David Carse: Environmental issues and their implications for financial
institutions in Hong Kong
Keynote Speech by Mr David Carse, Deputy Chief Executive of the Hong Kong Monetary Authority,
at the Conference on Environmental Risk Management for Hong Kong Financial Institutions, held in
Hong Kong on 29 November 2000.
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Ladies and gentlemen,
I am pleased to be here to deliver the keynote speech for this conference on Environmental Risk
Management for Hong Kong Financial Institutions.
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.
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.
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 banks' 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.
Environmental risk straddles a number of these risks. In particular, it is a subset of credit, legal and
reputation risk:
• 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.
• 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.
• may arise even in the absence of lender liability, particularly if banks are
Reputation risk
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.
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.
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.
Finally, banks and other financial institutions can profit from the growing public awareness of
environmental issues by offering "green" investment products.
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.
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.
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.
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.
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.
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
largescale project such as the construction of a power plant, a full environmental impact assessment should
be obtained from a professional and independent expert.
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".
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.
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.