This is an extract from a research report “Green Financing Policy Implementation in Cambodia” prepared by the Fair Finance Cambodia and NGO Forum on Cambodia.
The Royal Government of Cambodia (RGC) has taken steps to include green financing in its sustainable growth strategies. The potential provider of green financing in Cambodia is the Green Climate Fund. Since 2013, the RGC has placed a very high value on green growth to balance the economy, environment, society and culture. The purpose of the Policy on Green Growth 2013-2030 is to reduce poverty, increase economic growth, protect the environment, manage natural resources, advance societal progress and safety and uphold national cultural values. The RGC has created a legal framework for national policy implementation. This framework aims to formulate a Law on Green Growth and strategic plans, action plans and programs on green growth in line with the relevant sectors that identify specific activities and responsibilities of the relevant ministries/institutions.
What is green financing?
Sustainable finance involves making investment decisions that consider financial returns and environmental, social, and governance (ESG) factors. Often used interchangeably with “green finance”, it is a broad term with multiple definitions, depending on context. Main groups contributing to sustainable financing or green financing are Banks, Corporations, Institutional Investors and Retail Investors, Central Banks, International Financial Institutions (IFIs), Green Funds.
Green financing aims to prioritise financial flows to financially friendly projects through banking, micro-credit, insurance, and investment from the public, private and not-for-profit sectors. Integral to green financing is better management of environmental and social risks, are the opportunities that provide ecological benefits with a decent rate of return, and greater accountability.
Ways to promote green financing:
• through changes in countries’ regulatory frameworks
• harmonising public financial incentives
• increased green financing from different sectors
• aligning financial decision-making of the public sector with the environmental dimension of the SDGs
• increasing investment in clean and green technologies
• funding for sustainable natural resource-based green economies and climate-smart blue economy
• expanding the issuance of green bonds.
The UN Environment Program (UNEP) and UNEP FI have been working with countries, financial regulators and the finance sector to align financial systems to the 2030 sustainable development agenda.
The main areas for the current work on green financing are:
•Supporting the public sector in creating an enabling environment
•Promoting public-private partnerships on financing mechanisms
•Issuing green bonds
•Capacity building of community enterprises on micro-credit.
Through its resource efficiency program, UNEP will offer to review countries’ policy and regulatory environments for the financing system to develop sustainable finance roadmaps. It will also assist central banks and regulators in improving the regulatory framework of domestic financial markets to shape the way and support multi-country policy initiatives at the sub-regional, regional, and global levels. UNEP will build on current initiatives such as private climate finance and work with policymakers and private sector leaders to connect to green economy initiatives. UNEP will also catalyse policy action that inspires and informs public and private investors. Multi Stakeholder partnerships will be promoted to include prominent actors in financial markets, banks, investors, micro-credit entities, insurance companies, CSOs and the public sector.
Global Agenda 2030
The United Nations has developed the 2030 Agenda for Sustainable Development (UN, 2015) to guide the transformation towards a sustainable and inclusive economy. The 17 UN Sustainable Development Goals (SDGs) stimulate action over the 2015-2030 period in areas of critical importance for people and the planet. Following Rockström and Sukhdev (2015), the SDGs are classified according to the levels of the economy, the society, and the environment:
Action Taken by ASEAN toward achieving the global agenda 2030:
The growth in the Association of Southeast Asian Nations (ASEAN) region has come at a tremendous environmental expense. Air pollution, water contamination and deforestation are just a few issues that affect ASEAN countries. The region’s high vulnerability to climate change exacerbates these negative trends, contributing further to negative social and economic impacts. Also, ASEAN faces the challenge of not achieving the SDGs and previous (social and economic) advancements might have been at the expense of the environment. According to the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), ASEAN is making slow progress to achieve the 17 SDGs.
Numerous estimates indicate the need for considerably higher financing per country (depending on the economy), region and sector to accomplish the SDGs. Cambodia is already facing a funding gap of 49-59% of GDP before the COVID-19 pandemic. The finance ministers and central bank governors from members of the ASEAN developed several guidelines to mitigate these negative impacts. These include the ASEAN Green Financial Guide, ASEAN Green Bond Standards, ASEAN Taxonomy of Sustainable Finance. The development of “green taxonomy” is considered complicated as it requires scientific and evidence-based criteria.
Green financing policies available in Cambodia
In early August 2019, the Association of Banks in Cambodia signed two memorandums of understanding (MoUs) on “Cooperation of Sustainable Finance” with the MoE, the NBC and the United States Agency for International Development (USAID) to strengthen and develop sustainable financial cooperation in the banking sector. The goal of the MoUs was to improve and develop sustainable financial cooperation in the banking sector and support environmental protection, natural resource management and climate change in the Kingdom
For the Royal Government of Cambodia (RGC), the following are the relevant national legal frameworks that support green financing:
·Cambodia Climate Change Strategic Plan 2014-2023
·RGC, MoE, Climate Change Action Plan 2016 – 2018
·The Convention on Biological Diversity, ratified by Cambodia in 1995
·Biodiversity Country Profile Cambodia
·Cambodia National Biodiversity Strategy and Action Plan (February 2016)
·Cambodia National REDD+ Strategy 2017-2026 (Reducing Emissions from Deforestation and Forest Degradation in developing countries)
·Cambodian Ministry of Environment
·National regulations requiring Environmental Impact Assessment for specific projects ·Country Environment Profile, Royal Kingdom of Cambodia (produced with support from the European Union Delegation to Cambodia, April 2012)
·CITES – the Convention on International Trade in Endangered Species of Wild Fauna and Flora
For the environmental sector, there are vital legislations such as:
•1996 Law on Natural Resources Management and Environmental Protection
•1999 Sub-Decree no. 72 on Environmental Impact Assessment Process
•2009 Prakas no. 376 on General Guideline for Preparing the Initial Environmental Impact Assessment
•2020 Prakas no. 021 on Classification of Development Projects for Environmental Impact Assessment
•Other relevant sub-decrees on pollution control and Prakas on the use of terms of references for some development projects
For environmental protection policies in the context of social and ecological impact assessments, Cambodia’s legal framework has not yet given attention to promoting environmental and social issues and natural resource protection within the banking and finance sectors. Existing legislation has only aimed at sharpening technical work and improving the efficiency of management of environmental and social impact assessments, with specific guidelines from the Ministry of Environment. There is no legal basis or provision for the inclusion or integration of this assessment in the policies and practices of the financial sector in Cambodia. This shortcoming underscores the current need to scrutinise the social and environmental impacts possibly resulting from loans or lending to development projects.
The practice so far has been for project owners or clients receiving loans or credit from international banks (like ADB, WB or IFC) to diligently study and prepare environmental and social impact assessments to absolutely meet the rightful conditions of those banks. These conditions reflect the recognition of concerns about environmental-social issues and long-term sustainable development, which are currently actively discussed topics in the context of development. The provision of loans or credit in any amount enables clients or project owners to develop several large-scale projects that could pose significant risks and impact the environmental and social resources of the communities in which they are located. The financing provides clients with sufficient capacity to clear, build, utilise resources, and operate their projects on a large scale, potentially leading to disruptions or conflicts with resources and livelihood activities of people in and around the project areas.
Code of Banking Practice (CBP): The ABC introduced the CBP in 2015, which asserts the criteria for providing credit to customers. Clause 12.1 of the CBP recommends that banks conduct diligent and prudent operations in assessing their customers’ ability to repay credit facilities. There are five criteria set out to check information and data to examine credit repayment ability. The code and requirements for pre-lending assessments do not emphasise environmental and social issues that may affect the client’s business. These impacts may reduce the client’s ability to repay the loan.
Cambodia Sustainable Finance Principles (CSFP): It was initiated by the ABC and endorsed by NBC in 2019. The main objectives of the CSFP are to:
• Properly establish and implement environmental and social risk management
• Sustainably develop and promote business opportunities
• Integrate sustainability into the banking business
• Collaborate with all stakeholders, including governments, authorities, investors and international partners
• Provide capacity development and knowledge sharing.
With the CSFP, the NBC and the ABC signed a joint MoU with the MoE on July 31, 2019, to formally define cooperation between the three parties in contributing to environmental protection, natural resource management and climate change that could affect the banking sector in Cambodia. This MoU is a testament to the solidarity, contribution, responsibility, and commitment to achieving the goals of equitable and sustainable development.
Conclusion
In this study, green financing is on the global agenda that several vital stakeholders have discussed. In contrast, promisingly, green and social finance from private sources has proliferated in recent years to become a contributor to sustainable finance. This will require all concerned vital stakeholders to promote sustainable green finance to mitigate adverse impacts to the environment and societies.
Endorsing environmental protection and natural resource management is an interdisciplinary task requiring the engagement of key stakeholders, including state actors and private sectors and citizens. The provision of loans is a crucial way to promote and expand development or private investment, which is often observed to cause environmental and social harm.
Banking and financial institutions play an important role in Cambodia and significantly ensure a good investment climate for large development or investment projects. The investment projects continue providing employment opportunities, income and developmental progress of Cambodia. In Cambodia, the provision of loans or credits of banking and financial institutions has not yet implemented conditional loans on environmental and social impact assessments for potentially risky projects. In contrast to several international banks, such as the Asian Development Bank, the World Bank, and the International Finance Corporation, these banks have developed strong environmental, forest, resettlement, indigenous, and regional security policies.
The absence of environmental and social safeguards in Cambodia’s banking and financial sector is a significant concern, as credit from this sector has broadly contributed to many developments or investment projects, some of which have damaged natural resources and the environment. Also, private financing is needed for achieving SDGs and climate goals in Cambodia. This challenge is due to the confusion in the legal framework, especially in the banking and financial sectors, where there is no formal guidance on the impact of loan or credit operations on environmental and social resources in the region or financing from banking and financial institutions.
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