Banks commit to environmental risk standards

The environmental performance of debtors or invested companies raises a number of potential risks and opportunities for banks.

The Bank of Israel and the Israel Banking Association are joining forces to raise awareness about the importance of assessing environmental risks when banking institutions make lending decisions with the aim of formulating principles for proper environmental risk management. "The Supervisor of Banks, similar to the activities of supervisory institutions in other countries, will determine principles for the management of environmental risks of banking corporations," said Rony Hizkiyahu, Supervisor of Banks at the Bank of Israel. "Environmental risk management processes will be an inseparable part of the overall risk management system of banking corporations to which they will be committed by the banking management standard." In recent years, potential environmental liability has had a growing influence in the banking industry. However, while environmental factors are growing in importance, the systematic use of environmental information throughout the banking industry is still not widespread. Efforts recently have been in Israel to increase the awareness of the financial sector of its role in promoting environmental, social and corporate governance. "The initiative aims to find the most appropriate way to combine the interests of the banks as credit providers on the one hand with their aspiration to contribute to better living standards, the community and to convey green values on the other hand," said Moshe Perel, director of the Association. The environmental performance of current and potential debtors or invested companies raises a number of potential risk and opportunities for banks. Poor environmental practices by banks' clients could have a negative impact on the value of assets and increase the likelihood of fines or legal liability, which in turn could reduce the debtor's ability to make payments to the bank. Relevant issues in this context include the importance of quantifying environmental risks, the price tag of environmental catastrophes and the potential role of banks as gatekeepers with responsibility to the public and clients.