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

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. • 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. 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