Highlights from the Symposium on 6 November 2015, Mumbai
The symposium was officially opened by Ms. Susanne Dorasil from the German Federal Ministry for Economic Cooperation and Development. In her speech, Mr. Dorasil pointed out that financial institutions play a crucial role in limiting climate change and the degradation of our ecosystems. To foster the transformation towards a more sustainable economic system, Ms. Dorasil emphasized the need for more cooperation with the financial sector. The integration of environmental indicators into the decision-making processes of banks and investors is thereby of pivotal importance in order to boost investments in sustainable projects.
Ms. Lauren Smart from Trucost presented the key findings and results of the study Natural Capital Risk Exposure of the Financial Sector in India. The objective of the study was to provide Indian financial institutions with an understanding of the relevance and magnitude of the natural capital risks they are exposed to due to their lending and investment activities. Ms. Smart summarized the report’s finding that the total annual natural capital costs of companies financed by Indian banks are INR 90,496 billion, equivalent to 2.9 times the credit provided to these companies. Sectors with the highest natural capital costs include food, power and agriculture. The main factors pushing these costs are water consumption, land use and greenhouse gas emissions. If companies had to pay for their respective natural capital costs, for instance in the event of droughts or changes in the regulatory framework, it could impact their ability to repay loans significantly. Ms. Smart illustrated the channels through which the company’s balance sheet and credit ratios might be affected. To mitigate related risks, she outlined the scope for action on the part of the financial institutions: Foremost, they should quantify the natural capital costs and integrate them into their portfolio valuation and credit risk assessment. She furthermore highlighted how risks can be turned into opportunities: by reducing vulnerability through a prudent risk management; by tapping new sources of revenue through investment in innovative and more sustainable technologies, business models and market segments such as Green Bonds; and lastly, by enhancing reputation through a resilient long-term risk-return strategy.
Over the course of the following discussion with the audience and speakers, moderated by Ms. Anja Shivhare from GIZ India, participants asked questions on how the integration of natural capital risks in specific business segments of a bank could be implemented. Subsequently, the audience showed strong interest in learning more about the implications of the implementation of the approaches. In addition, the audience was keen on further details to what extent an integration of potential natural costs could translate into an overall revision of the bank’s lending activities to respective sectors. Moreover, Ms. Dorasil was asked about the overall approach of the German international cooperation against the backdrop of existing sustainability and green finance initiatives. In response to the question, Ms. Dorasil provided insights on the overarching approach of the German government, highlighting different initiatives and formats of collaboration. Furthermore, the audience showed strong interest in learning more about the underlying assumptions of the presented study. Moreover, representatives from Indian financial institutions asked about the rationale behind the conclusions of the report. Ms. Smart responded by providing deeper insights in the overall methodology and approach. Finally, the audience was advised that GIZ, together with Trucost, is planning to conduct a series of workshops to intensify the cooperation on natural capital with the financial sector in India.
Mr. Arunavo Mukerjee from Tata Cleantech Capital Ltd shared the company’s approach on managing water risks within the framework of the Water Foot Print Assessment Programme. The water footprint is an indicator of water use that is measured in terms of water volumes both directly and indirectly used or polluted by a consumer or producer. To enhance a company’s capacity in reducing its water footprint, Tata provides advisory services along a three-stage approach: First, the water footprint of a company is calculated using the Water Footprint Network methodology. Second, the sustainability of the company’s water footprint is assessed under consideration of local watershed conditions. In a third step, given these figures, abatement opportunities and strategies are identified. Mr. Mukerjee presented summary results on the assessment of several companies, which revealed an abatement potential of up to 50 percent of current consumption levels, e.g. by investing in closed loop configuration and desalination plants or by engaging with suppliers.
Mr. Yannick Motz from GIZ started his presentation introducing the audience into the overall work of the Emerging Markets Dialogue on Green Finance (EMD GF). He further explained that all activities carried out under the EMD GF were conducted in close collaboration with financial institutions from G20 countries. Against this backdrop, Mr. Motz elaborated on the different approaches, developed by EMD GF and its partners, how to manage water risks, one of the most important natural capital sources. First, the audience was informed about a recently launched tool to integrate water risks into the corporate bonds credit risk analysis. The tool allows financial experts to incorporate the actual water risks companies are exposed to into the corporate’s credit ratios. Mr. Motz further focused on the application of the open-source tool including corporate credit analysis by banks and investors, portfolio construction by investors, engagement to jointly mitigate respective risks and product development by portfolio managers. Second, Mr. Motz outlined the new pilot project on environmental stress testing. The project, commissioned by the German Federal Ministry for Economic Cooperation and Development, intends to develop an analytical framework and model that will allow banks to measure the performance of its corporate lending portfolio under the impact of drought scenarios.
The symposium was ended by concluding remarks from Mr. Wolfgang Leidig, Director of Private Sector Development of GIZ India. He summarized the key findings of the aforementioned inputs and provided an outlook on future green finance activities in India. Mr. Leidig announced the intention of GIZ and Trucost to set up a series of workshops to further anchor the natural capital approach in the Indian financial sector.