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.

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 BIS Review 108/2000  2  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.