Environmental and Social Risk Assessment (ESRA) - Detailed Explanation

ESRA is now mandatory for any bank loan above Rs 10 Cr for project finance in India if bank claims ESG compliance. RBI has moved from advisory (2007) to disclosure regime (2024-2028).

1. What is ESRA?

Environmental Risk: Project causing air/water pollution, deforestation, biodiversity loss, climate physical risk (flood, heat) and transition risk (carbon tax, coal phase-out).

Social Risk: Displacement, land acquisition without consent, tribal rights under PESA & Forest Rights Act 2006, labour exploitation, child labour, occupational health, community health.

Framework used by banks:

1. Equator Principles (EP4 - 2020): Voluntary guidelines adopted by 130+ banks globally including Yes Bank, IDFC First, SBI (as associate). For all project loans > USD 10M, bank must categorize, assess, manage E&S risks.
2. IFC Performance Standards 1-8: The gold standard for assessment.
3. RBI Guidelines:
   • 2007 Circular on CSR, Sustainable Development and Non-financial reporting - urged banks to include environmental considerations.
   • July 2022 - RBI Discussion Paper on Climate Risk and Sustainable Finance - acknowledged banks are subject to climate risks through carbon-intensive portfolios.
   • June 1, 2023 - Framework for Acceptance of Green Deposits - how banks raise and utilise green funds.
   • Feb 2024 - Draft Disclosure Framework on Climate-related Financial Risks - mandatory climate risk reporting.
   • 2026 update - RBI's Climate Risk Disclosure Regime: Voluntary adoption FY 2027, Mandatory FY 2028. Banks must undertake regular assessments of climate risks, classify portfolios into physical risks (floods, droughts) and transition risks (carbon tax), and do climate stress testing biennially.

2. ESRA Process in Banks - 4 Step Model

As followed by Yes Bank】 ESP (Environmental and Social Policy), SBI, Axis:

Step 1: Screening & Categorization

• Category A: High Risk - Thermal power, mining, large dams, airports, chemical - Full EIA mandatory
• Category B: Medium Risk - Manufacturing, roads
• Category C: Low Risk - IT, services

Step 2: Due Diligence

• Check: Does project have valid EC (Environmental Clearance) under EIA Notification 2006?
• Check: Forest Clearance under Forest Conservation Act 1980?
• Check: Public consultation done? Consent of Gram Sabha under FRA?
• Check: Social: R&R policy, labour license.

Step 3: Environmental and Social Management Plan (ESMP)
Mitigation measures + cost. If gaps, loan covenants added.

Step 4: Monitoring & Reporting
Independent engineer monitors quarterly. Non-compliance = Event of Default.

If bank fails to do this, bank faces reputational risk, NGT liability, and RBI penalty for greenwashing.

3. Landmark Case Laws

This is where ESRA becomes enforceable - Courts quash projects where EIA/ESRA failed, which directly impacts bank's loan recovery.

Case 1: Hanuman Laxman Aroskar vs Union of India, (2019) INSC 434 - Mopa Goa Airport - SUPREME COURT SUSPENDS EC

Facts: Environmental Clearance granted for Mopa Airport, Goa. Challenge in NGT. NGT upheld EC.

Supreme Court set aside NGT judgment and quashed EC. Held:

• EIA must be thorough, not copy-paste of project proponent's data.
• Proper public consultation is mandatory.
• NGT must do merits review, not just procedural.

Principle for Banks: If bank financed Mopa without checking EIA adequacy, loan would become NPA after EC quashed. ESRA must verify EIA quality.

Case 2: Tapas Guha & Ors vs Union of India - Silchar Greenfield Airport - Doloo Tea Estate - 2024

Facts: 41 lakh tea bushes uprooted and shade trees cut in Doloo Tea Estate, Silchar, Assam for greenfield airport without prior EC, in breach of EIA Notification 2006. NGT dismissed plea.

Supreme Court bench of CJI DY Chandrachud reversed NGT. Held clearing activities done without EC violate 2006 notification. Ordered no action violating notification.

Principle: Pre-emptive land clearing = violation. Bank must ensure EC obtained BEFORE disbursement, not after.

Case 3: Wonder Projects Development Pvt Ltd vs Union of India, 11 Aug 2020 (2020 INSC 498)

Facts: EC granted for construction project near wildlife sanctuary. NGT set aside EC due to procedural violation.

Supreme Court identified procedural integrity in EC is non-negotiable. Even if project is economically important, EC without proper EIA cannot stand.

Case 4: Tejinder Kumar Jolly vs State of Uttarakhand, 2021 INSC 751 - Stone Crushers

NGT dismissed application despite non-compliance by stone crushers. Supreme Court reviewed and held NGT must substantively adjudicate non-compliance. Directed state to assess units.

Principle: Regulatory lapses of EAC (Expert Appraisal Committee) will be rapped by SC. Bank cannot rely blindly on EC - must check if EAC considered objections.

Case 5: S.N. Dubey vs Raman Khandelwal, 2024 INSC 931 - Gokulpur Talab Lake

NGT declared large area around lake as no-development zone based solely on Court Commissioner report, without considering State objections.

Supreme Court overturned NGT order. Held NGT failed to do proper ESRA - relying only on one report without evidence.

Principle: ESRA must be evidence-based, participatory. Similarly, bank ESRA must not be tick-box.

Case 6: NKC Projects Pvt Ltd & NHAI vs NGT - Shali Ganga Riverbed Mining - 2024-25

NGT banned riverbed mining in Shali Ganga, Budgam, Kashmir. Appeals by NKC, NHAI, J&K Govt.

Supreme Court dismissed appeals, upheld ban. Bench of Justices P.S. Narasimha and Atul S. Chandurkar delivered scathing judgment against regulatory lapses in UT, holding J&K EAC failed to assess environmental impact.

Principle: Even NHAI project - if E&S assessment fails, project stopped. Bank's security (project cash flow) fails.

4. How Banks Implement - Yes Bank Example

Yes Bank has Environmental and Social Policy (ESP) which draws from Equator Principles, IFC guidelines and provides 360-degree risk mitigation framework. It has appointed environmental specialists and social experts to appraise loan proposals before sanctioning big ticket advances. Axis Bank planning ESG audit.

Checklist for Credit Officer for ESRA:

1. Is EC valid? Check Parivesh portal.
2. Is it Category A - need full EIA + public hearing?
3. Forest Rights Act - Gram Sabha consent letter attached?
4. R&R - Land acquisition award? Compensation paid?
5. Labour - Any pending PIL in NGT?
6. Climate Risk - Under RBI 2024 framework, classify as physical / transition risk.