The Inter-American Development Bank may not swim in the exact same pool as commercial banks, but this should still sound familiar: "It's incredible how much time you can waste not having access to information, particularly when you have stakeholders waiting on that information," says Hilary Hoagland-Grey, senior environmental specialist for the IDB in Washington.
To match this urgency for speed to actionable diligence, the IDB recently deployed a tech platform allowing it to quickly and accurately assess, track, report and store detailed data on the sustainability risks of projects it finances in Latin America and the Caribbean. It's also providing an object lesson in using automation to better ensure good funds aren't squandered on bad environmental bets.
In order for a project to gain and maintain financing from the IDB, it needs to comply with preset "gates" or performance metrics designed to manage impact on energy costs, compliance emission standards, ecological impacts, disruptions to local populations, and other issues. The IDB is using an automated Sustainable Finance product to "flag" disruptions that are noncompliant with bank parameters that were partially designed to weed out economically, environmentally and socially unsound projects.
The IDB categorizes the sustainability risk of its projects on a scale similar to the Equator Principals, a social and environmental banking benchmark that counts HSBC, Citigroup and Wells Fargo as adopters.
"There are a lot of similarities to the [sustainability] risks that commercial banks face and what we face. There's a negative commercial impact of bad policy, beyond the impact on the environmental side," she says. "And we also suffer from an extreme form of the reputational risk that some of the multinational banks face. And that was a driving force behind this tech deployment."
Another app allows the bank to report to its board and management on the ongoing performance of sustainability measures for individual projects, as well as identifying emerging trends across projects.
Sustainable Finance's "toolkit" is a Web-enabled suite that identifies and tracks sustainability risks at the project, client or sponsor level. "The intersection of project and client risks yields an outcome which the banks customize to say 'We're comfortable with this or we're not comfortable' and issue guidance to what a borrower can do to manage those risks," says Carey Bohjanen, an Amsterdam-based senior manager for Sustainable Finance, which was recently acquired by PricewaterhouseCoopers.
The firm would not discuss specific commercial bank clients that are using its technology, but the firm's current client roster includes ABN-AMRO, Barclays, Citigroup, LaSalle Bank and HSBC, and Bohjanen says about 15 financial institutions globally are using its tech products. Other tech firms that sell automated components of sustainability risk management include Innovest, whose client roster includes institutional investment operations as HSBC, BNP Paribas and others; and Trucost, whose current clients include institutional investors, Merrill Lynch and UBS.
Much of the sustainability diligence practices are currently focused on on project finance, which may be shortsighted considering the performance of any corporate loan can be subject to a firm's energy policies. "The insurance industry was really the first to recognize the risk," says John L. Cusack, founder of sustainability consultant Gifford Park Associates, adding AIG has is among the institutions to develop a sustainability-inclusive risk management strategy for the investment side of its business.