Workshop on Environmental Management Framework Session I

June 3, 2006

E&S risks and their implication for the financial sector

Scope.

Financial

FI
Risks

E&S Risks

Environment - A growing risk.

Bicchri (Rajasthan) - Dye intermediate company 9km stretch groundwater contamination - costs up from Rs.280 million to Rs.1billion. Medak (A.P.) - Land contamination through disposal of untreated effluents. SC order for framing of industry compensation guidelines .

1100 farmers will be paid a total of Rs.323 million. CPCB estimates clean up costs of industrial sites to run into thousands of crores US spends $40 billion every year on clean up costs. Source: [Economic Times, 15.11.98]

Environment - A growing risk.

Taj trapezium (1997) - 12 LMEs, 6300 SSIs; Cost approx. Rs.1.44 billion (SSIs only), Rs.2 billion (IOC) Vellore case (1996) - 900 tanneries in Tamil Nadu issued closure notices SC ruling for Delhi - Over 1500 units ordered to close & relocate

Grasim (Nagda, MP) - VSF plant shut for 46 days in 1996 due to water shortage. 17% drop in net profit. Global environmental issues - Climate change, Technology transfer, Trade restrictions, Product standards, etc.

Funneling effect
[Adapted from Natural Step]

Indian context
Financial liability for compensation & clean up costs associated with hazardous industries

Tightening of standards e.g. automobile emission norms Power of unaffected individuals to lodge a complaint Over 10,000 NGOs (20 times increase in last 15 years) Compliance levels - Approx.45% for all enterprises Official consents - rubber stamp approvals Import of toxic substances/ industries Product standards (Toxicity, LCAs, social criteria) textiles, leather, foods, spices Climate change - Emerging opportunity; Long term challenge for business (India, China)

Risk linkages
E&S Risks
Pollution Habitat destruction Hazardous wastes/ mtls Resource scarcity/ degradation Social issues (eg. child labour, wkg conditions, displacement)

Business Risks
Project delays/ cost overruns Business interruptions Legal fines/ penalties/ liabilities Delays in approvals Resource shortages/costs (water, power) Poor worker productivity Barriers to export mkts

Legal pressures Public pressures International standards Resource shortages

Financial Risk

Where does E&S risk fit within the Bank?

Credit risk

Non-payment of principal/ intt Collateral security recourse Lender liability risk Intt rate fluctuations Commodity pricing/ exchange risk Equity value fluctuations Security Business interruptions Regulatory non-compliance

Market risk

Operational risk

E&S risk factors => Financial risk

Punitive fines, cost of new treatment facilities, cleanup costs, litigation costs, project delays, disruption of operations, market barriers, worker unrest On-site or nearby pollution, Site contamination, Accidents Reduced ability to play ( credit worthiness)

Security impairment risk Direct liability risk

Clean-up costs where financier becomes owner of the contaminated site, in case of foreclosure
Project insurance claims to cover compensation costs, cleanup costs, and damages

Financial claims (insurers) Reputation risk

What can the financial sector do?

Identification/ Screening based on sector, nature of project, location.

To identify projects having significant E&S risks.

Assessment of risk based on audits, EIAs, site inspections, regulatory disclosures, other info sources Control of risk through mitigation or avoidance

Risk Mitigation Strategies

Control the risk (clauses in credit agreement, indemnities, warranties, covenants, certificates). Provides contractual control over client activities Transfer the risk (guarantee/ indemnifications by 3rd party eg. parent company or govts, syndication) Finance the risk (establishment of envl contingency fund, reclamation or remediation bond or LC) Insure the risk (risk transfer for a fee) - to cover sudden or gradual events Avoid the risk decline when risk is unacceptable & cannot be mitigated. Last recourse option.

Participants in the E&S risk mgmt process

Bank clients (disclosure; operational control) Credit officers / Credit risk management deptt Consultants (expert assessments; advice to clients & banks on risk
mitigation; liability/ cost assessments)

Other stakeholders i.e. govt., insurance, investors, public

(specific functional contributions depending on client/ unit involved)

Role of Credit officers

Manage relationship with client Inquire about & screens for E&S risk issues Determine optimum risk assessment and mitigation strategies Complete internal credit documentation Monitor on-going operations for implementation of risk mitigating measures Review for impact of internal/ regulatory changes

Role of Credit risk management Deptt (contd.)

Screens & adjudicates credit applications for E&S risk Ensure adherence to internal policy and risk allocation procedures Formulate risk monitoring & mitigation reqts.

Bank E&S Policies

Ensures consistency & continuity Made to fit applicable E&S risk management reqts Defines roles & responsibilities Identifies specific thresholds for E&S risk management Identifies bank specific risk mitigation strategies

What can the financial sector do?

(Part 2)
Apart from - addressing E&S risk in lending/ investment decisions, and - tracking implementation of risk mitigation measures Facilitate adoption of better technologies/ production systems Influence decision making at board level - encourage corporate governance and social responsibility Recognise link between environmental performance, quality systems & management maturity

Indian Financial Institutions which have Developed Environment & Social Risk Management Framework
IDFC ILFS ICICI Bank of Baroda TNUIDF SIDBI

International initiatives
UNEP Statement on Envt. & Sustainable Devt. (160 banks & 85 insurance cos.) World Bank, ADB, IFC E&S norms/ caveats for lending Credit Suisse Group, Union Bank of Switzerland, Bank of America, HSBC, Swiss Bank Corpn., Cooperation Bank UNEPs 1997 survey of FIs - Over 90% respondents had managers/ deptts in place to identify envl risks Rise of green funds - $1.19 trillion (10% of total), 144 funds [USA]; 2.2 billion, 19 funds [UK]; DM 2 billion [Germany]

Environment & Social Issues

What Cause Environmental Risk?

ISSUES Air Emissions Wastewater Discharge Hazardous Waste Resource Consumption Improper operational Practices IMPACTS Health Impacts on Humans Land Contamination Degradation of Environmental Resources. Accidents / emergencies Occupational Hazards

RISK DRIVERS Enforcement of legal Requirement Community Pressure Judicial Intervention Expectations of Foreign partners

Environmental Risk

Key Environmental Issues

Air Pollution Water Pollution Hazardous Waste / Materials Use of Ozone Depleting Substances Use of Persistent Organic Pollutants POPs Use of Poly-chlorinated Biphenyl

Air Pollution
Sector 1. Mini Cement Plant 2.Pesticides Polluting Streams Raw Material Handling Crushing Cement Mill Boilers, Process emissions Key Pollutants SPM, RPM, Trace elements in dust. SPM, NOx, VOCs, HCL, PAH, POPs

3.Dye & Dye Intermediates

4. Foundry

Boilers, Process emissions Drying & grinding

Scrap & charge preparation Fluxing & metal melting Quenching

NOx, SOx, SPM, Cl2,, H2S, VOCs, HCl.

VOCs, HAPs, HC, CO, NOx, metal oxides fumes.

Water Pollution
Sector 1. Textile Polluting Streams Bleaching Mercerising Dyeing & Printing Washing Key Pollutants Heavy metals, phenolic compounds, spent caustic, COD.

2.Dye & Left over mother liquor Dye Washing & Intermediat Finishing es Filtration Batch Reactions

BOD, COD, chlorides, phenolic compounds, heavy metals, organic chemicals, trace metals,

Water Pollution
Sector 3.Small Distilleries Polluting Streams Malting Steeping/germination Drying Kilning Brewing Extraction Fermentation Soaking Chrome Splitting Shaving Finishing Key Pollutants BOD, COD, Suspended solids, Ammonical nitrogen.

4.Tannries

TDS, suspended solids, BOD, Chromium, Boron, sulphides

Hazardous Waste
Sector 1. Textile Polluting Streams ETP sludge. Boiler ash Textile Chemical Residue Pesticide residue ETP sludge Expired Pesticides Dust from APCEs Key Pollutants Heavy metals, phenolic compounds Heaxchlorocyclohe xane, Hexachlorobenzene cyanides, phenols, heavy metals & traces of pesticides

2.Pesticides

Hazardous Waste
Sector 3.Dye & Dye Intermediates Polluting Streams Process sludge ETP Sludge Key Pollutants Sodium sulphate, Naphthalene, Heavy metals, organic compounds, dust from air filtration system, incinerator ash Methanol, ethanol, acetone, isopropanol, phenol, waste starches.

4. Pharmaceutic al Industry

Process residues Spent catalyst Expired drugs Off specification products

Ozone Depleting Substances

Sector Process Pollutants 1. Engineering Manufacturing of CFCs units refrigerators and ACs Use of Solvents for degreasing like CTC 2. Cosmetics Mixed with perfumes 3.Plastic & Production of allied Products Polyurethane Production of Poly styrene

Persistent Organic Pollutants

Sector 1. Pesticide industries 2. Agro products Process Production of POPs Use of POPs for pest controls Pollutants

Poly Chlorinated Biphenyl

Sector 1. Organic Chemical Industries Process Production of PCBs Pollutants

2.Electronic & electrical industry

Used in transformers

Occupational Health and Safety Hazards

Sector 1. Dye & Dye Intermediates Process Charging Process reactions Steam generation Scrap & charge preparation Metal Melting Milling Occupational Hazards Fugitive Emissions Exposure to Hazardous Chemicals Exposure to High Temp. High Nose levels. Exposure to High Temp Injuries due to moving machine parts

2. Foundry

3.Engineering units

Metal Cutting Fabrication Milling

High Nose levels. Injuries due to moving machine parts

Occupational Health and Safety Hazards

Sector Process Accidents

1. Pesticide Storage of Poisonous Leakage of poisonous Industry Chemicals / gas. gases / Chemicals Explosion Storage of Fuel
2. Foundry Metal Melting Explosion of Furness due to high concentration of CO.

3.Organic chemical industry

Storage of Poisonous Leakage of poisonous Chemicals / gas (Cl2). gases / Chemicals Explosion Storage of Fuel

Key Social Issues

Child Labour Forced Labour Wages Discrimination Freedom of expression and Right to collective bargaining Disciplinary Action Resettlement and Rehabilitation

Use of Sectoral Guidebook

Process Description Basic Polluting Process Critical Pollutants Summary of Key Environmental Issues Recommended P2 Measures Cleaner Production Initiatives Regulatory Obligations

Environmental laws

Environmental Regulations in India

Year
1974 1975 1977

Environmental Regulations
The Water (Prevention and Control of Pollution) Act, Amendments,1988 The Water (Prevention and Control of Pollution) Rules The Water (Prevention and Control of Pollution) Cess Act Amendments. 2003 The Water (Prevention and Control of Pollution) Cess Rules

1978

Environmental Regulations in India

Year
1981 1986 1986

Environmental Regulations
The Air (Prevention and Control of Pollution) Act, Amendments, 1987 The Environment (Protection) Act, Amendments,1991 The Environment (Protection) Rules Amendments, 2003

Environmental Regulations in India

Year
1989

Environmental Regulations
The Hazardous Wastes (Management and Handling) Rules, Amendments, 2003 Manufacture, Storage and Import of Hazardous Chemical Rules, Amendments, 2000 The Public Liability Insurance Act/ Rules, 1992 The Chemical Accidents (Emergency Planning, Preparedness and Response) Rules,

1989

1991 1996

Environmental Regulations in India

Year
1994 1994

Environmental Regulations
Environmental (Protection) Rules Environmental Clearance Amendments in the Environment (Protection) Rules, "Public Hearing made mandatory

Environmental Regulations in India

Year Environmental Regulations

1997
1999 2000 2000

The National Environment Appellate Authority Act Draft notification on Siting Guidelines for Industrial Projects Noise Pollution (Regulations and Control) Rules Ozone Depleting Substance Rules

Compliance Process
New Units Project Conception Stage Application to SPCB for CONSENT TO ESTABLISH Consent Granted Permission for Trial Run Performance Evaluation by SPCB

Construction Stage Change In Process / Raw material / Expansion of facility

Not Satisfactory

Grant Of CONSENT TO OPERATE Monitoring by SPCB Renewal Of Consent

Operational Stage