The following case study attempts to do three things. It first outlines some of the reasons why banking and the environment are so important to each other.

Secondly, it summarizes the specific experiences of one bank, the Development Bank of the Philippines (DBP). That bank has been involved actively in many of the issues intersecting environmental responsibility with its core business of lending and project financing.

The third and concluding part of the case study steps back and generalizes some principles from DBP's experience that could be considered by other financial institutions engaged in this area. How an institution wants to respond to the issue of environmental responsibility is one that each institution will make for itself. But there are lessons inherent in the DBP experience, which have application to other banks in Asia.

The recent financial crisis in Asia during the last few years is well known and does not need to be recapitulated. But certainly, one of the indirect outcomes of that crisis was to blur some of the major trends in financial and economic development in Asia. Certainly one of the most notable was that while the industrial transformation sweeping across Asia abated, it certainly did not stop. Whether under a low, medium or high growth scenario, growth in Asia will still be largely industrial led growth. In fact, if history is any indicator, the rate of industrial growth should continue at least twice as fast as overall growth. The consequences of this growth for the environment are profound. The figures from a recent ADB report entitled "Emerging Asia" are revealing:

Per the above, over time the industrial sector will account for an increasingly larger share of support to minimize negative environmental consequences of overall growth. Today, it is 4%; by the year 2025 it will be almost 40%. Industrialization, thus, will add its own burden to Asia's already formidable list of environmental challenges. In the emerging megacities of Asia, unplanned urbanization, air sometimes easier to see than breath, an emerging water crisis and massive traffic jams are all familiar. Today extractive industries, power generation and transport are the primary causes of air pollution. The lack of water infrastructure is a primary cause of water pollution. But over time, as the ADB figures indicate, industrial growth will become a larger factor in straining Asia's environmental fabric. The challenge to manage that growth and to minimize its effect on the environment is at the core of sustainable development in Asia.

Fortunately, there is a potential positive force influencing this new investment. Largely unknown to the conventional development community, large financial institutions are showing real leadership and bringing an analytical environmental rigor to their lending. In effect, while they may call it good credit management, financial institutions are positioning themselves to be environmental leaders. How Asia manages future financial reform in the face of continued industrialization will be a key to its future prosperity. The urgency and necessity of structural reforms now facing Asia's financial institutions represent an opportunity as much as they do an obstacle.

This opportunity comes as a result of globalization. There is emerging today a general consensus that for whatever else it may bring, globalization has resulted in the welcome phenomena of the world's multinationals exporting their best managerial and environmental practices. Not as easily noticed but no less important, financial institutions are a subset of this same trend, and are bringing their own set of best practices. A rigorous approach to project financing -- driven by risk analysis -- has the unintended consequence of creating a new environmental ethic. The globalization of liability together with a banker's understandable desire to be repaid combine to create something what I would call environmental due diligence. Standards for lending, like the corporate logo, are the same, be it at the head office or at the most remote branch. If encouraged, it can't help but have an increasingly salutary effect on the literally trillion dollars of project financing and thousands of investment decisions still to take place.

Within the financial community itself, there is consensus that the role of the environment in project financing will continue to grow. For example, a global survey on banks and the environment jointly done a few years ago, entitled "Environmental Policies and Practices of the Financial Services Sector," by UNEP and Solomon Brothers looked at ninety investment and commercial banks worldwide. ALL the banks surveyed predicted environmental issues would receive more attention and become more integrated with core business activities over the next 15 years. ALL of them said they need better-trained staff to comply with regulations, and the majority indicated a need for better data on financial risks associated with environmental issues. Interestingly, most of the respondents thought that the "driver" for such rising concern was not environmental regulations per se but more image and peer group perception.

Credit committees at financial institutions across Asia will determine if the building blocks of Asia's industrialization -- chemicals, plastics, electronics, steel and cement -- are increasingly engineered towards the world's best environmental practices and cleanest technologies. Already we've seen cases in Southeast Asia where countries have been willing to forego major investments when they've perceived that the technology involved would not meet world-class standards. Increasingly banks will not sign off on a credit without looking at the process technology involved or the mitigation measures to reduce pollution. Is the credit financing a project that is state of the art? Is it, in effect, global? Part of this is healthy self-interest and prudent risk management. In the United States, Super Fund legislation made the owner under a repossession -- read bank -- responsible to clean up the property in question, even if the damage was done under a previous owner. Nothing concentrates a banker's mind as the possibility that his collateral can suddenly become worthless or even have a negative worth.

Asia's shift to the private infrastructure also puts the environmental dimension in high profile. All private infrastructures are extended on a non-recourse basis with the viability of the cash flow itself standing as the ultimate security. Should something happen to interrupt that cash flow -- something like environmental negligence -- the credit could become non-performing.

Increasingly, industrial banks in Asia from India to the Philippines are ratcheting up their environmental practices to international standards, be it by phasing out financing of anything to do with CFCs, advising on substitutes, looking for cleaner process technologies or taking on more staff engineers to strengthen the technical analysis of projects financed. Some banks even see a collateral consulting opportunity sensing that the banker himself is in the best position to know the technological opportunities involved in a business.

The lion's share of credit for this positive trend deservedly goes to creative bank leadership throughout Asia who have seen the opportunity and acted on it. They have done this well ahead of either the donors or the traditional environmentalists. Over time, capital flows under the control of Asian financial institutions will finance an increasingly larger share of Asia's growth. Below is the story of how one bank responded to this opportunity.

Development Bank of the Philippines and The Concern For the Environment:

The Development Bank of the Philippines was created on June 14, 1958 with an initial capital of Peso 500 million. DBP was the successor to the Rehabilitation Finance Corporation which facilitated reconstruction after World War II. In February 1986. DBP's charter was revised, and again amended in 1998, to pave the way for the bank to pursue other activities and to fulfill its development mandate more meaningfully.

The bank basically expanded from its agricultural and industrial rehabilitation work to agricultural and industrial restructuring. Under the new charter, the bank�s primary objective caters to the medium and long-term financing needs of enterprises with emphasis on small and medium-scale industries. The DBP has a correspondence banking relationship with several U.S. banks including Citibank and Bank of America. It is also an active member of the Association of Development Finance Institutions in Asia and the Pacific (ADFIAP), a regional association of development bankers. The Bank has approximately 3,755 employees assigned at the Head Office and at 74 branches, 5 regional in-country offices, and total resources of about 67.5 billion pesos (US$2.6 billion).

After insolvency during the Marcos years, the bank reenergized itself and won numerous management awards and turned substantial profits. The DBP today is a big lender to industry including food processing, bottling and sundries manufacturing. Currently, DBP has Nordic and Japanese facilities for on-lending. The DBP also has a $100 million line with ADB for small and medium enterprises. The World Bank has had two big wholesale lending projects with DBP for industry, but these have all been fully utilized. They've also been active in a number of IFC projects. All these facilities involve standard environmental conditions in the loan agreements.

The Beginning of Environmental Commitment:

Environmental concerns were first highlighted by the bank's Board of Directors and its management in 1992 under a US $175 million World Bank structural adjustment program for the industry sector. While the goal of the facility was to improve the efficiency and international competitiveness of Filipino industry, it also required that loans granted under a World Bank facility have a component to address environmental issues. So, DBP decided to fund only environmentally-sound projects with the credit facility. Implementation was difficult at first since it meant assisting companies with environmental impact assessments, suggesting environmentally sound technologies, and working on policy reforms. Some officers within the bank worried about the delays that would ensue.

Some of this worry was justified. In the early 1990s, the Environmental Management Bureau (EMB) of the Department of Environment and Natural Resources (DENR) was not prepared to handle the increasing workload of the various certificates required for borrowers to access DBP funds. Given the World Bank's environmental requirements, DBP responded to the need to build and increase the capacity of the EMB by channeling technical assistance funds from the Swedish International Development and Cooperation Agency (SIDA) to upgrade the EMB staff in Environmental Impact Assessment training. The training was conducted by DBP staff with assistance from Swedish expatriate consultants.

Over time, DBP commitment to environmental protection and sustainable development become more ambitious and was driven less by what a bilateral aid agency desired and more by senior leadership of the bank itself. DBP began to look for initiatives which DBP itself could do. Its leadership believed that a bank, like other service sector enterprises, has a significant if indirect influence on the environment. While indirect impacts are more difficult to measure and benchmark, DBP believed itself to be in a unique position to influence industry's environmental performance and shaped its programs to act on that potential. The bank did so by providing financial credits and technical assistance for environmental investments, as well as publicly promoting good environmental stewardship.

Environmental Organization and Management:

From the outset in 1992, the bank's Board of Directors and senior operating management supported and reiterated DBP's commitment to the principles of environmental management. Before 1997, however, DBP used an informal, ad hoc approach to environmental issues. For instance, the DBP environmental policy was adopted as a set of guiding rules or principles for environmental improvement before a formal management system was initiated. Thus, the period between 1992 and 1997 was mainly interlinked with the World Bank structural adjustment program. During those five years the bank closed the gap between having good environmental ideas on paper, and building the skills capacity needed to initiate an internal EMS system.

When DBP became interested in the environmental impact of its operations, the main obstacle was the lack of technical and human resources. DBP tapped the support of international organizations and local organizations to structure the training that the staff needed. These included the World Bank, the Swedish International Development and Cooperation (SIDA), the Overseas Economic Cooperation Fund (OECF), Kreditanstalt fur Wiederaufbau of Germany (KfW), the United States-Asia Environmental Partnership managed by United States Agency of International Development (US-AEP/USAID) and DENR/EMB. It also obtained support from government agencies such as the Environmental Management Bureau and the Department of Natural Resources and the Environment.

In 1997 full-scale efforts to put in place the EMS system were started. First and foremost was the creation of an Environmental Management Unit. This unit is not layered away from senior management but reports directly to the bank's Industrial Restructuring and Special Programs Office (IRSPO) which consolidates all policy-based lending activities. They, in turn, report directly to DBP's President and CEO. In addition, the EMU Vice President reports activities directly to the Environmental Management System (EMS) Steering Committee, which is part of the banks Management Committee. If the EMU Vice President feels he has a need, he also is authorized to report directly to the Board of Directors. The EMU is a staffed organization addressing DBP's internal and external environmental concerns. The EMU serves as the bank�s mechanism to guide its environmental work. It is headed by a Vice President, and the entire staff of the IRSPO is available to address environmental issues of internal bank operations and those of its lending portfolio.

Implementation of environmental concerns in lending was difficult at first, since DBP staff had to assist companies with environmental impact assessments, suggest environmentally sound technologies, and undertake policy reforms. Another challenge was the concern of some bank officers that the focus on environmental soundness would cause delays in disbursements. In addition to the bank's environmental review, each project needed a clearance certificate from the Philippine DENR. Ironically, the opposite has occurred. According to the EMU Vice President, because applicants have already considered environmental impacts when they apply for a loan, the companies have smoother dealings with DENR. This facilitates faster processing of documents. In sum, the proactive stance of DBP to mobilize external industry associations and other sustainable development stakeholders outside of itself resulted in a number of successful activities.

The second core achievement is that DBP also has a clear statement of its environmental policy that has a direct impact on bank operations. An overall Environmental Policy Statement was approved by DBP's Management Committee in September, 1997. The policy extends the bank's commitment to a number of relevant areas as well as spelling out guiding principles for bank operations. (See Attachment). Since 1997, the DBP has had a number of environmental accomplishments in addition to the creation of the EMS steering committee and an EMS working committee. These include:

• Appointment of an environmental champion in each of the main departments;
• Initial environmental review and audit (beginning at the corporate headquarters);
• Compilation of corporate registers of significant environmental effects and associated targets;
• Implementation of an environmental communications plan;
• Publication of a quarterly environmental newsletter;
• Completion of environmental law registers;
• Publication of an externally verified report; and
• Training of environmental management professions within the bank.

The above efforts have generated substantial discussions within the bank on operational management and documentation control. With ISO 14001 requirements serving as a base driver, DBP's EMS is now intensifying its efforts in environmental awareness training and completion of procedures and work instructions based on ISO 14001. Along this line, the bank is presently reviewing its environmental policy with a view to redefining goals, objectives, targets and auditing of the system.

Finally, it should be noted that there are a number of outside charters co-existing alongside DBP's policies. These include the Philippine Business Charter for Sustainable Development, and the United Nations Environmental Program (UNEP) Statement by Financial Institutions on the Environment and Sustainable Development. Signed in 1997, the Philippine Charter reiterates DBP's commitment to the principles of environmental management. Approximately 300 signatories to the charter include DBP's clients. The UNEP document, also signed in 1997, affirms the bank�s commitment to the integration of environmental considerations into all aspects of its operations and services.

Specific Operations:

The DBP has done a good job of integrating environmental considerations into all aspects of its operations, asset management and business decisions, while also holding to both its development mission and profit objectives. Below are a number of projects illustrating that commitment. These include such sectors as cement, pulp and paper, sugar, fish canning, electroplating and a number of sewage and waste treatment facilities.

Source: SIDA

Thrust: Technical assistance to industry associations in developing and implementing environmental management plans; institutional capability building of DBP and cooperating agencies

Duration: October 1997 to September 1998

Total Budget: SEK 8.57 million

Source: OECF

Thrust: Credit and technical assistance to industry firms; capability building of DBP; adoption of environmental due diligence for credit evaluation. The activity also involves environmental targets, such as pollution reduction, in the loan agreement in exchange for a concessional interest rate. The program includes funds to hire consultants to assess clean technology options for each industrial sector. The borrower would be required to install and implement a self-monitoring system. Financing for the loan will be made available to four basic types of pollution control projects: pollution treatment, pollution minimization/clean technology, toxic and hazardous substance management and solid waste management. Priority will be given to "industries which have been noted to account for the highest rate of pollution to the local environment."

Duration: January 1997 to December 1999

Total Budget: Phase I, Yen 5 billion credit & Yen 147 million technical assistance

Source: KfW

Thrust: Credit and technical assistance to small and medium scale enterprises, promotion of clean practices and occupational health and safety

Duration: Start September 1998

Total Budget: DM 9.2 million credit; DM 0.8 million technical assistance; another DM 20 million credit & DM 2.0 information dissemination package approved April 2000 for re-lending to qualified SME for the procurement of environmental facilities and equipment.

In addition to projects done with foreign assistance, DBP also has proactively implemented internal resource activities and takes direct steps to improve its own environmental management system. A pollution prevention program/waste minimization project was launched in 1997 to improve the bank's paper and waste management. Employees at the head office were provided information on sorting waste and reducing environmental impact in such topics as use of lighting, air conditioning, water, waste generation and environmental management. Environmental data information gathering to be used in future environmental statements to gauge improvement was started in 1998 for resources used in the banks operations in 1998.

Creating Partnerships:

DBP has established a commendable record of entering into partnerships with resources outside itself to enable and achieve environmental objectives. For example, in addition to the international donor-funded credit facilities noted above, DBP has created partnerships with domestic partners in the Philippines. It has signed memoranda of agreement between industry associations, the Department of Environment and Natural Resources (DENR), and itself to assist industry in improving its environmental performance. Currently, the DENR submits to DBP a list of violator-firms which DBP uses to draw its marketing plans, offering its services to these violator-firms who will need to respond to the EMB requirements. The DBP plans to hire a local consulting firm to act as in-house trainer.

It has been no less active internationally. Through the US-AEP, the EMU Vice President and other top DBP officers attended a US-AEP-sponsored Bank of America workshop on Environmental Risk Management, and officers further engaged in a US-AEP Environmental Exchange Program study tour. A number of initiatives came out of that trip. DBP officers recommended to their Board of Directors that the bank sign onto UNEP�s Statement by Financial Institutions on the Environment and Sustainable Development. The materials gathered during the study tour were used as a basis to train account officers to do environmental risk assessments of all loan applications, and develop an environmental due diligence manual for DBP and its 125 affiliated banks throughout the Philippines. A current goal of the Environmental Management Unit is to improve the affiliated banks' ability to do the assessments, and eventually add it to the criteria for accreditation with DBP.

In 1999, to convince the industrial sector to take action in environmental issues, the DBP changed its credit evaluation forms to incorporate environmental issues. At the same time it launched a series of twelve manuals. Prepared by the EMU and consultants, the manuals cover Pollution Abatement, Waste Minimization, Environmental Performance Reporting, and sectoral evaluation guidebooks for each of the nine top production sectors operating in the Philippines. The manuals are designed primarily for DBP account officers and industrial clients, but also have been made available to other banks and financial institutions, government agencies, academe, industries, and other interested groups. The objective is to increase the expertise of DBP account officers and clients in dealing with environmental projects.

In July 2000, DBP will host the venue for an international Training of Trainers course on Environmental Risk Management co-sponsored by the Association of Development Finance Institutions of Asia and the Pacific (ADFIAP) and US-AEP. In 1999, DBP (a member of ADFIAP) entered an international awards competition for the Asia-Pacific Bankers Congress 1999-jointly organized by ADFIAP and the Asia Bankers Association. DBP won the Environmental Bank of the Year prize during the Congress.

Most recently, the bank has launched an initiative working in partnership with the Department of Science & Technology. The effort creates a special lending fund devoted exclusively to clean technology adaptation in the industrial sector.

Finally, the Board of Directors has given the go ahead for the bank to move to full ISO 14000 certification.

The bank is optimistic about its future and divides its future environmental objectives into two categories: internal materials and equipment use and external environmental investments:

Materials and Equipment: DBP will continue to pursue activities to minimize material use and waste generation. Targets include decreased paper consumption, reduced energy consumption, reduced water consumption and decreased bank-operated vehicular emission. Environmental data information gathered in 1998 for selected resources will be used as the benchmark to gauge improvement in future years.

Environmental Investments: While the accomplishments of the bank described above are significant, a number of new initiatives are in the offing. These include increasing financial incentives, shaping environmental policies of industry, and promoting clean technology and practices. To do those there will have to be parallel investments in improving DBP's environmental performance and capacity. These involve institutional capability building and implementation of environmental due diligence in project evaluation through bank officer training in line with ISO14001 EMS; appraising contaminated collateral properties; and pilot-testing environmental due diligence on loan applications beyond strictly environmentally dedicated transactions.

What inferences can be drawn from the experience of the Development Bank of the Philippines which might be applicable to other institutions in Asia? It seems to me that all of them center on the commitment of the leadership of a financial institution. Put simply leadership needs to ask itself does the institution want to be a true environmental leader or merely dress itself up in environmental rhetoric. If the answer were the first then the follow-generalized statements would have to be subscribed to.

• Senior leadership must be committed to environmental responsibility and must be seen to be committed. If it isn't, you will have a program which at best will be tolerated and at worst be marginalized or ignored. All the golden intentions in the world are pointless unless the Chairman cares and is known to care.

• The most senior person possible should be put in charge of environmental policy, ideally with staff to support him or her. A member of the board should have clear responsibility to track what is happening, and there should be a well-defined management structure.

• Draft a corporate environmental policy, have it approved by the Board of Directors and then make it public. Make it clear that you want to have an environmental policy for how you manage your operations in-house and how you structure your portfolio. Include targets, with numbers and dates; this will not be possible unless you also follow the remaining suggestions.

• Measure. Nothing concentrates the mind like numbers.

• Institute a regular environmental audit to check on what is happening. While an outside consultant may help with the first three steps, and audit only be done in-house. Pay particular attention to the follow-up: there is no point in knowing what is wrong if nothing is done to fix it.

• Review how you screen the technology that you finance, and ask yourself are you doing everything possible to insure that only the cleanest possible technology is being financed.

• Review your human resources. Are sufficient engineers on staff or under contract. Are they current with new technologies?

• If you have loans in a country where environmental standards are low, do not expect them to stay that way. If one country finds a way of forcing companies to clean up, others will follow. Better to assume that standards everywhere will rise and incorporate that in your credit policy than to risk an expensive and disagreeable surprise.

• Accept that environmental regulations will tend to converge upward. What is compulsory in the most energetically environmental markets (California, Germany, Singapore, Scandinavia) will probably reach your own markets sooner than you think. If you insist on the highest environmental standards in your loan portfolio before they are made compulsory, you will avoid a larger credit risk later (and also have a marketing advantage).

• Remember that greenery is often a proxy for quality. A loan to a truly green company is more likely to be repaid. Through your credit policies, send a signal that you recognize that.

• If you are a member of a national banking association argue for a code of environmental conduct along the lines of similar ones in other industries such a Responsible Care in the chemical industry.

The DBP, in its developmental mission and initiatives, is committed to environmental protection and sustainable development and shall integrate and implement environmental considerations into all aspects of its operations and services, asset management, and business decisions.

The term environment means the surroundings in which an organization operates, including air, water, land, natural resources, flora, fauna, humans, and their interrelation.

In furtherance of this commitment, DBP, as a matter of policy, shall endeavor to do the following:

• Provide financial assistance only to environmentally sound projects;

• Make the identification and quantification of environmental risks, including environmental due diligence inquiry, a part of the normal process of risk assessment and management;

• Develop products and services which will promote the protection and enhancement of the environment;

• Subscribe to the Philippine Environmental Impact Statement (EIS) System and integrate the system in its credit process;

• Comply with local, national and international environmental regulations applicable to its operations and business services;

• Actively promote activities and investments in environment-friendly projects;

• Take an active role in encouraging clients, customers and business associates to comply with environmental regulations and integrate environmental considerations in their operations;

• Play a catalytic function in bridging public and private sector efforts in protecting the environment;

• Develop a network and long term relationships with local and international environmental organizations to foster exchange of information and collaborative and/or cooperative efforts in programs or projects relating to environmental protection and sustainable development;

• Develop and implement an Environmental Management System;

• Pursue the best practice in environmental management including energy efficiency, recycling and waste reduction and periodically update these practices to incorporate relevant developments in environmental management;

• Instill a commitment to environmental protection and sustainable development throughout the Bank, to ensure all employees at all levels are aware of the need for the effective implementation of the Banks environmental programs;

• Provide employees with training and information to enhance their understanding of the Banks environmental programs and their responsibility to implement them;

• Conduct internal environmental reviews on a periodic basis and measure activities against environmental goals;

• Objectively evaluate environmental performance;

• And identify areas for improvement.