Pravin Jadhav, Head – Environmental & Sustainability Risk, RBL Bank on ESG and Financial Crime Compliance

Environmental crimes (such as wildlife trafficking, illegal logging and mining etc) and social crimes (such as modern slavery) usually do not get the same level of attention from law enforcement as some other predicate offences and is often therefore considered to be a high-profit and low-risk activity for criminals. Is there any way in which ESG teams and Financial Crime Compliance teams in banks can work more synergistically to reduce the flow of money emanating from such types of illicit activity through the bank, and identify and report such activity to the Financial Intelligence Unit?

Sustainable development is the only way to grow by taking all stakeholders along. Economic development at the cost of environment, biodiversity or any underserved community will always face scrutiny of the future generations and regulators. #Environmental #Social #Governance (#ESG) regulations are being developed following international standards and guidelines.

The recognition of this fact had led to many Indian banks adopting voluntary initiatives like Equator Principles, Principles of Responsible Banking. As part of raising loans from multilateral development agencies like the The World Bank, Asian Development Bank (ADB) etc. the banks had implemented an environmental and social management system (ESMS), following the Performance Standards of IFC – International Finance Corporation (IFC PS). As a commitment to the investors or lenders, following these principles, typically large eligible loans undergo through environmental and social (E&S) due diligence, In addition to the standard credit and governance review. The banks, including RBL Bank, have adopted this sustainability policy from 2013 and also adopted IFC’s exclusion list (https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/sustainability-at-ifc/company-resources/ifcexclusionlist) as a screening method for these loan process. These include:

• Production or activities involving harmful or exploitative forms of forced labor/harmful child labor;
• Commercial logging operations for use in primary tropical moist forest;
• Production or trade in wood or other forestry products other than from sustainably managed forests.  

This is in addition to the any illegal activity in the country of operation. Thus, the banks that have signed up to any such voluntary initiatives and adopted IFC PS based ESMS, follow these policies, which are reviewed by the Board and investors.

All relevant #business teams and #credit teams undergo awareness sessions and mandatory training, to identify the excluded activities, that cannot be funded by the bank. Also, the purpose of loan is stated explicitly in the loan sanction letters and the use of funds are reviewed. This is to ensure no diversion of funds. This enables banks to monitor the unintended negative impacts from their borrowers and ensures that the #sustainability criteria are integrated into the business practices.

How can a bank or financial institution verify whether it’s corporate customers’ supply chains operate in an ethical manner and that there is no intermingling with illicit funds? Does the customer due diligence process now also include supply chain audits?

From an E&S assessment point, we review customers’ sustainability policies, certifications and sector specific issues. Thus, a furniture manufacturer is asked to share details of its suppliers, how they ensure no deforestation and sourcing sustainable raw material etc. including Forest Stewardship Council (FSC) certification. For the palm oil producers, they need to show their RSPO (Roundtable on Sustainable Palm Oil) certificate. For the textile industries Certifications like OEKO-TEX, GOTS, Fair Trade etc. are sought to ensure sustainable sourcing as well as fair treatment to the labour.

The standard loan application process also looks at credentials of the promoters, owners / Directors and also includes any cases, loan defaults etc. The source of funds are also part of the loan due diligence and which other banks have given loan to that company. Some sample suppliers are also reviewed for understanding the business continuity risks. Except for new business, not many companies of significant size may be there which have not availed loan or are debt free, to date. So, each sizable business is reviewed independently by each bank, during the loan approval processes.

What is the importance of being an ESG-centric bank and how does this impact the relationship with the bank’s various stakeholders? And what is your advice to other banks that are embarking on their ESG journey?

Adoption of ESG has helped us stay ahead of the regulations. When RBL Bank started sustainability reporting in 2017-18, we did internal capacity building. Later when we were required to do Business Responsibility Report (BRR) and Integrated Report (IR) as per SEBI’s requirement, the early start helped us to do this transition smoothly. 

In August 2022, we became a supporter of Taskforce on Climate related Financial Disclosures (TCFD). The Reserve Bank of India (RBI) has also recommended adoption of the TCFD Framework by Indian banks, in its new climate risk consultation paper.

RBL Bank conducts Environmental and Social (E&S) Risk assessment of its eligible transactions, as per the E&S Risk Policy. The assessment includes a generic climate risk tool to see the potential impact of physical risk due to the impacts of climate change on the borrowers’ assets. With a fairly matured ESG governance and practice, the bank has been able to access capital from development finance institutes (DFIs) as well. We are actively engaged in disbursal of loans from climate smart credit lines and in the sectors like renewable energy, electric vehicles and agriculture, which result in the emission reductions and delinking the economic growth from GHG emissions. As part of a larger climate risk agenda and green lending initiative, the bank has made its foray into climate smart loans and sustainable agricultural loans aimed at climate-friendly agricultural practices that enhance water usage and energy efficiency.

The International Financial Services Centres Authority (IFSCA) at GIFT City, Gujarat has also mandated a sustainable lending framework. Accordingly, having earlier experience in the sustainable lending, the bank was prepared with required policies and internal capacity to implement this from FY 23.

Thus, staying ahead of the impending regulations and access to international capital, effectively lowering the cost of capital are two important advantages of ESG integration.

Pravin Jadhav, Head – Environmental & Sustainability Risk, RBL Bank

The advice for banks embarking on this journey is to start with wherever they are. The flexibility of choosing your own path and knowledge available in the market will help make this journey easier for all. This journey also serves as an additional risk identification and mitigation step. 

Disclaimer: The views expressed above are my personal views in personal capacity and not of RBL Bank.