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Report BFA - Bankia 2014 / Risk managementEnvironmental risk

Borrower-related environmental risk

A bank’s activities have a very limited impact on the environment. However, its lending decisions do have a very significant influence. This indirect effect stems from its customers’ production activities and asset investment decisions. Environmental risk management is intended to protect the quality of its assets, monitoring its loan books and controlling what decisions are made regarding investments in the institution’s own financial and tangible assets.

One new area that is covered is climate change, which will add to the mix of banking (credit, operational and business) risks, leading to greater reputational risk as its transactions with customers come under closer scrutiny with regards to their environmental impact.

Environmental risk scale
Very low Low Medium High
No impact Specific impacts close to location Wider impact encompassing several sectors Foreseeable/complex existing and future impacts
Customer demonstrates environmental management competence Customer unable to demonstrate sufficient competence or enviromental management measures required Permanent monitoring measures required
Low-risk business activity as per spanish business activity coding (CNAE) Medium to high-risk business activity as per spanish business activity coding (CNAE) Medium to high-risk business activity as per spanish business activity coding (CNAE)

Environmental risk associated with lending

Borrowers bring with them environmental risk through their business activity. Such risk is inherent in the production process, which may be passed on to the bank as credit risk or reputational risk.

This environmentally-related credit risk relates to:

  • Feasibility of the activity (environmental permits or regulation)
  • Increase in investments in technology or mitigation measures
  • Impact on the business’s cash flows
  • Public or criminal liability for environmental impact, with internal or external insurance
  • Regulatory risk affecting activity or products
  • Impairment of assets pledged as collateral

Environmental risk varies depending on the regulations in each country:

  • In high-income OECD member countries, environmental legislation guarantees a high level of control and transparency.
  • In other countries, it is necessary to determine the environmental and social issues affected by production, and carry out an ad hoc audit thereof. In these cases, it is more appropriate to refer to environmental/social risk.

Environmental rating

In order to management environmental risk, Bankia has implemented a policy for managing environmentally-related credit risk as an environmental rating tool.

This rating tool is intended to provide qualitative information that supports the information obtained from credit ratings.

The environmental rating provides an indication of the environmental impact of a company’s activity and the possible repercussions on credit risk and the feasibility of its own businesses.

A scale is therefore drawn up to reflect the company’s position from an environmental perspective.

The environmental rating tool can be used to individually rate large and medium-sized corporate segments of the loan book (companies with sales of more than 20 million euros, excluding real estate development companies).

Roll-out of this tool has been postponed until 2015 so that it can be brought into line with the institution’s new internal structure resulting from the restructuring and clean-up in 2013 and most of 2014.

Specific criteria are also used to rate large and medium-sized corporates taken as a whole. The result of the assessment shows that 75.3% of borrowers and 62.2% of the value at risk relates to portfolios rated as having low or very low environmental risk. Graph A shows the two corporate segments separately, and provides a breakdown of the percentage of borrowers in each risk bucket.

Graph B looks at the percentage of value at risk in each risk bucket.

A) Distribution of borrowers in each portfolio (%)

B) Distribution of value at risk in each portfolio (%)

These graphs underline the fact that the low and very low risk buckets are the most heavily populated in both segments.

Environmental risk
  Borrowers Value at risk
Risk bucket Number % €Mn %
Very low 370 12.4% 3,028.01 20.7%
Low 1,871 62.9% 6,087.96 41.5%
Medium 639 21.5% 4,380.00 29.9%
High 96 3.2% 1,164.90 7.9%
Total 2,976 100.0% 14,660.87 100.0%

The tool also includes a module for rating investment projects using the scale and methodology of the Equator Principles, which includes certain environmental and social criteria. The tool is currently being redesigned to adapt it to the needs of each business area.

In project finance and specialised lending, environmental impact is assessed, as required under current environmental regulations, by commissioning a report from a technical adviser. Any loans exceeding 1 million euros must be approved by the institution’s governing bodies.

OECD Projects

Portfolio by region

Portfolio by sector

The authorised exposure of the specialised lending portfolio is concentrated (98%) in OECD countries. Companies in these countries are encouraged to follow certain principles and standards of good practice (OECD Guidelines for Multinational Enterprises), aimed at ensuring responsible business conduct in areas such as human rights, anti-corruption, taxation, labour relations, environment and consumer protection.

The institution’s commitment to tackling climate change is also demonstrated by its financing of numerous investment projects related to the renewable energy sector.