At BOQ we recognise our corporate and social responsibility to maintain a lending portfolio comprised of sustainable businesses. To this end we have identified a number of industries that fall outside of our risk appetite, or for which we require additional risk assessments to be completed.
Part of our standard process for managing risk is to consider the economic, environmental and social sustainability of our customers and potential customers. We do this by:
- working closely with our customers to understand their businesses;
- having a clearly expressed and communicated risk appetite in relation to reputational and environmental matters;
- undertaking a comprehensive analysis throughout the credit decision and management process to identify potential issues; and
- having a suite of credit policies and practices that ensure risks and issues are identified.
While reputation and environmental risk can arise from a number of areas, from a lending perspective we focus on:
- the nature and operation of the borrower’s business and income sources;
- the nature and location of the property where the business operates (both leased and owner-occupied property) on which the activity occurs or where security property is located;
- contamination issues arising from land use; and
- potential risk of animal welfare issues.
All lending decisions are referred to a credit decision team who closely evaluate:
- the legislative or regulatory restrictions or controls under which the business must operate;
- compliance with legislation and regulation, both historical and ongoing;
- the potential for liability for environmental issues to be assumed by BOQ at some future date; and
- the sustainability of income sources relied upon to make loan repayments and the sustainability of asset values utilised as security.
Throughout this process we work closely with customers and potential customers to understand how they are able to manage sustainability risks and reduce their impact. We may also engage independent third parties to make assessments on our behalf. Where we have concerns as to the customer’s ability to comply with their legal obligations or determine that our association with the business or industry poses substantial economic or reputation risk, then BOQ will decline to be involved. Final authority for the credit team’s decisions rest with the Executive Credit Committee chaired by our Chief Risk Officer.
Evolving our risk management
We are aware this is an area that is attracting increasing focus from our stakeholders and as a result we have taken a number of steps in recent years:
- we introduced a Conduct and Reputational Risk Framework to outline BOQ’s prudent and proactive approach to managing reputation risk;
- as part of our Lending policies, we also have a Prohibited List of Industries and Activities for which we have no risk appetite; and
- we introduced an Ecological Care and Sustainability Lending Policy, which helps guide our lending decisions and strengthen controls when considering lending in a range of industries that have the potential for environmental and animal welfare impact.
We regularly monitor emerging sustainability concerns and will continue to evolve our risk management and reporting accordingly.
BOQ acknowledges the increased community concern about climate change and the impact that businesses have on the environment they operate in. These impacts arise both directly through physical footprint, resource utilisation and output and indirectly through supply chain and customer support. Climate change is one of the most significant issues that will impact the long term prosperity of our economy, environment and society. We support the goal of governments around the world to limit global warming to less than 2 degrees Celsius (and as close to 1.5 degrees Celsius as possible) above pre-industrial levels and to transition to net zero emissions by 2050 as outlined in the Paris Agreement. As part of the banking industry, we believe we have role to play in assisting the transition to a lower carbon economy, through both the resources we utilise directly and through our financing activities.
The transition to a lower-carbon economy requires significant and, in some cases, disruptive changes across economic sectors and industries. We understand the financial sector must take action now to identify where financial dislocations and sudden losses in asset value may occur. In order to help identify the information needed by stakeholders to appropriately assess and price climate-related risks and opportunities, BOQ’s Risk team conducted a review of its current approach to managing climate-related risk in FY20 and has developed a roadmap and set of recommendations aimed at reducing emissions and achieving carbon neutrality.
Lending to the fossil fuel mining sector
BOQ does not directly fund mining projects and, in 2018, BOQ committed to cease funding equipment directly involved in the extraction of fossil fuels by 2023. As at 31 August 2020, our exposure to this industry decreased to $16.4m. During the year an extension was granted in relation to an existing contract which has pushed the expiration of the contract out to 2024, at which point BOQ’s exposure to fossil fuel extraction will reduce to nil. B
We will continue to support business and consumer loan applicants in regional areas who may be reliant on income from the mining industry, within the context of our group risk appetite. When assessing any new lending, a key element of the lending assessment is the sustainability of income sources to service the debt as well as the value of the borrower’s assets, both of which can be impacted by changes in economic conditions. BOQ will continue to monitor changes in economic conditions, related to climate change and a host of other factors, when determining our appetite for lending across the economy.
In FY19, BOQ Finance established a new Energy Efficient Equipment Finance Program, by joining the Clean Energy Finance Corporation (CEFC) co-financing program. The CEFC is a government entity established to facilitate increased flows of finance into Australian based renewable energy, energy efficiency and low emissions technology. The program will allow BOQ to provide small business owners with competitive finance for eligible equipment.
In addition to the above BOQ aims to make a positive environmental contribution to the communities in which we operate by:
- considering the environment in relevant business decisions;
- improving measurement and reporting of our operational environmental impact via BOQ’s non-financial performance table;
- building out disclosures that align with the Task Force on Climate-related Financial Disclosures’ recommendations; and
- actively managing and improving our sustainability approach by engaging with stakeholders to understand impacts, trends and attitudes relating to climate change.
We are conscious of the industries we support through our lending and this consideration extends to those industries whose business activities involve the treatment, production, breeding, transport or housing of animals.
The World Organisation for Animal Health (OIE) sets the international standard and provides an effective framework for animal welfare management. The OIE is an intergovernmental organisation with the global mandate to improve animal health, animal welfare and veterinary public health. OIE standards have become the de facto international reference for animal welfare in the trade of animals and their products in developed and developing markets. OIE standards act as a guide for the development of assurance programs and it is envisaged that they will be increasingly used as a basis for bilateral agreements between OIE member countries.
We align our practices with the OIE’s five freedoms of animal welfare and their general principals of animal welfare. We encourage all our borrowers to adhere to these standards and this has become part of our business as usual lending practice.