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Workshop on Environmental
Management Framework Session I
June 3, 2006
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E&S risks and their implication for the
financial sector
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Financial
E&S
FI Risks
Risks
Scope.
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Environment - A growing risk.
Bicchri (Rajasthan) - Dye intermediate company
9km stretch groundwater contamination - costs up fromRs.280 million to Rs.1billion.
Medak (A.P.) - Land contamination through disposal ofuntreated 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 runinto thousands of crores
US spends $40 billion every year on clean up costs.
Source: [Economic Times, 15.11.98]
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Environment - A growing risk.
Taj trapezium (1997) - 12 LMEs, 6300 SSIs; Costapprox. Rs.1.44 billion (SSIs only), Rs.2 billion (IOC)
Vellore case (1996) - 900 tanneries in Tamil Nadu issuedclosure notices
SC ruling for Delhi - Over 1500 units ordered to close &relocate
Grasim (Nagda, MP) - VSF plant shut for 46 days in 1996due to water shortage. 17% drop in net profit.
Global environmental issues - Climate change, Technology
transfer, Trade restrictions, Product standards, etc.
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Funneling effect[Adapted from Natural Step]
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Indian context
Financial liability for compensation & clean up costsassociated 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 termchallenge for business (India, China)
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Risk linkages
E&S Risks
PollutionHabitat destruction
Hazardous wastes/ mtls
Resource scarcity/ degradation
Social issues (eg. child labour,
wkg conditions, displacement)
Business Risks
Project delays/ cost overrunsBusiness 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
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Where does E&S risk fit within the Bank?
Credit risk Non-payment of principal/ intt
Collateral security recourse
Lender liability risk
Market risk Intt rate fluctuations
Commodity pricing/ exchange risk
Equity value fluctuations
Operational risk Security
Business interruptions
Regulatory non-compliance
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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
Clean-up costs where financier becomesowner of the contaminated site, in case offoreclosure
Project insurance claims to covercompensation costs, cleanup costs, anddamages
Reduced ability to
play( credit worthiness)
Security impairment
risk
Direct liability risk
Financial claims(insurers)
Reputation risk
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What can the financial sector do?
Identification/ Screening based on sector, nature ofproject, location.
To identify projects having significant E&S risks.
Assessment of risk based on audits, EIAs, siteinspections, regulatory disclosures, other info sources
Control of risk through mitigation or avoidance
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Risk Mitigation Strategies
Control the risk (clauses in credit agreement, indemnities,warranties, covenants, certificates). Provides contractualcontrol over client activities
Transferthe risk (guarantee/ indemnifications by 3rd party eg.parent company or govts, syndication)
Financethe risk (establishment of envl contingency fund,reclamation or remediation bond or LC)
Insure the risk (risk transfer for a fee) - to cover sudden orgradual events
Avoidthe riskdecline when risk is unacceptable & cannotbe mitigated. Last recourse option.
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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 riskmitigation; liability/ cost assessments)
Other stakeholders i.e. govt., insurance, investors, public(specific functional contributions depending on client/ unit involved)
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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
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Role of Credit risk management Deptt (contd.)
Screens & adjudicates credit applications for E&S
risk
Ensure adherence to internal policy and riskallocation procedures
Formulate risk monitoring & mitigation reqts.
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Bank E&S Policies
Ensures consistency & continuity
Made to fit applicable E&S risk management reqts
Defines roles & responsibilitiesIdentifies specific thresholds for E&S risk
management
Identifies bank specific risk mitigation strategies
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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 corporategovernance and social responsibility
Recognise link between environmental performance, quality
systems & management maturity
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Indian Financial Institutions which have
Developed Environment & Social Risk
Management Framework
IDFC
ILFSICICI
Bank of Baroda
TNUIDFSIDBI
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International initiatives
UNEP Statement on Envt. & Sustainable Devt. (160 banks
& 85 insurance cos.)
World Bank, ADB, IFCE&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]
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Environment & Social Issues
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What Cause Environmental Risk?
ISSUES
Air Emissions
Wastewater Discharge
Hazardous Waste
Resource Consumption
Improper operational
Practices
IMPACTS
Health Impacts onHumans
Land Contamination
Degradation of
Environmental Resources.
Accidents / emergencies
Occupational Hazards
RISK DRIVERSEnforcement of legal Requirement
Community Pressure
Judicial Intervention
Expectations of Foreign partners
Environmental
Risk
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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
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Sector Polluting Streams Key Pollutants
1. MiniCement Plant
Raw Material HandlingCrushing
Cement Mill
SPM, RPM, Traceelements in dust.
2.Pesticides Boilers,
Process emissions
SPM, NOx, VOCs,
HCL, PAH, POPs3.Dye &
Dye
Intermediates
Boilers,
Process emissions
Drying & grinding
NOx, SOx, SPM, Cl2,,
H2S, VOCs, HCl.
4. Foundry Scrap & chargepreparation
Fluxing & metal
melting
Quenching
VOCs, HAPs, HC, CO,NOx, metal oxides
fumes.
Air Pollution
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Sector Polluting Streams Key Pollutants
1. Textile Bleaching
Mercerising
Dyeing & Printing
Washing
Heavy metals, phenoliccompounds, spentcaustic, COD.
2.Dye &
DyeIntermediat
es
Left over motherliquor
Washing &
FinishingFiltration
Batch Reactions
BOD, COD, chlorides,phenolic compounds,heavy metals, organic
chemicals, tracemetals,
Water Pollution
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Sector Polluting Streams Key Pollutants
3.SmallDistilleries
MaltingSteeping/germinationDryingKilning
BrewingExtractionFermentation
BOD, COD,Suspended solids,Ammonical nitrogen.
4.Tannries SoakingChrome SplittingShavingFinishing
TDS, suspendedsolids, BOD,Chromium, Boron,
sulphides
Water Pollution
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Sector Polluting Streams Key Pollutants1. Textile ETP sludge.
Boiler ash
Textile Chemical Residue
Heavy metals,
phenolic
compounds
2.Pesticides Pesticide residue
ETP sludge
Expired Pesticides
Dust from APCEs
Heaxchlorocyclohe
xane, Hexa-
chlorobenzene
cyanides, phenols,heavy metals &
traces of pesticides
Hazardous Waste
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Sector Polluting Streams Key Pollutants
3.Dye &
Dye
Intermediates
Process sludge
ETP Sludge
Sodium sulphate,
Naphthalene, Heavy
metals, organic
compounds, dust from
air filtration system,incinerator ash
4.
Pharmaceutic
al Industry
Process residues
Spent catalyst
Expired drugs
Off specification
products
Methanol, ethanol,
acetone, isopropanol,
phenol, waste starches.
Hazardous Waste
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Ozone Depleting Substances
Sector Process Pollutants
1. Engineeringunits
Manufacturing ofrefrigerators and ACs
Use of Solvents for
degreasing like CTC
CFCs
2. Cosmetics Mixed with perfumes
3.Plastic &
allied Products
Production of
Polyurethane
Production of Polystyrene
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Persistent Organic Pollutants
Sector Process Pollutants
1. Pesticide
industries
Production of POPs
2. Agroproducts
Use of POPs for pestcontrols
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Poly Chlorinated Biphenyl
Sector Process Pollutants
1. Organic
Chemical
Industries
Production of PCBs
2.Electronic &
electrical
industry
Used in transformers
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Sector Process Occupational Hazards
1. Dye & Dye
Intermediates
Charging
Process reactions
Steam generation
Fugitive Emissions
Exposure to Hazardous
Chemicals
Exposure to High Temp.
2. Foundry Scrap & charge
preparation
Metal MeltingMilling
High Nose levels.
Exposure to High Temp
Injuries due to moving
machine parts
3.Engineering
units
Metal Cutting
Fabrication
Milling
High Nose levels.
Injuries due to moving
machine parts
Occupational Health and Safety Hazards
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Sector Process Accidents
1. Pesticide
Industry
Storage of Poisonous
Chemicals / gas.
Storage of Fuel
Leakage of poisonous
gases / Chemicals
Explosion
2. Foundry Metal Melting Explosion of Furness
due to high concentration
of CO.
3.Organicchemical
industry
Storage of PoisonousChemicals / gas (Cl2).
Storage of Fuel
Leakage of poisonousgases / Chemicals
Explosion
Occupational Health and Safety Hazards
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Key Social Issues
Child Labour
Forced Labour
Wages
Discrimination
Freedom of expression and Right to collective
bargaining
Disciplinary Action Resettlement and Rehabilitation
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Use of Sectoral Guidebook
Process Description Basic Polluting Process
Critical Pollutants
Summary of Key Environmental Issues Recommended P2 Measures
Cleaner Production Initiatives
Regulatory Obligations
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Environmental laws
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Environmental Regulations in India
Year Environmental Regulations
1974 The Water (Prevention and Control of
Pollution) Act, Amendments,1988
1975 The Water (Prevention and Control ofPollution) Rules
1977 The Water (Prevention and Control of
Pollution) Cess Act Amendments. 20031978 The Water (Prevention and Control of
Pollution) Cess Rules
i l l i i di
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Environmental Regulations in India
Year Environmental Regulations
1981 The Air (Prevention and Control of
Pollution) Act, Amendments, 1987
1986 The Environment (Protection) Act,Amendments,1991
1986 The Environment (Protection) Rules
Amendments, 2003
E i t l R l ti i I di
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Environmental Regulations in India
Year Environmental Regulations
1989 The Hazardous Wastes (Management
and Handling) Rules, Amendments,
2003
1989 Manufacture, Storage and Import ofHazardous Chemical Rules,
Amendments, 2000
1991 The Public Liability Insurance Act/
Rules, 1992
1996 The Chemical Accidents (Emergency
Planning, Preparedness and Response)
Rules,
E i t l R l ti i I di
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Year Environmental Regulations
1994 Environmental (Protection) Rules
Environmental Clearance
1994 Amendments in the Environment(Protection) Rules, "Public Hearing
made mandatory
Environmental Regulations in India
E i t l R l ti i I di
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Year Environmental Regulations1997 The National Environment Appellate
Authority Act
1999 Draft notification on Siting Guidelines forIndustrial Projects
2000 Noise Pollution (Regulations and Control)
Rules
2000 Ozone Depleting Substance Rules
Environmental Regulations in India
C li P
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New Units
Application to SPCB for CONSENT TO ESTABLISH
Consent Granted
Project
Conception
Stage
Permission for Trial Run
Performance Evaluation
by SPCB Not
Satisfactory
Grant OfCONSENT TO OPERATE
Monitoring by SPCB
Construction
Stage
Operational
Stage
Renewal Of Consent
Change In
Process
/ Raw
material /
Expansion
of facility
Compliance Process