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Environmental and social risk assessment

We have developed sector-specific risk assessment tools, comprising a series of questions related to a client’s operations and ability to manage environmental and social risks. These tools, known collectively as ESRA, are sector-specific in line with our position statements. They are designed to provide relationship managers and credit officers in our Wholesale Banking business with an adaptable yet simple means of assessing our clients’ E&S and reputational risk performance.

ESRA helps us measure a client’s performance against industry peers, while building a long-term view of their ability and capacity to manage E&S and governance risks and associated challenges. It considers our clients’ track record in complying with relevant laws and regulations along with their E&S management systems, their membership of renowned industry bodies, their media and NGO profile, and their plan and strategy for reducing greenhouse gas emissions.

Streamlining internal processes

In 2010, we updated the ESRA to enhance its user-friendliness and alignment to international regulations, standards and industry-specific requirements. ESRA is integrated into Credit Mate, our system for assessing credit. This keeps an electronic record of appraisal and approvals, ensuring that a client’s E&S profile is reviewed alongside the client’s creditworthiness on an ongoing basis. To highlight our recently published position statement on water, we have added new questions to the checklist, relating to water conservation and pollution. We have also provided Credit Mate with additional checks and balances to ensure that relationship managers complement E&S performance assessments with client conversations or third-party verification.

Besides processes for lending based transactions, we have developed processes tailored to our non-lending Wholesale Banking products. The depth and scope of E&S due diligence varies according to whether we are investing in private equity, providing advisory services in connection with acquisitions or divestitures, or engaged in raising equity capital – through activities such as initial public offerings (IPOs), rights issues and share placings. Nonetheless, our position statements and ESRA tools provide us with a consistent framework for measuring our clients’ performance against our E&S commitments.

Key developments in 2010

In 2010, we continued to streamline our internal governance processes for managing E&S risks. Key achievements included:

  • Enhanced the recording and monitoring of transaction data in relation to clients’ E&S performance to ensure that it is embedded in our Wholesale Banking activities and prepared for audit purposes
  • Developed E&S risk management processes for advisory and equity transactions in addition to lending

Managing E&S risks in SME Banking

In our aspiration to be a responsible financier, we commit to equal standards in Wholesale Banking and Consumer Banking, including Small and Medium-sized Enterprise (SME) Banking. In emerging markets SMEs are an engine for job creation and economic growth. We are currently enhancing our internal processes for identifying and mitigating E&S risk in our SME business. This work will include rolling out our 14 existing position statements to SME customers, and developing ESRA tools specially adapted to SMEs. Smaller companies face a different set of funding and cash flow challenges to global corporations, and often have limited capacity and resources to tackle E&S issues. In addition, we are exploring opportunities for financing green initiatives by SMEs. A research project that we carried out in 2010 showed that many SMEs are keen to invest in order to improve their environmental efficiency and resource use.

Annual Report and Accounts 2010