A Sustainable Banking Network (SBN) Task Force Report June 2020 Country Addendum to the SBN Report Necessary Ambition: How Low-Income Countries Are Adopting Sustainable Finance Profile to Address Poverty, Climate Change, and Other Urgent Challenges Cambodia © International Finance Corporation [2020], as the Secretariat of the Sustainable Banking Network (SBN). All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC and SBN encourage dissemination of their work and will normally grant permission to reproduce portions of the work promptly, and when the reproduction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as we may reasonably require. 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Additionally, “International Finance Corpo- ration” and “IFC” are registered trademarks of IFC and are protected under international law. Cambodia SBN Member: Association of Banks in Cambodia (ABC) This Country Profile is an addendum to the SBN report: (member since 2016) Necessary Ambition: How Low-Income Countries Are Adopting Sustainable Finance to Address Poverty, SBN Working Group: IDA* Task Force Climate Change, and Other Urgent Challenges. The report and country profiles for the first time capture Key policy documents: in a systematic way how sustainable finance is being ◻◻ Cambodian Sustainable Finance Principles harnessed by low-income countries to address a (ABC, 2018) range of common environmental and social priorities and drive financial sector innovation despite market ◻◻ Cambodian Sustainable Finance Principles constraints. Implementation Guidelines (ABC, 2019) SBN Progression Matrix Stage (2019): Developing The report and profiles complement and build on – the country has formally launched a national the data collection and analysis for the SBN 2019 sustainable finance roadmap, framework, policy, or Global Progress Report, which covered 39 emerging voluntary industry principles, and a formal task force, markets. They delve deeper into the experiences of 8 working group, or institution has been tasked with low-income countries in the SBN network through an implementation. online survey, interviews, and desk research. SBN and IFC role: IFC, through the Asia region This country profile has four sections: Environmental and Social Risk Management (ESRM) Program for financial institutions, has provided ◻◻ The Drivers of Action – factors that spurred advisory services to ABC in relation to principles and the country to develop sustainable finance tools development, implementation, and capacity policies or voluntary principles. building, in partnership with the government of Japan. ◻◻ The country’s Experiences in Developing Through SBN, ABC has shared its experience with other Sustainable Finance Frameworks and what SBN members and benefited from the collective SBN was learned in the process. knowledge base. ◻◻ Future Priorities for the country as it continues to develop its sustainable finance About this Country Profile: systems. * IDA stands for the International Development Association (ida.worldbank. ◻◻ How the country views linkages between org), an international financial institution under the World Bank Group sustainable finance policies and Broader that offers concessional loans and grants to the world’s poorest developing countries. Development of its Financial System. Country Profile - Cambodia 1 1 Drivers of action in Cambodia, suggesting less broad-based impetus for progress. In common with countries with banking What factors spurred Cambodia to develop association SBN members, the coordinated voluntary sustainable finance voluntary principles? approach is emphasized above policymaker or regulator engagement. Peer experience has also been The ABC has been the primary champion of an important driver and has been critical to drafting sustainable finance in Cambodia. Figure 1 compares the sustainable finance principles (discussed below). the drivers of sustainable finance in Cambodia with Unlike peer countries, neither national development those in other SBN IDA countries. Compared with commitments nor environmental and social challenges countries with established sustainable finance systems, have driven sustainable finance in Cambodia. fewer factors are considered highly important drivers Figure 1 Having a coordinated voluntary approach has been the key driver for sustainable finance in Cambodia High Medium Low N/A Policy environment: NaƟonal commitments to the Sustainable Development Goals (SDGs), Paris Agreement on Climate Change, or a NaƟonal Sustainable Development Policy Policymaker and/or regulator engagement: NaƟonal guidelines or regulatory requirements to beƩer manage environmental and social (E&S) risks in the financial sector, improving financial stability Coordinated voluntary approach: IniƟaƟve taken by local financial insƟtuƟons to adopt internaƟonal good pracƟce in sustainable finance and level the playing field Market incentives: Opportunity to increase compeƟƟveness and resilience of the financial sector through innovaƟon in green and socially inclusive finance Environmental and social challenges: E&S risk exposure that fosters parƟcipaƟon of financial insƟtuƟons to address the E&S risks at the country level Peer experience: DemonstraƟon effect of countries that have adopted a sustainable finance roadmap Notes: Large dots represent Cambodia’s responses; small dots represent those of other countries. Source: SBN IDA Diagnostic Survey responses “ Development of the Cambodian Sustainable Finance Principles got momentum since the Sustainable Finance (SF) Committee’s Working Group kicked off with the support of IFC and Mongolian Bankers Association (MBA) in May 2018. IFC and MBA’s support was indispensable in organizing workshops and drafting the policy. Establishing the SF Committee and getting bank CEOs’ and regulators' attention and involvement was key to obtaining endorsement for introducing the sustainable finance principles. ” - Association of Banks in Cambodia 2 Necessary Ambition – An SBN Task Force Report 2. Developing a sustainable The process of developing sustainable finance principles in Cambodia, summarized in Figure finance framework 2, has relied on close collaboration between regulators and bank CEOs, as well as technical What process did Cambodia go through support from IFC and the Mongolian Bankers to develop a framework to promote Association (MBA). Banks in Cambodia only adopted sustainable finance, and what have they the Cambodian Sustainable Finance Principles in learned on the way? January 2019. Implementation is therefore in the early stages. Figure 2 Stages and steps for developing and implementing the sustainable finance framework in Cambodia May 2016 – ABC joined SBN and issued a Statement of Intent to develop Sustainable Finance Principles, in collaboraƟon with the Ministry of the Environment and the NaƟonal Bank of Cambodia. 1. Trigger March 2017 – ABC signed a memorandum of understanding with IFC and the MBA for cooperaƟon in developing the Principles. September 2017 – ABC established the Sustainable Finance CommiƩee comprised of bank 2. Engage representaƟves. May 2018 – Sustainable Finance CommiƩee working group began the process of draŌing the Principles, with support from the IFC and MBA. 3. DraŌ September 2018 – ABC Council approved the Sustainable Finance Principles and invited regulator and government officials to conferences and meeƟngs to obtain their endorsement. November 2018 – A learning visit to Mongolia and Japan. 4. Launch January 2019 – 45 member banks adopted the Cambodian Sustainable Finance Principles. February 2019 – ABC issued the Sustainable Finance Principles ImplementaƟon Guidelines. Source: SBN IDA Diagnostic Survey responses All three key stakeholder groups in Cambodia drafting the principles and engaging stakeholders. initially experienced challenges in developing and To encourage the prioritization of sustainable finance, implementing the sustainable finance principles: the ABC and the National Bank of Cambodia have demonstrated strong commitment and have also ◻ Banks insufficiently prioritized sustainable supported banks through capacity-building activities. finance, considering it to be counter to their business interests, and lacked the capacity to Although the sustainable finance principles have implement sustainable finance. only recently been adopted, there is evidence that ◻ The ABC had insufficient resources, knowledge, banks have already improved their management and expertise to lead sustainable finance of E&S risks. The following are some of the practices development. among banks in Cambodia: compiling an exclusion list to avoid lending to businesses that present E&S risks; ◻ The regulator was insufficiently engaged, developing E&S risk management policies; creating resulting in limited enforcement of sustainable incentive schemes to encourage awareness of E&S risk; finance. raising public awareness of E&S issues; and designing To overcome these challenges, the ABC drew heavily bank branches with environmental considerations and on the support of international partners—notably social inclusion factors in mind. IFC and the Mongolia Banking Association—in Country Profile - Cambodia 3 Figure 3 The solutions Cambodia found to address challenges in sustainable finance implementation Challenge Solution Capacity constraints within banks to Extensive training, including workshops and train-the-trainer sessions implement sustainable finance UƟlize the support of internaƟonal partners Limited national expertise to lead the sustainable finance process InternaƟonal exchange visits Banks often prioritize profits over Engagement with banks to persuade them of sustainable finance benefits sustainability DemonstraƟon of commitment among key stakeholders Banks are wary of additional regulatory Implement sustainable finance gradually to support internal capacity burden building Source: SBN IDA Diagnostic Survey responses 3. Future priorities The ABC’s Sustainable Finance Committee continues to conduct stakeholder engagement What are Cambodia’s priorities as it and develop implementation tools, with the goal continues to develop a sustainable financial of becoming the sustainable finance champion in system? the Mekong Region by 2023. Figure 4 summarizes Cambodia’s next steps in sustainable finance implementation. Figure 4 Cambodia’s next steps in the development of a sustainable finance framework 2020 2021 2022 2023 Expansion to other financial sector Cambodia to become sustainable finance champion in the Mekong Region Client engagement and creaƟon of green finance Engagement with the business opportuniƟes regulator Source: SBN IDA Diagnostic Survey responses Figure 5 compares Cambodia’s ongoing challenges enabling environment, capacity building, and the in developing a sustainable finance system with development of specific tools to support sustainable those faced in other SBN IDA countries. As with peer finance implementation. In addition, the ABC countries, there is significant focus on a supportive highlighted limited regulation and enforcement as an ongoing challenge. 4 Necessary Ambition – An SBN Task Force Report Figure 5 Ongoing challenges to be met in developing and implementing sustainable finance for Cambodia High Medium Low N/A Build the capacity of regulators and financial insƟtuƟons Enhance cooperaƟon among financial Enabling environment and capacity building insƟtuƟons Provide clear incenƟves for sustainable finance Develop and launch a sustainable finance roadmap Expand sustainable finance to other financial sectors Develop a taxonomy of green/socially Specific regulations inclusive projects or tools Promote publicly available environmental data Create green asset guidelines, incenƟves, and awareness Note: Large dots represent Cambodia’s responses; small dots represent those of other countries. Source: SBN IDA Diagnostic Survey responses 4. Broader financial sector financial sector development with other IDA SBN countries. These concerns are wide-ranging, and this development is reflected in Cambodia’s sustainable finance agenda, which incorporates financial inclusion and SME finance How does sustainable finance in Cambodia to enable poverty reduction and employment creation. connect with broader ambitions? Sustainable finance is seen as strengthening and Stakeholders in Cambodia are concerned about advancing financial inclusion efforts such as financial broad financial sector development, both with access, financial literacy, consumer protection, and regard to cross-cutting and sector-specific issues. community adaptation finance. Figure 6 compares Cambodia’s concerns related to Country Profile - Cambodia 5 Figure 6 Key areas of concern related to financial sector development for Cambodia High Medium Low N/A Financial inclusion Cross-cutting issues FinTech/digital finance Long-term financing Environmental and social risk management Agricultural finance Sectoral financial areas SME finance Climate and green finance Disaster risk finance, disaster/weather insurance Note: Large dots represent Cambodia’s responses; small dots represent those of other countries. Source: SBN IDA Diagnostic Survey responses “ In addition to the narrowly defined green finance - such as financing renewable energy projects - sustainable finance could contribute to poverty reduction by covering financing for the poor and MSMEs to have the means to get income, as well as financing projects and ” businesses that can create jobs for the poor. - Association of Banks in Cambodia 6 Necessary Ambition – An SBN Task Force Report Access SBN knowledge resources at: www.ifc.org/sbn Access the SBN Necessary Assessment Report and associated Country Profiles at: www.ifc.org/sbnnecessaryambition