Banks to Give Better Credit to Environmentally-Friendly Companies
Care to attempt to put a price tag on the value of nature? It’s a pressing issue for environmentalists as well as economists struggling in an era of environmental devastation. How exactly do you value the Earth as a resource? The latest group to get involved in attempts to make dollars and cents of nature is, astonishingly, big banks, because it turns out they have a vested interest in the fate of the planet.
After all, without a planet to do business on, they’ll have a hard time functioning. So some banks have decided to change the way they establish credit ratings and determine how much credit to extend to their major clients. In addition to considering economic factors that might determine a company’s ability to repay, they’ll also be looking at business practices to determine if their clients are behaving in a sustainable and economically responsible way.
If they aren’t, the bank plans to cut their credit ratings. Those interested in repairing or boosting their ratings can do so by addressing specific problematic practices, just like individual creditors can improve their credit ratings by paying off big debts and making sure they’re not late on any bills. Firms will be obliged to discuss their use of environmental capital in annual reports and other documents, allowing participating institutions such as the World Bank to determine how they’re interacting with nature.
Firms that use natural resources, in addition to those responsible for pollution and high waste, could face significant cuts to their credit ratings. Meanwhile, those behaving with environmental responsibility in mind and promoting the welfare of the planet could have access to more credit on better terms. Effectively, the proposal expands the criteria used to calculate creditworthiness, and discusses the complexity of credit in a world where the Earth’s natural resources have a value that may be tough to calculate, but is still important.
Advocates for the plan say that natural resources have been historically undervalued, especially when it comes to things like intact forests and clean waterways. This plan will create a standardized, regulated approach for valuation of natural resources, making it easier to quantify them in assessments of major corporations and their impact on the environment.
It will also create a fairly-valued scale of environmental impact that can be used to compare differing companies. This is critical if banks plan to use this information to determine creditworthiness, as they need to be able to show their math, so to speak, to prove that no discrimination is occurring.
It’s likely to take almost a decade to get this program fully up and running, because the banks and institutions involved want to take their time to get it right. As they work on various aspects of the project, however, there will be opportunities for comment, and hopefully public discussion about the issue will spark larger conversations about resource use and assessing companies. Furthermore, since companies will have to account for their use of natural capital over time, some may also adopt such accounting voluntarily to get in ahead of the pack.
When the system is finally implemented, it could change the way credit is handled worldwide.
Photo credit: debabrata.