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.
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.