When a conservative Wall Street publication, published a piece sometime back, calling for acceptance of climate change due to global warming, and advocating measures to manage it without compromising on economic growth, that was one of the indicators that ‘climate change’  had indeed arrived ! While there are still nay sayers, there is a general acceptance, that human activity since the industrial revolution has significantly warmed the earth, with associated consequences. The just released report in September 2013, of the Intergovernmental Panel on Climate Change says that it’s ‘extremely likely’ that human influence is the cause for warming of the planet.

Any human activity leaves an environmental footprint. That includes the banking system. But conscious efforts can be made to reduce the environment impact to the extent possible. Some banks have set themselves targets to reduce greenhouse gas emissions by a certain percentage over an identified base year. Banks can also consciously facilitate the financing of projects which help promote ‘sustainable growth’, for instance, renewable energy projects.

Environmental/social impact assessment

Many banks evaluate the sustainability/environmental/social impact while assessing a commercial credit/project financing proposal.

78 banks in 35 countries have adopted the Equator Principles (EP) established in association with the International Finance Corporation, an arm of the World Bank. This is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects and is primarily intended to provide a minimum standard for due diligence while evaluating credit proposals.

The financial products in scope are Project Finance Advisory Services, Project Finance, Project-Related Corporate Loans and Bridge Loans. The participating institutions commit to implementing the EP in their internal environmental and social policies, procedures and standards for financing projects and will not provide financing to projects where the client is not in compliance with the EP.

The recent version, Equator Principles III, effective June 2013, provides for improved transparency and disclosure, information sharing between members, as well as increased scope.

While there are significant reporting requirements, the compliance is voluntary.  In such a scenario, detractors question the efficacy of these standards in combating climate change. But the equator principles do spread the awareness of the need for sustainable lending and assessment of environmental/social impacts when deciding on the funding of large infrastructure projects.

Paperless banking

Moving on from project appraisal to banking operations, this area has traditionally been paper intensive. Application forms for opening an account, loan approval process, facility letters, loan agreements and other loan documentation, paper based clearing, posting of transactions necessitating vouchers in duplicate, numerous management reports, multiple paper based trade instruments, credit assessment/annual review of corporate/commercial borrowers, ledgers and books of accounts, central bank reporting etc are all part of day to day banking, which consume tremendous amount of paper. Such processing, reporting and communication also needs physical movement of documents, which adds to fuel consumption where it involves movement of documents to other branches or customers.

The last few decades has seen banking systems replacing many of these paper based processes. Loan applications made through e channels, funds transfer through internet/mobile banking, electronic reporting rather than paper based, loan approval process through origination systems, e statements of bank accounts, are some examples. But even today, walk into a bank’s transaction processing or credit approval division, and one can still see the managers/processors working with significant amount of paper. Some customers though having the facility to place a deposit through the internet channel are still averse to do so. End customers have yet to migrate to electronic channels for a loan application, in a big way. Corporate banking is just moving into electronic processing for credit approvals. Paper based vouchers are yet to disappear in transaction processing.

Clearly this requires a mindset change. Customers who switch to electronic bank statements can be positively encouraged, by incentivizing them. Those who insist on paper based statements may be charged for the service. Faster processing of electronic loan applications could be highlighted to encourage potential customers to use e channels.

Banks need to accelerate their internal targets for electronic processing. A credit application for a corporate borrower could run into multiple pages. It also needs many addenda like financial statements. All these can be become paperless through an integrated corporate loan origination and document management system. Even the process of high end syndicated lending, which requires document distribution to syndicate members, now has portals for document upload and secure access.

In a utopian world, all else except a legal agreement needing the borrower’s signature, would be electronic. We still need to wait for a few more years for that to happen. When digital signatures are accepted globally even for large corporate lending agreements, that indeed would be the fall of the last (paper) bastion.

But would this all be a ‘whack a mole’ scenario, where replacement of paper with desktops and laptops, smart phones, servers, associated cooling systems, network equipment and cables, carbon foot print associated with software development etc, adds to increase in greenhouse gas emissions, in some other form? Well, that could be the subject of another piece!

-The views expressed are personal