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.