A thesis submitted in partial fulfillment of the requirements for the degree of Master of Business Administration, School of Management

Thesis (M.B.A.) - Asian Institute of Technology, 2001

Environmental degradation provides a remarkable credit risk to the Financial Institutions. Environmental risks can be either inherent in the collateral or may arise from the operation of the project. Another significant environmental risk is non-compliance by borrowers with environmental regulations. In addition to this, the fomih type of environmental risk is that arising from the prospective changes in the legislation and regulations. The study argues that the risks can be transformed into a competitive advantage by successful environmental credit risk management. The report introduces a managerial risk reduction tool, Environmental Due Diligence (EDD), and discusses the implementation of EDD within the commercial banks of the Philippines. There are numerous obstacles in the way for the Financial Institutions to realise that taking a pro-active role in steering the investments to contribute towards sustainable development actually would be financially beneficial to them. Most of them have to do with the conceptual problem: since the bankers do not always see the environmental risks as credit risk, there is no demand to manage it. The rationale of this study is to find solutions to overcome the obstacles and to promote the application of EDD in the Philippine commercial banks. The research suggests that it is economically rational for all of the banks within a market to apply EDD: it improves their profitability and international competitiveness, as well as enhances their image as a good corporate citizens. Recommendations for the process of promoting EDD are made, and it is also pointed out that in order to have environmentally remarkable implications, EDD should be universally implemented within the market.