Environmental and Social Risks in Project Financing: Evidence From India

This study includes an assessment of developmental projects that have been affected by environmental and social impacts in India.

Background
Sustainable finance begins with recognizing the sources of risks – be it financial, social or environmental. Internationally, examples abound of companies or projects that have been shut down or heavily penalized as a result of adverse environmental and social impacts. Financial institutions that invest in such projects face a multitude of risks – from credit and collateral to legal, regulatory and reputational risks. The threat of such penalties creates a strong incentive to integrate environmental and social risk assessment and management into their risk management processes. In the last decade or so, there have been similar cases in India as well. This report compiles some such case studies of developmental projects in India that have been affected by environmental and social impacts arising out of the project activities.
Approach
All the case studies have been developed using a combination of secondary research and personal interviews with officials of banks and FIs. The main purpose of this report is to focus on the risks faced by banks and FIs who have financed these projects. Detailed information on the exact amount of investments, terms of lending and repayment etc. are not always available in the public domain. Some risks, such as reputational risks and brand loyalty cannot be monetized easily. However, the information provided in the case studies on delay in project completion, cost overruns, change in project promoter’s share prices, legal and reputational risks etc. were used to present a sense of the additional financial risks incurred by banks and FIs who were invested in these projects. Many of these risks and potential losses are avoidable and can also lead to additional benefits in the form of carbon credits and business opportunities in new and emerging areas.
Implications
Results from this report are useful to a wide range of stakeholders, especially Indian banks and FIs in identifying and understanding environmental and social risks associated with their lending operations and consequently, start a dialogue on ways to incorporate these risks in their financing decisions.

Thematic area

Governance

Project Leads

Koyel Mandal, Vivek Venkataramani

Location

India

Partners

ICICI Bank Technology Finance Group

Status

Completed