Why El Salvador is banking on Environmental and Social Risk Management

By Auda Maria Escobar, Financial Stability Specialist, Banco Central de Reserva de El Salvador

El Salvador is rich in natural resources and marine life, but its long coastline and expanding agricultural sector leave it vulnerable to the impact of climate change. Rising sea levels, droughts, and tropical storms like Hurricane Ida have had devastating impacts on the country’s vulnerable populations, and risk causing major losses to commodity producers and subsistence farmers.

83 percent of Salvadoran banks and financial institutions (FIs) consider climate change to pose a significant risk to the quality of their credit portfolios. Aware of this vulnerability, the country’s banking sector is helping to mitigate climate impact through a national Environmental and Social Risk Management System (ESRM).

ESRM provides banks and FIs with a set of policies and tools to evaluate, identify, and manage the environmental and social risks associated with the activities to be financed under client projects. It also sets out good practice, not in order to restrict credits, but rather to improve the management of risks associated with their approval. As such, ESRM not only protects banks and FIs from bankrolling potentially harmful projects, it provides a platform for them to promote sustainable practices to their clients.

And embracing ESRM is not just good for the environment; it makes sound business sense. A survey by the Banco Central de Reserva de El Salvador has found that, since adopting ESRM, many banks and FIs have benefited from an improved public image, grown their customer base, and seen a boost in credit portfolio quality. 100 percent of surveyed entities had adopted ESRM, either voluntarily or at the request of their financiers, while responders revealed an advanced knowledge of SARAS and a keen interest in implementing it in their internal evaluation processes.

With climate change posing a real risk to economic growth, stability, and development in countries across the globe, Environmental and Social Risk Management systems offer a solution. They give the banking sector the power to promote sustainable development, and to invest in environmental projects and environmentally sound practices.

By adopting ESRM, El Salvador’s banking sector can play a critical role in mitigating the impact of climate change, both on behalf of their communities, and for their own long-term sustainability. By complying with ESRM, banks and FIs’ priorities are being directed in the right place, keeping their credit portfolios clean and their clients protected against climate risk.