Environmental Risks & The Lebanese Banking Sector

1. Environmental Risks & The Lebanese Banking Sector By Dr. Nicolas Khairallah HR Director Fransabank sal October 22 – 23, 2007 – Athens, Greece

2. Lebanese Banks protecting the EnvironmentOBJECTIVES: • 1-Enhance Environmental Risk Management in The Lebanese Banking Industry. • 2-Standardize Methodology and Approach of Environmental Risk Management. • 3- Place E.R.M. in the context of the Strategic and Risk Management of the Banks.

3. Our Agenda 0- Lebanon in Brief . 1- Environmental Issues in Lebanon: 1.1 The Environment: Crisis in progress 1.2 Degradation Sources 1.3 Chocking Conclusion 2-Avoiding Environmental Degradation. 2.1 Role of the Government 2.2 Role of the Banks

4. Lebanon in BriefGeography

5. Lebanon in BriefGeography • Total Area : 10,452 square kilometers Borders: • North: Syria • South: Israel • East : Mediterranean Sea • West : Syria • Land: 10,230 sq km Water: 170 sq km Coastline:225 km • Area = 0.7 times the size of Connecticut • Coordinates: 33 50 N, 35 50 E

6. Lebanon in BriefDemography • Total Population: 3.826.018 (2006 statistics) • Population growth rate: 1.26% (2006 statistics) • Population density: about 430 persons per square meter. • ¼ of population live in Greater Beirut. • ½ of population live along the coastal areas. General Information: • GDP per capita is around USD 4.000 (Upper middle-income country*). *According to World Bank classifications.

7. Lebanon in BriefEconomic Indicators

8. Our Agenda 0- Lebanon in Brief . 1- Environmental Issues in Lebanon: 1.1 The Environment: Crisis in progress 1.2 Degradation Sources 1.3 Chocking Conclusion 2-Avoiding Environmental Degradation. 2.1 Role of the Government 2.2 Role of the Banks

9. 1-1 The Environment & the Government • The Lebanese Government approach since the 1950s has been to promote the industrial sector at the expense of clean environment = Anti-Sustainable Development. • The Cost of Degradation as a percentage of GDP is growing faster than the GDP.

10. 1- 1 The Environment : Crisis in Progress • Oil spill crisis after July 2006 war (15.000 tons dumped in the Mediterranean). • Unprecedented forest fires in October 2007. • Forested areas = 3.5% of total land area (10.230 km2) : 20% is the minimum forest cover for a healthy environment according to international standards. • Agricultural land = 32% of total land area (15% decrease in last century). • (Litani and Nahr Ibrahim rivers most polluted rivers in Lebanon).

11. 1- 1 The Environment : Crisis in Progress SOME EXAMPLES • Pollution of water resources (inefficient irrigation techniques, archaic water distribution system, untreated sewers, industrial dumped solid waste). • Concentration of heavy metal, pesticides, & plastic in coastal Mediterranean waters)30% of the fish have mercury in their stomach due to wastes of tanneries, soap & paint factories, disposed oil *. * http://www.geocities.com/CapitolHill/Parliament/2587/env.html

12. 1- 1 The Environment : Crisis in Progress • Pollution loads from Mobile sources (transport). • Savage urbanization & decreasing fertile lands. Result: Loss of the nation’s welfare, healthy life, & well-being of the people.

13. 1-2 The Lebanese Environment’s Degradation Sources Degradation is the result of drawbacks in: • Indoor air pollution: biomass fuel causing increasing female heart disease + rising respiratory mortality among children and females (infant mortality rate 24.52 deaths / 1000 live births). • Per capita CO2 = 4.55 tons (3 times higher than India). 1.030.275 t/yr 1.225.750 t/yr from vehicles from power plants

14. 1-2 The Lebanese Environment’s Degradation sources 3.Inadequate potable water, poor sanitation & hygiene (causing a more pervasive diarrheal illness). 4.Solid Waste: the pervasive effect of Bourj Hammoud Dump and Amrousieh Incinerator closed in July 1997. 5.Uncontrolled construction (affecting coastal & natural resources limiting potential for international beach tourism)

15. 1-3 Chocking Conclusion • The economic & human activity is having increasingly negative impact on the environment. • The annual damage cost of environmental degradation in 2000 in Lebanon was estimated at 2.8 – 4.0 percent of GDP, USD 565 million (1.5 times >in high income countries). *Maria Sarraf, Bjorn Larsen, & Marwan Owaygen, Cost of Environment Degradation, “The Case of Lebanon and Tunisia”, Case Study: Lebanon-Executive Summary, p.2

16. Our Agenda 0- Lebanon in Brief . 1- Environmental Issues in Lebanon: 1.1 The Environment: Crisis in progress 1.2 Degradation Sources 1.3 Chocking Conclusion 2-Avoiding Environmental Degradation. 2.1 Role of the Government 2.2 Role of the Banks

17. 2.1How can the Lebanese Government avoid environmental degradation? 0. Create a new and neutral entity independent from the ministries and directly reporting to the Premier Minister. Analyze the environmental impacts of government policies and development plans. 2.Promote inter-sector involvement in protecting the environment. 3.Strictly enforcing environmental regulations and laws.

18. 2.1How can the Lebanese Government avoid environmental degradation? 4. Decreasing prices and taxes, an action that favors the efficient use of clean resources and industries. 5. Encouraging public as well as private funding of environmental awareness campaigns. 6. Closely monitoring public and private transportation (forbid unclean diesel). 7. Engaging in the modernization of sewers, tunnels (bad aeration), and public roads.

19. 2.1-Develop the Public Balanced Scorecard Why should the Lebanese Government achieve a balanced set of performance measures? • This allows the Government to clearly assess damages done to the environment, while also brainstorming ways to reverse this by formulating SMART goals and action plans capable of restoring well-fare and healthy life to the Lebanese Ecosystems.

20. Mission Strategy Budget Measure Target Initiative Objective Customers & Stakeholders Customers/Citizens Objective Measure Target Initiative Financial Employees & Organization Capacity Internal Business Process Measure Target Initiative Objective Internal Business Processes Learning & Growth Objective Measure Target Initiative Key Questions What is our mission? What services and programs are required and need to be provided? How do we create value? What benefits do we need to provide? To prudently manage public resources, how should we allocate funds and control costs? How will we sustain our ability to change and improve? To satisfy taxpayers, elected officials, regulators, and other stakeholders, at what business processes must we excel?

21. 2-2 Role Of The Banking Industry In Lebanon 2.2.1 Environmental Risk and Banking 2.2.2 Characteristics 2.2.3 Banks , Basle 2 &E.R.M.

22. 2.2.1 Banks and the Environment Banking activities themselvesgenerate pollution, albeit on a small scale relative to manufacturing. Banks, like any other business are potentially liable for environmental damage that their operations cause. However, becausebanking operations are not highly pollution-intensive,pollution from their own operations has notbeen the primary environmental concern.The focus, instead, is on derived environmental liability throughdebt and equity transactions.

23. 2.2.1 Potential Environmental Risk for Banks • LIABILITY FROM BANKS’ OWN OPERATIONS • COMMERCIAL LENDING AND CREDIT EXTENSION (DEBT) RISKS • Reduced Value Of Collateralized Property • Cost Of Clean Up Is Capitalized Into Property Value • Property Transactions May Be Prohibited Until Clean Up Occurs • Potential Lender Liability • Cleanup Of Contamination On Collateralized Property In Which The Bank Takes An Interest • Personal Injuries • Property Damage • Risk Of Loan Default By Debtors • Cash Flow Problems Due To Cleanup Costs Or Other Environmental Liabilities • Reduced Priority Of Repayment Under Bankruptcy

24. 2.2.1 Potential Environmental Risk for Banks • INVESTMENT (EQUITY) RISKS • Effect Of Environmental Liabilities On Value Of Companies In Which Investment Banks Or Their Clients Own Equity. • Upstream Liability If The Bank Is A Principal Or General Partner Or Owner • REPUTATION RISK • Negative Public (Or Shareholders) Opinion (Or Even Perception Of What The Bank Does Or Does Not) Growing Concerns About The Environment Have Contributed To Public Expectations About The Role Of Corporations And Financial Institution In Society.

25. 2.2.1 Environmental Risk by Transaction Type Direct Liability Risk Collateral Impairment Risk Cash Flow Impairment Risk Reputation Risk Unsecured Loans X X X Secured Loans X X X X Guaranteed Loans X X X Securitized Loans X X X Equity Investments X X X Leasing Activities X X X X

26. 2.2.2 Characteristics Of the Lebanese Banks

27. 2.2.2- Banking Indicators

28. 2.2.2 Credit / Loans Allocation in Lebanon (1)

29. 2.2.2 Credit / Loans Allocation in Lebanon (2)

30. 2.2.2 Credit / Loans Allocation in Lebanon (3)

31. 2.2.2 Voluntary Compliance: The ISO 14000 • ISO 14000 is a series of voluntary compliance standards for environmental practices. • Two essential platforms to the ISO 14000 series, one relates to management (i.e., Systems and processes) and the other to products .

32. -Actual situation Lebanese bankers are primarily focusing on the Risk avoidance and rarely looking for the return on revenue opportunities arising from environmental practices . Environmental Information is less frequently used by banks in equity transactions than in debt transactions.

33. Environmental Opportunities in the Lebanese Banking Sector Financing national environmental projects. Act as “ Catalyseur” for the IFC and EIB.

34. 2.2.3 Banks , Basle 2 & Environmental Risk Management Strategic Considerations facing Banks: Globalization, Basle 2, Speed of Change , Reputation

35. 1-Basel II & Environmental Protection • Banks can rely on Basel II guidelines in their campaigns for Environmental Protection: • Strategic objectives & corporate values should be established. • Clear lines of responsibility & accountability should be set & enforced. • Board members should be qualified, understand clearly their role and not be subject to undue influence from management or outside the concerns. • There should be appropriate oversight by senior management.

36. 1 -Environmental Risk Management What are Environmental Considerations to comply with: World Bank Guidelines ISO 14001 standards for Environmental Systems Environmental rating criteria Environmental rating criteria: Internalize environmental costs & benefits Screen projects according to ROA Encourage the application of World Bank Guidelines

37. 2-Standardize Methodology and Approach of E.R.M. What is the best approach to Integrating Environmental Protection in FB strategies? Develop the “ Environmental Policy” Formulate an Environment Risk Policy based on People, Processes and Systems and integrating Good Housekeeping (for its Internal Operations) and encourage the development of Clean Products by all the Business Lines. ( B.O.D. Responsibility and Corporate Governance Committee). Introduce “The Environment Factor” in the Mission of the Bank

38. 2-Standardize Methodology and Approach of E.R.M. • Phase 1: • Sign the UN Chart on Environmental & Sustainable development. • Join the WBCSD. • Appoint an Environmental protection officer.

39. 2-Standardize Methodology and Approach of E.R.M. Phase 2: - Join International Banks: take advantage of environmental market opportunities. - Incorporate environmental risks into FB Risk Management processes. -Develop an Environmental Management System. Integrate Environmental considerations into all aspects of FB Operations and services (Training, Personnel Policies & Procedures, Advertising Campaigns, Code of Conduct & Ethics, , Know Your Staff policy , Know Your Customer policy…)

40. 2-Standardize Methodology and Approach of E.R.M. Phase 3: Implementation of FB Environmental Policy Imposing environmental conditions on credit and loans. Granting loans: A preliminary Environmental review is a Must before granting a loan: 1- Questionnaire and disclosure statement .(customer) 2-An appropriate information and data to determine environmental problems , if any? 3-A field survey with photos (compliance officer) 2. Assigning a Specialized Team to hold responsibility for the policy’s effective implementation: i. A financial Analyst ii. An engineer iii. An economist iv. A lawyer / Legal Consultant

41. 3. Implementation of FB Environmental Policy The Balanced Score-Card Model • Objective Setting • What are the objectives to be achieved? • (Protect the environment) • Feedback & Learning • Articulating the shared vision • Supplying strategic feedback • Facilitating strategy review and learning • Communicating & Linking • Divide main objective into SMART goals • Formulating a clear action plan • Linking rewards to performance measures BALANCED SCORECARD • Business Planning • Setting targets • Aligning strategic initiatives • Allocating resources • Establishing milestones

42. 4.FB & Environmental Contributions What are current FB Environmental contributions: _______________________________________ Contribution to the reconstruction of Lebanon (Qana Fund). Financing the maintenance of public gardens (Bekaa area & Marjeyoun.) Sponsoring Tree Planting campaigns. Contributing to the Council of Environment & Cultural Protection. Encouraging the use of recycled material.

43. References

44. References (1) • Lebanon State of the Environment Report , Ministry of Environment. 2.http://www.geocities.com/CapitolHill/Parliament/2587/env.html 3.Association of Banks in Lebanon (ABL) as of December 2006 4.Maria Sarraf, Bjorn Larsen, & Marwan Owaygen, Cost of Environmental Degradation, “The Case of Lebanon and Tunisia”. June 2004

45. References (2) 5. Review of Environmental Risk Management at Banking Institutions and Potential Relevance of ISO 14000. Working Paper April 1997. E.Weiler, B. Murray, Sheryl Kelly and J. Ganzi 6.Environmental Risk Management in New Zealand- Is there scope to apply a more generic framework? Linda Cameron . July 2006. 7.Business and the Environmental Project at IGES Kansai Research Centre, Kobe University , 2004.

46. References (3) 8. Review of Environmental Risk Management at Banking Institutions and Potential Relevance of ISO 14000. Working Paper April 1997. E.Weiler, B. Murray, Sheryl Kelly and J. Ganzi

47. Thank you for you Valuable Time, And Best Regards