(Presentation at the Conference on Environmental Risk Management for Hong Kong Financial Institutions, Hotel Nikko, Hong Kong)
Ladies and gentlemen,
1. I am pleased to be here to deliver the keynote speech for
this conference on Environmental Risk Management for Hong Kong
financial institutions.
2. I congratulate the various organisers for putting together
the conference, which I understand is the first of its kind to be
held in Hong Kong. If so, it is long overdue. Environmental issues
have come very much to the forefront of public awareness in Hong
Kong in recent years, and cleaning up the environment has become
one of the Government's main preoccupations. There are all sorts of
good reasons for wishing to do this, in terms of improving the
quality of life and the long-term health and well-being of the
people of Hong Kong. But there is also a growing recognition on the
part of business, both here and elsewhere, that economic growth is
inextricably linked with a healthy environment. At this year's
World Economic Forum in Davos, business leaders voted global
climate change the most pressing issue facing the world's business
community. It is all the more disappointing therefore that last
week's UN summit conference in The Hague on climate change should
have ended in failure.
3. At first sight it might appear that banks and other financial
institutions, as service companies, have less responsibility for
environmental protection than other companies, notably those whose
industrial processes have a direct impact on the environment.
However, this would be to ignore the central role in the economy
that banks have as financial intermediaries. While they may not be
polluters themselves, they will probably have a banking
relationship with some companies that are polluters or could be in
the future.
4. This creates a number of risks for the banks, and raises the
question of how these risks should be identified, measured,
monitored and controlled. This is primarily a matter for bank's
management to deal with, and I hope that today's conference will
help them to do so. But it is also an issue for banking regulators,
particularly with the increased focus on risk-based supervision. In
the case of the HKMA, this is a process whereby we try to assess
the extent to which banks are exposed to various types of risk and
the quality of the systems used for managing these risks. For this
purpose, we have identified eight different types of risk: credit,
market, interest rate, liquidity, operational, legal, reputation
and strategic.
5. Environmental risk straddles a number of these risks. In
particular, it is a sub-set of credit, legal and reputation
risk:
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Credit risk can arise indirectly where
banks are lending to customers whose businesses are adversely
affected by the costs of cleaning up pollution or by changes in
environmental regulations. For example, the costs of meeting new
requirements on emission levels may be sufficient to put some
companies out of business. Banks may also find themselves directly
affected if they find that the value of property that they have
taken as collateral is impaired by contamination.
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Legal risk can take a number of
different forms. Most obviously, banks like other companies are at
risk if they themselves do not comply with relevant environmental
legislation. But more specifically, they are at risk of direct
lender liability for clean-up costs or claims for damages if they
have actually taken possession of contaminated or pollution-causing
property as a result of realising security. There is also the even
more worrying prospect that in some jurisdictions the mere act of
lending to a company or project which causes environmental problems
may lead to the lender incurring some liability for clean-up costs.
Banks may protest, with some justification, that they should not be
forced into the role of "environmental police", but this may carry
little weight in some courts.
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Reputation risk may arise even in the
absence of lender liability, particularly if banks are seen as
associated with large-scale projects that are viewed as socially or
environmentally damaging, such as dam projects. The growth of
globalised protest movements and the use of the internet to
disseminate information have greatly increased the risk that
individual companies will be the subject of concerted campaigns of
public criticism.
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6. These are the risks, but it would also be wrong to ignore the
opportunities that environmental protection can provide for banks
and other financial institutions. Most obviously, the costs of
cleaning up pollution and the need to invest in environmentally
friendly technology imply the need for finance, either from the
banks or the capital markets. Just to take one small example in the
Hong Kong context, the Government's initiative to persuade diesel
taxi owners to switch to LPG taxis creates the chance for the banks
to finance the purchase of the new vehicles. Banks also need to
bear in mind that while there will be losers from the drive to cut
pollution, there will also be winners in the shape of those
companies which can exploit the new technologies to curb
emissions.
7. Another by-product from efforts to combat climate change will
be the growth of emissions trading between companies. Such trading
allows companies that can reduce their carbon emissions below
allotted targets to sell their surplus credits to those companies
that cannot reach their targets. Admittedly, the immediate future
of emissions trading is in some doubt following the Hague
conference, but it still has the potential to become a major
commodity market. If so, there will inevitably be a role for
financial institutions to broker deals between buyers and sellers
of emission credits, and perhaps to take positions themselves.
8. Finally, banks and other financial institutions can profit
from the growing public awareness of environmental issues by
offering "green" investment products.
9. How do banks in Hong Kong measure up in terms of
environmental issues? As an international financial centre, Hong
Kong provides a base for a number of multinational banks that have
developed detailed environmental policies and procedures. In the
case of local and regional banks, I would say that environmental
issues are less highly articulated. This is why I welcome this
conference and the involvement in it of the Hong Kong Association
of Banks.
10. It is not my purpose in this speech to anticipate the more
detailed advice that subsequent speakers are going to offer. But I
would like to offer a few general recommendations that banks should
take into account in dealing with environmental issues.
First, banks should keep themselves informed about
international and regional initiatives on the environment,
particularly those that directly concern financial
institutions.
11. In this connection, I would draw the attention of those
institutions that are not already aware of it to the work of the
United Nations Environment Programme ("UNEP"). This
is the main UN institution that deals with environmental questions.
As part of its work, it has established a Financial Institutions
Initiative on the Environment which is a partnership between UNEP
and leading banking and insurance companies to promote sustainable
development and environmentally sound business practices. The basic
role of the Initiative is to promote the integration of
environmental considerations into all aspects of the financial
sector's operations and services.
12. One of the products of the Initiative is a "Statement by
Financial Institutions on the Environment and Sustainable
Development" (which is appended to this speech). The Statement
includes a commitment by financial institutions to contribute
towards sustainable development, to adopt a precautionary approach
to environmental management and to foster public awareness and
communication of their environmental policies. Over 160
institutions have signed up to the statement, but none I regret
from Hong Kong, except those which have done so by virtue of being
part of international banking groups. I would therefore urge banks
in Hong Kong to consider becoming signatories to the Statement, and
to familiarise themselves with the work of the Initiative more
generally. You will find that the various components of the work of
the Initiative, including annual roundtable meetings, provide much
useful practical guidance to financial institutions on how to
tackle environmental issues.
Secondly, in line with the UNEP Statement referred to
above, banks should consider producing a formal environmental
policy statement and making this publicly available.
13. Such a statement should represent an acknowledgement by the
bank that it must take environmental implications into account in
its business operations, decisions and processes. This should
include its own use of energy and resources and how it interacts
with customers. However, on its own, a policy runs the risk of
becoming a "motherhood" statement. Policies should therefore be
backed up by management structures and systems, specific
objectives, action plans and monitoring procedures to ensure that
concrete results are achieved. Banks should also issue regular
environmental reports that inform the outside world of their
progress in meeting their environmental objectives. This is one
area where the public sector has taken the lead in Hong Kong.
Following the Chief Executive's 1998 Policy Address all Government
bureaux and departments (including the HKMA) are now required to
publish annual reports on their environmental policies and
actions.
Thirdly, banks should where appropriate build environmental
risk assessments into their credit decisions.
14. This follows from my earlier comments about environment and
credit risk. Of course, detailed environmental risk assessment will
not be appropriate in all cases. At its most general, environmental
considerations are simply part of the process of "know your
customer" - in other words, being aware of the nature of his
business and industrial operations, and being alive to the
possibility that that there may be an environmental angle. In
particular cases, however, more detailed assessment and
quantification of the environmental risks will be required. This
will be the case, for example, where land is being taken as
security or where the borrower is involved in a high-risk industry
such as chemicals. Obviously, the larger the bank's exposure, the
more important the environmental risk assessment becomes. Taken to
the extreme, where the bank is involved in the financing of a
large-scale project such as the construction of a power plant, a
full environmental impact assessment should be obtained from a
professional and independent expert.
15. One point that is particularly relevant to banks that
finance companies or projects in countries like China is that the
rules of the environmental game can change very quickly. The
authorities in China are getting serious about cutting emissions
and pollution, as the requirement by the Beijing Municipal
Government on the Shougang Steel Group to cut back its output has
shown. The problem in China is that regulations are not always
strictly enforced. But this can change overnight, resulting in
major compliance problems for the companies concerned and increased
risk for the banks that have lent to them. Hong Kong banks which
lend into China would therefore be well advised to keep this in
mind.
Finally, banks should pay close regard to their own
"corporate ecology".
16. Banks can contribute to environmental protection by the way
in which they manage their use of resources in their own
operations. In this way banks can be responsible corporate citizens
while at the same time reducing business costs. The type of
measures that can be adopted include saving on energy consumption,
recycling of paper, waste management, purchasing environmentally
friendly products and use of video conferencing to cut down on
unnecessary travel. Use of office automation such as email can also
help to reduce the consumption of paper, provided of course that
staff can be encouraged not to print out the messages. The
important aspect of this, as with other areas of environmental
management, is to try to set measurable objectives for green
initiatives, to assign management responsibility for monitoring
performance and to offer staff guidance and training on how to
achieve the desired results. As noted earlier, the progress should
be communicated to the outside world in the bank's environmental
report.
17. I would like to close by expressing my appreciation for
being allowed the opportunity to speak to you today on this
important topic. Doing the research for my speech has certainly
helped to raise my own awareness of the importance of environmental
issues in general and the implications of these for financial
institutions in particular. I hope that you will find this
conference to be useful and informative, and that you will pick up
lessons and advice on environmental issues that you can take back
with you to build into your business operations and decisions. The
need to do this is the keynote of my speech and the main theme of
this conference.
29 November 2000
Hong Kong Monetary Authority
