Lowrance, Global Head of Environmental and Social Risk Management at Citi Institutional Clients Group, spoke with VET about the Equator Principles and the adoption of green credit policies.
Is now the right time for Vietnam’s banking sector to implement green credit policies?
Following the ratification of the United Nations 2030 Agenda on Sustainable Development, it is a great time for Vietnam and other growing economies to adopt green credit policies. The financial sector has a crucial role to play in enabling a transition towards a green economy by ensuring that the world’s existing capital assets are channeled towards productive and sustainable development. This will benefit not only the risk management frameworks of Vietnamese banks but also the environmental and social impacts of projects in Vietnam.
What should the government and the State Bank of Vietnam (SBV) do to encourage the implementation of green credit and foster progress?
A key challenge for the implementation of green credit policies is building the capacity within banks in a safe and non-competitive environment. The government and the SBV play an important role in convening knowledge sharing roundtables with commercial banks.
Because effective implementation of green credit policy creates a level-playing field, most international finance institutions, like Citi, are happy to share knowledge and best practice in the design and implementation of an environmental and social risk management (ESRM) function. However, it is the role of the government to bring commercial banks together.
Can you tell us about the Equator Principles in general and the green credit policies of Citi in particular? What is in the interest in applying these policies?
Citi was one of the original four banks who founded the Equator Principles (EPs) in 2003. As a company, we decided to take an active leadership role in helping to develop an industry-wide set of environmental and social risk guidelines to manage these non-financial risks in financing projects.
Twelve years later, the EPs have been expanded to cover more project-related financing, and the EP Association has commitments from more than 80 global financial institutions, including six Asian banks. As such, the Principles have become the de-facto “gold standard” for ESRM in the financial sector.
Following the adoption of the EPs Citi took an early decision to develop a comprehensive Environmental and Social Risk Management Policy that covers other financial products outside the scope of the EPs. This is a global policy, and we apply it to numerous transactions in all industry sectors.
The Policy is triggered largely by high impact sectors such as energy, mining, transport, agribusiness, and infrastructure, but we have additional discretionary triggers related to “areas of high caution and special focus” for any project or transaction that may have elevated franchise risk to Citi. We work with our bankers and clients through proactive engagement and diligence to ensure transactions adhere to these standards.
When applying its green credit policies, Citi would have to reject various projects in Vietnam that are polluting yet highly-profitable. How do you evaluate the gains and losses in such decisions?
We look at things a little differently. We don’t require companies to be perfect and 100 per cent in compliance with international environmental and social standards on the first day they become a Citi client. But we do expect prospective or new clients to commit to work together with us, and external consultants when needed, to bring their on-the-ground practices on environmental and social matters in line with international standards in a time-bound manner.
If they are willing to make this commitment to improve over time then we can proceed with financing a project, as our preference ultimately is to be able to effect positive, sustainable improvements on the ground.
So before declining a transaction we seek to work closely with the client through positive and proactive engagement to identify gaps and work with the client to fill those gaps over time. Only if the company is unwilling to work on improving their environmental and social performance would we then decline to finance the transaction.
What had to be prepared in order for Citi to apply the EPs and its own green credit policies? What would your advice be for banks in Vietnam who are preparing to implement green credit policies?
The first step is to determine who will be responsible for implementing the EPs and ESRM. Citi decided to have the ESRM function reside within Risk Management. We revised our credit policies and procedures to include ESRM approval as part of the credit approval process. We also hired an external consultant in the beginning to help us design the right ESRM Policy structure internally and to train all our relevant bankers and risk managers.
My advice to Vietnamese banks would be to ensure the ESRM function has the support of senior management and is integrated into existing risk management frameworks.