How Banking Became Green

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The fallout from the subprime crisis permeated -- and traveled across -- all risk types. From the seeds of operational risk failures in underwriting processes, problems migrated to credit and market risk in the collateralized debt market, and ultimately reputations were damaged once the scale of the losses was announced.

The risks posed by environmental issues and climate change are similar in nature. Banks face pressure to reduce their carbon footprints by employing greener operational polices, while lending officers need to consider the credit and market risks associated with investing in environmentally sensitive sectors.

Failure to properly engage in the risk issues around climate change can lead to serious reputational, legal and regulatory problems for firms. Perceptions of risk are broadening, from the traditional silo approach to taking a more enterprise-wide view of a bank's exposure and how different risk types interact and affect one another. The effects of climate change have an impact on all forms of risk in financial services firms. Here, we address the impact on credit and market risk management.

Financial services firms are on the front line of the effects of climate change. Over the past 12 to 18 months this has been realized as green issues remain firmly on the media and political agenda for banks.

Much of the increased attention on environmental risk and how it relates to financial services firms has come from the Equator Principles -- industry guidelines for assessing the environmental risks of project finance initiatives – which were initially drafted in June 2003 and revised in July 2006. "In only four years the Equator Principles moved from having 10 member banks to 55 banks. That is still a tiny proportion of the banking business compared with mainstream syndicated lending, but it has raised awareness of environmental risk in banks, which might have started to look at ways to include different types of screening for environment risk in their lending processes," says Chris Bray, head of environment risk at Barclays in London.

The Forge Group -- a group of UK banks and insurers -- released guidance on climate change for financial services firms in 2007, providing facts about the implications of climate change on the industry and practical advice for different sectors of the organization, including risk management. The United Nations Environment Programme for Financial Institutions Initiative and the British Bankers' Association also have working groups on the issue of climate change and environmental risk. Industry groups such as these can lobby regulators and legislators to ensure that future policy decisions not only address the issues but also present an economically viable solution within which the banks can participate.

The general consensus is that banks need to make sure they have a good understanding of how climate change and other environmental issues affect their businesses. Much of this is only just being thought about by most banks, but some -- unsurprisingly the larger global banks -- are streets ahead.

A recent report, Corporate governance and climate change: the banking sector, by the Ceres investor coalition, analyzed climate change governance practices at 40 of the world's banks. It found that a growing number of European, US and Japanese banks are responding to the risks and opportunities presented by climate change.

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