Pushing lenders to over‐comply with environmental regulations: A developing country perspective

Abstract

In the past few years, the number of lenders adopting voluntary environmental codes, such as the Equator Principles, is increasing. The main reasons for this form of over-compliance include warm glow preferences of agents, credit risk and incentives arising from regulation. Empirical evidence suggests that lenders that over-comply are generally bigger than those that don't. In particular, they are likely to be MNCs. In addition, the behaviour of over-complying lenders differs from other lenders, for instance they are more likely to incorporate environmental risks in their lending practices. In the context of developing countries, incentives that promote over-compliance exist to much lesser degree. Analysing the regulatory environment in developing countries, we find no compelling reason for regulators to encourage voluntary initiatives such as the Equator Principles. Copyright © 2009 John Wiley & Sons, Ltd.

A Comparative Study on Environment Credit Risk Management of Commercial Banks in the Asia‐Pacific Region

“…For the countries assigned to low ECRM performance in Figure , both the voluntary code and green income incentive have low influence. This indicated that the voluntary codes do not have much influence in developing areas because there is less reason for complying such as regulatory environment in these areas (Kulkarni, ). Such regions also lack green income incentive to make banks' performance better in ECRM.…”

Equator Principles: Bridging the Gap between Economics and Ethics?

“…Reputation appears to be more important for multinational companies, as they face more stakeholder pressure. CSR issues are thus essential for the global players being in the spotlight (Kulkarni , p. 475). By adopting the EPs as a transnational CSR initiative, Equator banks take preventative and proactive measures to protect their reputation and defend themselves against civil society activism and NGO reputational pressure.…”

“…This “two‐speed” or “clubs within the club” structure would allow Equator banks to proactively respond to social‐environmental and human rights issues and meet the demands of various stakeholder groups. Equator Principles Financial Institutions would have the strategic opportunity to “over‐comply” (Kulkarni ), to go beyond what is formally (legally) and informally (morally) required, and gain first‐mover (competitive) advantages. They might boost their credibility for environmentally and socially friendly business practices and as a consequence, gain (additional) reputational capital that directly adds to their brand value.…”

“…Empirical research has shown that ESG issues affect long‐term shareholder values pointing at a link between environmental, social, and financial performances (Kulkarni , p. 474; Jones and Murrell : i.e., corporate social performance as a heuristics and signaling device has positive impacts on the firm's stock price).…”

Equator Principles: Bridging the Gap between Economics and Ethics?

“…This "two-speed" or "clubs within the club" structure would allow Equator banks to proactively respond to social-environmental and human rights issues and meet the demands of various stakeholder groups. Equator Principles Financial Institutions would have the strategic opportunity to "over-comply" (Kulkarni 2010), to go beyond what is formally (legally) and informally (morally) required, and gain first-mover (competitive) advantages. They might boost their credibility for environmentally and socially friendly business practices and as a consequence, gain (additional) reputational capital that directly adds to their brand value.…”