Environmental Finance

Unit 10

Unit 10
Structure 10.1 Introduction Objectives

Environmental Finance and Sustainable Development

10.2 History and Background 10.3 Sustainable Development 10.4 Need for Environmental Finance 10.5 Sustainable Investment Fund 10.5.1 Lending policies 10.5.2 Financing eco-friendly economy 10.6 Summary 10.7 Glossary 10.8 Terminal Questions 10.9 Answers 10.10 Caselet

10.1 Introduction
The previous unit provided an introduction to the ecosystem services and risks involved. It described the future of biodiversity and the drivers of environmental degradation. The implications and externalities with the business opportunities were also described in the previous unit. In this unit, we will learn the concept and importance of sustainable development and discuss how environmental finance can sustain business opportunities. Environmental issues exist in various forms, scales and levels. Developed countries saw a rise in public attention and awareness to issues related to air and water pollution. The foundation for the environmental policy and sustainable development is based on the fact that environment and
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economy are interrelated. Maintaining the environment is a necessity for any kind of economic activity to prosper and to support mankind. The Aral Sea in central Asia achieved international notoriety in the 1990s as an icon of environmental degradation due to water mismanagement. Massive irrigation projects, begun in the early 1960s, diverted water out of the rivers feeding the Aral Sea, causing it to dry up over the following decades, losing 90 per cent of its volume and 74 per cent of its surface area between 1960 and 2006. Images of the contracting shoreline and photographs of fishing boats stranded in the desert caught the attention of scientists, politicians, environmental activists, international organizations and the news media. The shrinking sea and drying wetlands devastated the local economy and ecology, and loose sediments from the exposed Aral Sea bed were blown into pesticide-laced salt and dust storms that damaged crops, plants and the health of humans and animals to distances of some 300 miles downwind. Water quality in the areas around the Aral Sea plummeted. Even the typically restrained academic literature used terms like disaster, catastrophe and tragedy to describe the Aral Sea situation. Although some small-scale amelioration efforts have been successful, the more serious problems continue till today. The Great Salt Lake shares some particularly striking similarities with the Aral Sea in terms of climatic and hydrological characteristics. So, the Aral Sea can shed light on the future water management challenges that are faced by the Great Salt Lake in response to population growth and regional climate shift towards drier conditions. The Great Salt Lake is not the only lake in the western United States that is facing this combined squeeze on water resources from increased demand and decreased supply. Could it become an icon of twenty-first century American water problems in the same way that the Aral Sea became an icon of global water problems in the twentieth century? The Great Salt Lake is not yet comparable to the Aral Sea in terms of environmental degradation. However, future water management challenges, a local tendency to undervalue the Great Salt Lake and discouraging examples from elsewhere
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in the western United States suggest that there are legitimate reasons to worry that it may be on a similar trajectory. (Source: http://www.environmentmagazine.org/Archives/Back%20Issues/SeptemberOctober%202009/Bedford-abstract.html) This unit provides answers to questions like: What will be the impact on earth if such environmental degradations do not stop? How can different financing options help in sustainable development? After studying this unit you will be able to explain the concept of sustainable development and its role in sustaining business opportunities. Objectives After studying this unit, you should be able to: explain the concept and importance of sustainable development examine how environmental finance can sustain business opportunities describe the role of sustainable investment fund

10.2

History and Background

Sustainable development implies economic development that can sustain itself in the long run without adversely affecting the environment. World Commission on Environment and Development defines sustainable development as Development that meets the needs of the present without compromising the ability of future generations to meet their own needs." Ever since the concept of sustainable development has started receiving global approval, the gap between perceived need for demands and their effective financing has been growing ever wider. The financial requirements of individual countries and of the global economy for pursuing sustainable development is mainly based on what is assumed about national and international policies. Sustainable development is a bankable project (the
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project which generates a positive net present value) and the benefits may not increase for several years. However, the costs that need to be paid today require long-term bridge finance which is inadequate and often unavailable in transitional economies. The history of international trade-sustainable development started from 1992 Earth summit in Rio de Janeiro, Brazil. It was a solution to the task of defining operations of sustainable development. In Chapter 2 of the Agenda 21, the negotiators made it clear that an open, equitable, secure, nondiscriminatory and predictable multilateral trading system must be ensured to deliver on the promises of sustainable development. It was agreed that the trade policies must not act as obstacles in the path of promoting development and curbing environment degradation. The world summit on sustainable development that was held in Johannesburg in the year 2002 relooked at the issue and restated the conclusion as, to promote open, equitable, rule-based, predictable and nondiscriminatory multilateral trading and financial systems that benefit all the nations in the pursuit of sustainable development. The Millennium Development Goals (MDGs) adapted from the United Nations Millennium Declaration stated that developed countries would help the developing nations by supporting them through aid, debt relief and better opportunities for trade. Today, the development is taking place but at a very slow pace. The achievement of the goals of Millennium Development has become a challenge in Sub-Saharan Africa. The achievements are monitored by the United Nations. The report developed in 2009 regarding the issue indicated that ensuring of environmental sustainability is still far from meeting the target. Also, the concerns over the increase in greenhouse gas emissions and forest losses have raised issues in Sub-Saharan Africa, Latin Africa and the Caribbean. The impact of trade and investment has been high on economic activities. Different international processes such as multilateral environmental agreements manage the trading aspects that include intellectual property rights and agricultural rights. The multilateral environmental agreement consists of the following:
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UN Framework Convention on Climate Change (UNFCCC) World Trade Organisation (WTO) International Maritime Organisation (IMO) UN Environment Programme (UNEP) UN Development Programme (UNDP) UN Food and Agriculture Organisation (FAO)

These organisations have different levels of processes associated with sustainability. The institutes related to UN are involved in promoting sustainable development in the investment front on the global level, whereas, regional development banks provide funding on the national level. Some of the regional development banks are IDB, African Development Bank (AfDB, ADB, EIB (European Investment Bank) and EBRD (Bank for Reconstruction and Development), Global Environment Facility (GEF) and other cooperative institutions.

10.3

Sustainable Development

Environmental sustainability is a process of long-term maintenance of the factors and practices that contribute to the environmental quality. It also helps in maintaining the elements and functions of ecosystem for future generations on a long-term basis. The aim of environmental sustainability is to sustain or maintain: human life capabilities that the natural environment needs to sustain the living conditions of people and other groups such as clean water and air, appropriate climate, etc. environmental aspects that generate renewable resources including water, fish, solar energy, etc. functioning of society, in spite of depletion of non-renewable resources quality life for all people

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Sustainable development provides a framework for the integration of environmental sustainability with economic, cultural, social and political sustainability. It requires the management and protection of ecosystems to help maintain the productive and ecological functions, differences in human managed and natural systems while safe guarding the environment pollution. This will help maintain the quality of land, water and air. Following steps are essential to incorporate sustainable development in a business organisation: 1. 2. 3. 4. 5. 6. 7. Performing stakeholder analysis Setting sustainable development policies and objectives Designing and executing an implementation plan Creating a supportive corporate culture Developing measures and standards of performance Preparing reports Enhancing internal monitoring processes

Let us discuss each step in detail. Performing stakeholder analysis One of the vital components of sustainable development is to identify the parties who have shown interest in the organisation by investing in their business shares. It is essential to perform stakeholder analysis to identify the parties who are directly or indirectly affected by the business activities like shareholders, employees, customers, suppliers, creditors, regulators and the community in which the organisation operates. Firms that understand the needs of their stakeholders will be able to capitalise better on the opportunities presented. They will gain benefits by possessing a well-informed active workforce and the firms value will increase the capital markets. To identify the stakeholder groups, a firms management must take into account all business activities and the location in which the firm operates.

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The analysis must consider the impact of business activities on the environment, the public and the future generation needs. Once the stakeholder groups are identified, the management must list the needs and expectations of these groups. To attain sustainable development it is essential to list both current and future needs of the stakeholders. This is done by community advisory panel which communicates with the stakeholder group. The purpose is to analyse the positive and negative impacts of business activities on stakeholders. Setting sustainable development goals and objectives In this step, the senior management of the organisation formulates basic values and operating goals to be followed by its employees with regard to sustainable development. The management must include the expectations of stakeholders in the organisations policy statement to set out the mission towards sustainable development. This policy statement guides the organisations planning process and sets values to be achieved by the management, employees, suppliers and other groups of the organisation. To set these goals, an organisation must make the commitment to work towards continued excellence, leadership and stewardship to safeguard the environment for future generation. They should take into account the public concerns and take responsibility for their decisions and actions which affect the public. They should believe in responsibly integrating environmental and economic concerns in all decisions related to operations. They should continuously strive towards cutting down emission levels to safeguard human health and environment. Their primary goal should be to eliminate wastes and emissions. Once the objectives are established, the senior management must compare the competitive and financial strategies of the organisation with the objectives. This is because in some cases business strategies are consistent with the sustainable development goals whereas, in other cases the existing strategies may be incomplete or in conflict with the goals. Thus, strategies have to be modified to meet the goals.
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Designing and executing an implementation plan It is essential to draft a plan to incorporate management system changes to accomplish sustainable development objectives. The plan includes converting sustainable development policies into organisations operational terms. This is a major task as it alters the normal operation of the organisation. It includes defining responsibilities and accountability, changing corporate culture and employee attitudes, launching organisational structures, operational practices and information reporting systems. Creating supportive corporate culture To ensure that the management and employees support the sustainable development policies, it is essential to have appropriate corporate culture. Many organisations have experienced regeneration in their operation while implementing sustainable development policies. When the employees participate actively in the programme, practical ideas can be generated effectively to accomplish sustainable development. There is also an added advantage of more customers involving with the organisation when it operates in a socially responsible manner. Developing measures and standards of performance There is a need for appropriate measures to implement sustainable development objectives and to prepare performance reports. The performance measures are influenced by the organisations sustainable development objectives and standards set by the regulatory body to operate in a defined framework. For example, performance targets set in terms of allowable emission levels and limiting the usage of energy per ton of output. New measuring techniques have to be introduced to compare the actual performance with the set targets in actual units. Management control and external reporting is to be performed, depending on the availability of appropriate information on organisations operations.
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This is essential to permit the management to evaluate the organisations performance against external and internal performance standards with the help of appropriate performance measures. Preparing reports Reports that outline the sustainable development objectives and compare the organisations performance against those goals are developed for internal management and stakeholders. Directors and senior executives evaluate the performance, take decisions and monitor the implementation of their policies and strategies depending on the internal reports generated. The external reports generated are used by customers, creditors, shareholders, employees and public to assess the organisations performance against social and environmental objectives. Regulators and government officials make use of reports to ensure the organisation is operating in compliance with their regulations. Enhancing internal monitoring processes It is essential to develop mechanisms to assist the organisations directors and senior management to ensure that the sustainable development policies are implemented from time to time. Performance monitoring is effectively linked to reporting as it helps to monitor and evaluate organisations operations and output on an on-going basis. Monitoring can be done in following ways: Evaluating performance reports submitted by middle managers. Visiting organisations operating sites frequently to observe whether employees are performing their duties correctly.

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Organising meetings with subordinates to evaluate reports and obtaining inputs to improve the procedures and reporting systems. Employing an environmental auditing programme. In order to monitor implementation of management policies it is essential to practically organise the internal environmental audits. For example, these days most of the organisations conduct internal audits to monitor that their operations comply with environmental policies and legislation. To do this, team experts like engineers, scientists and auditors who have knowledge and expertise in auditing are required. Application of the environmental financing strategy Traditionally, action plans designed for environment protection was poorly organised, without proper finance planning. These issues were difficult to analyse for major long-term environmental programmes that required huge capital investments in public infrastructure. As a result, project implementation was delayed by resource constraints, interruptions, cost overruns, unplanned spending decisions and resource allocation conflicts. The environmental financing strategy offers a long-term predictable framework for organising mid-term investment programmes and for project pipelines in the public sector. It helps to reorganise the annual budget process and to prepare individual capital investment projects. The strategy also assists in indicating the roles of various finance sources in financing the expenditure. Thus, a well organised environmental financing strategy leads to successful project implementation. Millennium Development goals that were adopted in 2000 and estimated to be achieved by 2015, provide a concrete benchmark to overcome poverty in all dimensions. It provides a framework that unites the entire community to work together to achieve the same goal. Benefits of achieving these goals will save millions of lives in addition to billions of people having the opportunity to benefit from the global economy. MDGs have eight goals in total, the seventh goal emphasising on ensuring environmental sustainability.

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We will focus only on the seventh goal in the following discussion. This goal is divided into four targets.

Target 7.A: Integrate the principles of sustainable development into country policies and programmes and reverse the loss of environmental resources. - Rate of deforestation shows the sign of reduction but must be controlled. - Immediate response required for climate change. Target 7.B: Reduce biodiversity loss, achieving, by 2010, a significant reduction in the rate of loss. - The target set for 2010 for biodiversity conservation, was missed with potentially grave consequences. - Main habitats for threatened species in the ecosystem are not being satisfactorily protected. - The number of species facing extinction is growing by the day, especially in developing countries. - Overexploitation of global fisheries has stabilized, but steep challenges remain to ensure their sustainability. Target 7.C: Halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation.

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- The world is on track to meet the drinking water target, though much remains to be done in some regions. - Accelerated and targeted efforts are needed to bring drinking water to all rural households. - Safe water supply remains a challenge in many parts of the world. - With half the population of developing regions without sanitation, the 2015 target appears to be out of reach. - Disparities in urban and rural sanitation coverage remain daunting. - Improvements in sanitation are bypassing the poor. Target 7.D: By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers. - Slum improvements, though considerable, are failing to keep pace with the growing ranks of the urban poor. - Slum prevalence remains high in sub-Saharan Africa and increases in countries affected. (Source: http://www.un.org/millenniumgoals/environ.shtml) Steps taken by different nations to achieve these goals: Issue: Reduction in ozone-depleting substances The Montreal protocol of 1987, led to the removal of 98 per cent of the ozone-depleting substances by 2008. The substances involved in ozone depletion also contribute to greenhouse gases that result in climate changes. All the nations had contributed in phasing out of hydrochloro flourocarbons (HCFCs) in the year 2007.
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Issue: Installation of water systems in Brazil, Burkina Faso and Sri Lanka Brazil has been implementing the one million Cisterns Programme from 2002. This programme was initiated with the aim of providing clean water to 36 million people in the semi-arid areas of north-eastern Brazil. In some of the villages, a water tower and pipe systems were mounted to supply water to 1300 people in the year 2006. This method provided 20 litres of water a day to individual houses. Rainwater harvesting has been introduced in Sri Lanka and this has enabled a number of households to save on an average of $31 per month. Issue: Expanding good sanitation practices in Kyrgyzstan In Kyrgyzstan, a project was developed which emphasised on the promotion of good sanitation and hygienic practices. These health practices were necessary because almost one third of children were infected with one or more intestinal parasites. When the quality of water supplied was improved in the villages that were covered by the project, the incidence of lambliasis decreased by 76 per cent in total. Issue: Ensuring environmental sustainability in India In India, according to the assessment made in 2003, 20.64% of total land area has been covered under various forests because of governments constant attempts to preserve the natural resources. The reserved and protected forest areas jointly account for 19% of the total land area to maintain biological diversity. The energy consumption has decreased constantly from about 36 kilogram oil equivalent in 1991-92 to about 32 kilogram oil equivalent in 2003-04 to generate GDP worth INR 1000. By 2015, the percentage of population without sustainable access to safe drinking water and sanitation facilities is to be halved and India is noted to be on track in achieving this target. According to UNICEF, India is said to be on track in meeting the MDG on water coverage. However, the quality and sustainability is still a key issue.
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Achieving MDG in case of sanitation, demands massive investments in good facilities and change of hygienic practices. There is an increasing impact of human activities on the integrity of ecosystems that provide necessary resources and services for welfare of the people and economic activities. There is a necessity to manage the natural resources base in a sustainable and integrated way for sustainable development. Hence, it is very crucial to implement strategies that include targets adopted at both national and regional levels. These strategies aim at protecting ecosystems and achieving integrated management of water, land and living resources. They also help in strengthening regional, local and national capacities. Self Assessment Questions 1. The solution to the task of defining operations of sustainable development is called ___________. 2. The achievement of Millennium Development goals are monitored by United Nations. (True/False) 3. Regional development banks provide funding on the ___________ level. 4. Which of the following provides a framework that unites the entire community to work together to achieve the same goal? (Pick the right option) a) Millennium Development Goals b) UNDP c) UNICEF d) Sustainable development 5. 98 per cent of the ozone-depleting substances were removed by 2008 due to _________. 6. What is the method introduced in Sri Lanka that has enabled a number of households to save on an average of $31 per month?

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10.4

Need for Environmental Finance

The field of environmental finance is a part of both environmental economics and the conservation movement which develops different financial instruments to protect biodiversity. In the past, environmental financing management has been considered as a priority of the international donor community. Developing countries claimed that development was the first priority. During this process, a part of the environmental protection needed to be paid for by the global communities. In recent years, this perception has changed to a great extent. Some people believe that a healthy and safe environment is a key for socio-economic development and that environmental degradation might weaken and even reverse the economic benefits. Many developing countries have adopted various steps in incorporating environmental management in their daily activities. These attempts must be supported and augmented. Environmental financing can no longer be considered as a donor-supported activity, but it must be a part of national and global financing. Sound environmental finance strategies are required to meet the costs of achieving the MDGs. In the report created in 2003, the costs of meeting the target of water supply and sanitation were calculated with regard to Kazakhstan, Moldova and Ukraine. The calculated amount shows that the annual investment required in water supply and sanitation will have to be raised considerably, in case the goals have to be met. A number of challenges are faced by investors in the process of funding the environmental initiations. On the national and global fronts, various policies have been undertaken to meet the key issues associated with environment. At times, efforts are made to measure the costs involved in the implementation of such policies. One of the ways to solve the issue of scarce financial resources is to implement environmental policy and confront the amount that is required. This is done to achieve the different points of the policy and organise the total amount of resources accurately. It implies that the costs and benefits must be estimated when a particular policy objective is to be established. After the estimation, the costs must be compared with the actual available finance and the amount that people,
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company and other institutions are willing to pay. The comparison will result in a list of policy objectives that can be implemented in real time period. This method was implemented few times for the estimation of the overall costs of the national environmental policies. Environmental policy makers do not perform a formal analysis of affordability and willingness to pay, when new policy objectives are established. To overcome such issues, a flexible instrument was developed and tested in a number of countries. This instrument allows the organisation to gather policy relevant information and the balancing of environmental policies and targets with available resources. The instrument is called Environmental Financing Strategies (EFS). Some of the international funding agencies that implement EFS are UNDP, World Bank, GEF, WHO, etc. The basic idea behind this approach is to take public policy targets in areas like water supply and sanitation and identify the costs and timetables to achieve them. It also needs to compare the schedule of the expenditure requirements with the available finance sources. This analysis reveals the finance gaps that were not visible during the implementation plan. The EFS determines ways to fill these gaps. These may be done by determining policy reforms that could support the organising of additional finance, adjusting the target levels or by extending the time period to achieve them. Overview of Accounting and Environment in Business Accounting that deals with environmental issues, is a complex activity. It can be defined in different ways according to the content of the activity and its purpose. Content Accounting basically deals with capturing, analysing, verifying and processing data. Environmental accounting mainly deals with measurement of environment performance. It analyses both financial and non-financial data. Therefore environmental accounting can be performed not only by accountants, but also by environmental managers. Purpose
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Environmental accountancy can be divided into the following two categories: Management accounting This provides information for managerial decision making. For example, managers can use product costs for valuing inventory valuation and determining income. Financial accounting This reports the financial probity of the organisation to the stakeholders. For example information about the liabilities that have resulted due to environmental pollution needs to be shared with the stakeholders.

Based on content and purpose of accounting, there are four approaches to environmental accounting. They are: Financial risk reporting This assesses the financial risks associated with environment. For example, assessment of the liabilities associated with cleaning up an oil-spill. Social accountability reporting This deals with publishing voluntary standalone corporate environmental reports to the external stakeholders. These reports act as indicators of corporate accountability. Energy and materials accounting This assesses the impact of the materials on the environment. The flow of physical substances like water, oil, and gases have many environmental impacts. Hence, analysis of this information is very important. Eco-balance tools are used to analyse the impact of an object on the environment. Environment related management accounting These provide a summary of the corporate costs and the benefits of environmental action. These categorise the costs and benefits of many waste minimisation schemes. These provide information to support decision making that depend on environmental factors.

Environmental accounting systems provide information on the environmental impacts of the organisation. They supplement the traditional accounting systems and help in communicating with the internal and external stakeholders. Self Assessment Questions
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7. Who is not responsible to perform a formal analysis of affordability and willingness to pay, when new policy objectives are established? 8. Ways to fill finance gaps are determined by _______. (Pick the right option) a) Policy makers b) EFS c) MDG d) Consumers 9. Implementing environmental policy and confront the required amount is one of the ways to solve the issue of scarce financial resources. (True/False) 10. _________________________ provides a summary of the corporate costs and the benefits of environmental action. (Pick the right option) a) Financial risk reporting b) Social accountability reporting c) Energy and materials accounting d) Environment related management accounting

10.5

Sustainable Investment Fund

Growing prosperity in the world has increased the awareness and interest in things beyond the basic needs. Fighting for human rights, peace, being sensitive towards the vagaries of nature, determination to create a safe, healthy world, have become equally important for mankind. However, people who are environmentally aware or driven to activism are very few in numbers and their financial contribution alone will be unequal to the needs of environmental development. This group of people wishing to use their money to enhance sustainable development are referred to as the sustainability segment. The theory of hierarchy of needs of the psychologist Maslow explains the growing need for the broader return on savings. He describes five hierarchical levels of need that can be distinguished.
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Figure 10.1 Hierarchical Levels of Needs

Figure 10.1 shows the pictorial representation of five hierarchical levels of needs. The hierarchical levels are: Basic needs of the first level are the physiological needs that include food, health and shelter. The second level consists of safety requirements. The third level includes companionship, love and affection. The fourth level has the esteem needs such as self-respect, respect from others. The fifth level is concerning the self-realisation needs that include knowledge, creativity and self-expression.

The most important point in this pyramid is the sustainability needs. Other than mutual funds, individuals invest a large amount of money in the sustainable investment fund. A market is created when a large number of people strive for the same order and the market for sustainable investment funds arise. The group that meets the basic needs strives to achieve the higher level needs. This particular market exists with different definitions
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varying from one country to another. In some of the countries, anything that is ethical and concerned with environment is termed as green. The concept of Socially Responsible Investment (SRI) is adopted in various countries to bring in social and economic responsibility towards environment. This has helped in screening of companies who have put in an effort to introduce the eco-friendly initiatives in their products and services. It has also influenced the shareholders to encourage such companies by investing in their shares. The concept of SRI is comparatively less in European countries. In Europe, they emphasise more on the environmental component and not the social perspective of sustainability. Another difference that can be noted is USA SRI is linked to institutional investors whereas, European SRI is related to retail market. The sustainable investments perform social and environmental screening of three generations, namely Noordhock, Abbema and Van Ruitenbeek. The social or the environmental criteria are used in first generation funds. However, these funds are not invested in arms trade, nuclear energy and tobacco production. The positive criteria are used in second generation funds. The factors that are given more importance are progressive social or environmental policy. Both positive and negative criteria are considered in third generation funds and the focus is mainly on the relative performance within a sector. Lately, the trend is bent towards the growth of the sustainably invested capital, the number of funds and the provision of information and benchmarks. In many countries, the funds have doubled and tripled in the last five years. 10.5.1 Lending policies Lending policies are the statement of the philosophy standards and guidelines of the lending institution. These must be observed while granting or refusing a loan request. The policies must be based on the statutory regulations. They determine the sector of industry or business for which the loan can be approved and disapproved. Provision of finance for advanced environmental projects has a number of opportunities. The different ways to approach this developing market is to:

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Create criteria for new financing strategies to seek out loans for various projects such as electric vehicles, waste management, recycling, etc. Evaluate the existing loan requests with accordance to their ecological and economic viability. This would result in better performance in loan payment.

The following are some of the principles of good lending: Safety The 5Cs of the borrower must be taken into consideration. The 5Cs are Character- willingness to pay, Capacity - ability to pay back, Capital - borrowers financial strength and stake in business, Collateral borrowers ability to offer quality assets and Conditions - trend in borrowers recent activities. Liquidity This takes into consideration if repayment can be ensured at a short notice. Purpose This confirms the borrowers working capital finance, import and export finance, etc. Profitability This means that the cost of funds and cost of operation must be low. Security This ascertains whether it is marketable. Diversification Providing loans to diverse people, locations and businesses in different ways. National interest, suitability This checks the source and mode of payment, the duration and productivity of the loan.

United Nations Conference on Environment and Development (UNCED) developed a large volume of international agreements to ease the efforts. It included a non-binding soft law declaration on the environment and development. UNCED provides some principles that banks need to follow. It calls for the authorisation of stakeholders in the design and implementation of policies and projects related to bank. 10.5.2 Financing eco-friendly economy

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Sustainability can be made more profitable by modifying the price manipulations to favour sustainability. Economy is often influenced by the government through a number of subsidies that indirectly reduce the cost of activities that degrade environment. The costs related to environment are often reflected in goods and services prices. This means the burden of these activities is shared by the entire community and not the producer or consumer alone. Taxes such as subsidies must be such that they support sustainability. For example, the income taxes in Denmark have been lowered and substituted by higher taxes on water, fuel and electricity. These substitutions are such that government gets the same amount of revenue. The difference is that, the people are charged on spending finite resources. Government must encourage people to employ environment friendly techniques and help them adopt sustainable practices and commend the firms who continue such practices. Economies can be financed only by investors. On a global front, investors must develop tools and processes with the valuation of the company that are required for a systematic integration of Environmental, Social and Governance (ESG) factors. ESG factors have material impacts on the brand and reputation of the company. At times, the ESG factors are overlooked by investors, resulting in the wrong valuation of the market. Investors must consider the following steps before investing: Build expertise on the basics of ESG valuation Using quantitative and qualitative data in the investment analysis Formalising a process to collect qualitative data

The business is available to avail financial support if it works in any of the following sectors: New economies like biotechnology, pharmaceuticals, information and computer technologies, aeronautics, aerospace, materials engineering and instrumentation Manufacturing
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Research laboratories Tourism Environmental restoration Waste recovery and processing Call centres Aquaculture, sea farming, marine biotechnology and other horticulture specialities

Sustainability is considered as an environmental concept and not an economic one. A sustainable vision that does not consider the economic factors, generally fails. It must work with the ecological principles, reinforce and use it as a base. Sustainable practices prove to be profitable in case of eco-economies. Activity 1: Assume you are the manager of an environmental company. What do you think you should consider while acquiring funds from other institutions?
(Refer section 2.5 detailed guidelines.)

Self Assessment Questions 11. Policies are created when a large number of people strive for the same order and the market for sustainable investment funds arise. (True/False) 12. A sustainable vision that does not consider the ________ factors generally fails. 13. The statement of the philosophy standards and guidelines of the lending institution are called ______. a) Lending policies b) Trade policies
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c) Contract details d) Sustainable practices

10.6

Summary

Let us recapitulate the important concepts discussed in this unit. The framework for the integration of environmental sustainability with economic, cultural, social and political sustainability is given by sustainability development. Millennium Development Goals (MDG) provide a framework that unites the entire community to work together to achieve the same goal. MDG includes eight goals to be achieved by the year 2015, the seventh goal deals with the sustainable development. The seventh goal has been divided into four different sections. The achievement of MDG requires a fair amount of funds and finances. The group of people who are interested in using their money to enhance sustainable development are referred to as sustainability segment. Lending policies are the statement of the philosophy standards and guidelines of the lending institution. Government must levy tax in a manner that it helps build sustainable environment. People must be encouraged to come up with innovations that help decrease environmental degradation.

10.7

Glossary

Greenhouse: Greenhouse is a building where plants are grown. It is a structure that consists primarily of glass, in which temperature and humidity can be controlled for the cultivation or protection of plants. Financial probity: It implies absolute and confirmed integrity in financial matters.

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Montreal protocol: It is an international treaty that protects the ozone layer by removing the numerous substances that are expected to be responsible for the depletion of ozone.

10.8

Terminal Questions

1. Give a brief description on the history and background of sustainable development. 2. Explain MDG and list out the sections of the seventh goal. 3. List out the strategies that can be implemented to curb the environmental degradation issues. 4. Describe the lending principles involved in environmental protection. 5. Write a short note on the need to finance eco-friendly economies.

10.9

Answers

Self Assessment Questions 1. International trade-sustainable development 2. True 3. National 4. a) Millennium Development Goals 5. Montreal Protocol 6. Rainwater harvesting 7. Environment policy makers 8. b) EFS 9. True 10. d) Environment related management accounting 11. False. Markets are created when a large number of people strive for the same order and the market for sustainable investment funds arise. 12. Economic factors
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13. a) Lending policies Terminal Questions 1. Chapter 2 of the Agenda 21 in the International Trade Sustainable Development states that an open, equitable, secure, non-discriminatory and predictable multilateral trading system must be ensured to deliver on the promises of sustainable development. For more details, refer section 10.2. 2. Millennium Development Goals are the eight goals that are said to be achieved by the year 2015. These goals are mutually agreed upon by all the UN member states and some of the other international organisations as well. The seventh goal is to ensure environmental sustainability. For more details, refer section 10.3. 3. Developing standards, designs and approaches are some of the strategies that need to be followed to curb the growing concerns over environment degradation. For more details, refer section 10.3. 4. Safety, liquidity, purpose, profitability, security, diversification and national interest are some of the principles of lending. For more details, refer section 10.5.1. 5. The goals listed in MDGs need finances to be achieved. The funding is generally provided by investors. They must develop tools and processes that are needed for a systematic integration of ESG factors with the valuation of the company. For more details, refer section 10.5.2.

10.10

Caselet

Ministry for Environment Waste Minimisation Fund A funding programme was featured as a good practice in a seminar that was conducted by the office for community and voluntary sector. It was
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presented by Elena Wrelton who is an analyst in the funds management team in the Ministry of Environment. The process included the funders having a clear idea of the business requirements with different levels of audit and accountability. Some of the good practices are as follows: Criteria The criteria must describe the manner and amount to be funded. Providing a right balance may be complicated for the funders but simple for the applicants to understand. Staged applications -Risks of funding unproven projects can be reduced by the use of feasibility study. -There is flexibility in staging the projects based on their complexity. -The process must be solved in a step by step manner. -Evaluation process can be streamlined for smaller grants. Risk management -Management of risks is the key to check for fund effectiveness. They are helpful in guiding the evaluation of application and the monitoring. -Assessment of risks can be done on the basis of application value, prior experience with the applicant, application complexity and other information regarding the project. -The risks must be updated throughout the progress of the project so that it can be used for future applications. Panel assessment
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Panels are used by funds to grant recommendations. Most of the funds implement external expertise to support assessment of application. The number of funding rounds can result in incomplete assessment and bad decisions. The turnover of the internal panel members must be built for the growth in expertise. Contracts The different contracts involved may be the following: -Assessment of risk to determine structure of funding. -No invoice payment but only milestone payment. -Payments to ensure completion of project and reporting after project completion. -The on-going effectiveness of a project must be measured after its completion. Discussion Questions: 1. What were the different risk management points to be taken into consideration? (Hint: Key while funding) 2. What is involved in contracts? (Hint: Assessment of risks) (Source: http://www.msd.govt.nz/what-we-can-do/community/good-practicefunding/integrity/ministry-for-the-environment-waste-minimisation-fund.html)

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References Bartolomeo, M., Bennet, M., et al. (1999). Eco-management Accounting. The Netherlands: Kluwer Academic Publishers Bourlakis, M.A., & Weightman, P.W.H. (2004). Food Supply Chain Management. Blackwell Publisher. Sands P., Earthscan (1993). Green International Law. Earthscan Publications Limited. Steger U., Fang Z., Lu W., (2003). Greening Chinese Business. Greenleaf Publishing.

E-References http://www.iisd.ca/process/trade_invest-intro.htm September 30, 2011 Retrieved on

http://www.investquebec.com/en/index.aspx?page=2500 - Retrieved on September 30, 2011 http://www.un.org/millenniumgoals/pdf/MDG_FS_7_EN.pdf - Retrieved on September 30, 2011 http://books.google.co.in/books?id=jpRUrKf1vjcC&pg=PA110&dq=Finan cing+eco+friendly+economy&hl=en&ei=j4SFTuf7Nsr3rQes8eHuDA&sa= X&oi=book_result&ct=book-previewlink&resnum=1&ved=0CD0QuwUwAA#v=onepage&q&f=false Retrieved on October 3, 2011 http://cab.org.in/Lists/Knowledge%20Bank/DispForm.aspx?ID=25Retrieved on October 3, 2011 http://geog.ucsb.edu/~gallo/vision/EcoEconomy.html#Homeon October 3, 2011 Retrieved

http://kalyan-city.blogspot.com/2010/09/principles-of-good-lendingevery-banker.html- Retrieved on October 4, 2011

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http://www.ecotopia.com/webpress/ecodevt.htm- Retrieved on October 4, 2011 https://www.wellsfargo.com/downloads/pdf/about/csr/reports/environmen tal_lending_practices.pdf- Retrieved on October 4, 2011 http://microfinance.cgap.org/2010/02/08/socially-responsible-investmentboom-in-east-asia/- Retrieved on October 10, 2011 http://www.asria.org/news/events/lib/120903csm_asria.pdf- Retrieved on October 10, 2011 http://www.un.org/esa/dsd/agenda21/res_agenda21_02.shtml Retrieved on October 13, 2011 -

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