Bringing the environment into bank lending: Implications for environmental reporting

In recent years, it has come to be recognised that banks' lending operations affect, and are affected by, the state of the natural environment. In particular, rising public concern about the state of the natural environment, as reflected in legislation and consumer attitudes, poses risks for the state of a bank's lending portfolio. Even if they are not directly concerned about the environment, banks therefore have an incentive to understand the environmental implications of their lending decisions. This generates a potential demand for environmental information on companies.

This paper reports on empirical research conducted to explore the interface between bank lending and the demand for environmental information. Based on a postal questionnaire survey of banks engaged in corporate lending in the UK, supplemented by a programme of semi-structured interviews, it reports on: the extent to which UK banks incorporate environmental considerations into their corporate lending decisions; the sources of information used by banks when making corporate lending decisions which involve environmental considerations; and lending bankers' views on developments in environmental reporting.

The results indicate, inter alia, the importance that bankers attach to the annual report, notwithstanding its traditional limitations as a source of information on corporate environmental impact, and some desire for extensions to environmental disclosure. However, those desired developments are relatively narrow in scope, mirroring banks' principal interest in protecting their loans, and tend not to extend to more comprehensive forms of environmental disclosure such as might be expected to be found in a separate corporate environmental report.