Environmental risks in lending
Barclays has a strong and longstanding commitment to managing the environmental and social risks associated with our lending and business relationships.
Our approach and governance
Barclays has a strong and long-standing commitment to managing the environmental and social risks associated with its lending and financing activities. We recognise that the bank’s potential adverse environmental and social impacts are frequently indirect, arising from the provision of financial services to business customers operating in sensitive sectors. We believe that appropriate risk management of these environmental and social impacts is not only the right thing to do, but ensures the longevity of our business and our ability to serve our clients.
Our approach to environmental and social risk management is based on a combination of statements, standards and guidance. This enables us to adopt a robust approach, while maintaining the flexibility to consider potential clients and transactions on their respective merits.
Barclays has a dedicated global Environmental Risk Management team. This team is a part of the central Credit Risk Management function in Group Risk, recognising that environment is a mainstream credit risk issue. Environmental and social risks are required considerations in risk assessment for credit facilities and capital market transactions. Environmental Risk Standard is included in the Wholesale Credit Risk Control Framework. The team reviews any project finance application for more than US$10m, as stipulated by the Equator Principles, and may also review applications below this threshold and any other types of transaction referred to it when these relate to sensitive sectors or regions, or where deemed appropriate.
We recognise the growing importance of climate change as a significant global issue, which has impacts for our business and clients. As well as managing potential risks to our own business, as a financier we have an important role to play in ensuring society’s energy needs are met whilst helping to limit the threat that climate change poses to our planet.
Barclays' approach to environmental credit risk management addresses both direct and indirect risks:
Direct risk can arise when the Bank takes commercial land as collateral. In many jurisdictions, enforcement of a commercial mortgage by the Bank, leading to possession, potentially renders the Bank liable for the costs of remediating a site if deemed by the regulator to be contaminated, including for pre-existing conditions. In the UK, the Group’s approach requires commercial land, if being pledged as collateral, to be subject to a screening mechanism. Assessment of the commercial history of a piece of land and its potential for environmental contamination helps ensure any potential environmental degradation is reflected in the value ascribed to that security.
It also identifies potential liabilities which may be incurred by the Bank, if realisation of the security was to become a possibility. Our panel of property and land valuers use our bespoke environmental screening product, Barclays Siteguard, to assess the commercial history of a piece of land and its potential for contamination, as well as the operational implications of a site’s current or intended commercial use. Where appropriate, cases are then referred to Environmental Risk Management for review. Lending managers also have access to a dedicated intranet which provides comprehensive information and guidance on managing environmental risk factors.
Indirect risk can arise when environmental issues may impact the creditworthiness of the borrower. For instance, incremental costs may be incurred in upgrading a business’s operations to meet emerging environmental regulations or tightening standards. Businesses may also be impacted by changing demand for goods and services and changing supply chain pressures. Environmental considerations affecting our clients can be varied. The Bank has developed a series of environmental risk briefing notes, covering 10 broad industry headings ranging from Agriculture and Fisheries to Oil and Gas, from Mining and Metals to Utilities and Waste Management. These briefing notes are available to all colleagues including business teams and credit risk functions. They outline the nature of environmental and social risks as well as the factors which mitigate those risks.
The growing importance of climate change as a source of indirect risk is increasingly being recognised in policy discussions. Currently, climate risks are assessed at a relationship or transactional level. For example, the potential impacts of climate change on clients’ operations, and the extent to which such impacts are reflected in their business planning assumptions.
Environmental Risk Assessment Process
Barclays has a governance structure in place to facilitate clear dialogue across the business regarding issues of potential environmental and social risk.
There are established lines of communication between Barclays business teams, the credit risk teams, the central Environmental Risk Management team and business level reputation risk committees. Initially, the lending manager will liaise with the credit teams and, if a proposed transaction is judged to have material environmental or social sensitivities, guidance can be obtained from the Environmental Risk Management team. Further escalation to regional risk management committees and to Group-Wide Risk Committee, a sub-committee of the Board Reputation Committee, will be recommended in cases where the sensitivities are likely to remain significant.
Business and credit risk teams receive environmental risk training through presentations and direct engagement with subject specialists.
Our industry-specific risk guidance notes cover more than 50 environmentally and socially sensitive activities across 10 different sectors, which can be found below. We undertake enhanced due diligence for agribusiness, forestry and forest products, infrastructure, oil and gas (conventional and unconventional) power and mining.
This Environmental and Social Risk Briefing covers Agriculture and Fisheries incorporating the harvesting of crops, fruits, vegetables, trees, rearing livestock, and dairy farming. It also covers the operation of Fish Farms and Fish Hatcheries.
This Environmental and Social Risk Briefing (ESRB) covers Chemicals and Pharmaceuticals. Both industries manufacture products that are effectively the basis for almost every other manufacturing activity. It is therefore, a highly complex sector.
This Environmental and Social Risk Briefing covers the Forestry and Logging industry. Forestry is the practice of managing and using, for human benefit, the natural resources that occur on and in association with forested lands.
Infrastructure includes the design, construction, operation and decommissioning of industrial, commercial and residential facilities. These are addressed by this Environmental and Social Risk Briefing (ESRB).
This Environmental and Social Risk Briefing (ESRB) covers the general manufacturing sector. Manufacturing activities comprise the transformation of raw materials into finished goods for sale by means of tools and machinery and include all intermediate processes involving the production or finishing of components parts.
This Environmental and Social Risk Briefing covers Mining and Metals (including Quarrying). Mining is the extraction and development of sub-surface solid resources. Core mining and quarrying products are metals and minerals, precious and semi-precious gemstones, building and road materials and industrial non-metal products.
This Environmental and Social Risk Briefing covers the oil and gas industry from exploration to production to refining to retail. It includes natural and petroleum gas, fuel oils, petrochemicals, lubricants, petroleum and other by-products as well as the emerging market of bio fuels (biodiesel).
This Environmental and Social Risk Briefing (ESRB) covers the power generation industry and includes power stations and the use of fossil fuels, nuclear power and renewable energy sources: such as hydroelectric power, wind farms, geothermal energy, photovoltaics and energy generation from biomass and waste.
This Environmental and Social Risk Briefing (ESRB) covers selected sub-sectors of the Service Industry (i.e. those that can have appreciable environmental and social “footprints”) including industrial health care, telecommunications and tourism. Dry Cleaning has been included in the Chemical and Pharmaceutical ESRB due to the intensive use of chemicals in the process.
This Environmental and Social Risk Briefing (ESRB) covers the following:
- Electricity transmission, distribution and supply;
- Water supply;
- Sewage treatment works;
- Landfill facilities (hazardous and domestic);
- Waste incineration;
- Scrap metal recovery; and
- Waste Transfer Stations.
Electricity generation is addressed in the Power Generation ESRB.
The Equator Principles
Where the Bank is financing infrastructure projects which have potentially adverse environmental impacts the Group’s Client Assessment and Aggregation policy and supporting Environmental Risk Standard will apply. This policy identifies the circumstances in which the Bank requires due diligence to include assessment of specialist environmental reports. These reports will include consideration of a wide range of the project’s potential impacts including on air, water and land quality, on biodiversity issues, on locally affected communities, including any material upstream and downstream impacts, and working conditions together with employee and community health and safety.
Adherence to the Environmental Risk Standard is the mechanism by which Barclays fulfils the requirements of the Equator Principles. These Principles are an internationally recognised framework for environmental due diligence in project finance. Barclays was one of the four banks which collaborated in developing the Principles, ahead of their launch with 10 adopting banks. There are now over 90 banks worldwide which have adopted the Equator Principles (see www.equator-principles.com).
The Equator Principles have established greater consistency and transparency around banks’ requirements for non-financial organisations engaged in project funding transactions. This in turn has prompted such organisations – for example, law firms, construction companies and project sponsors themselves – to consider environmental and social factors in their approaches to these developments.