Managing our environmental impact

The new Docklands building in Melbourne, Australia, has been designed with features that encourage sustainable environmental practices, including succulents that act as air purifiers.

In addition to improving the eco-efficiency of our own resource use, we have an important role to play in facilitating sustainable development through our financial activities, business operations and engagement with the community. Our commitment to environmental sustainability is encapsulated in our environmental policy.

• compliance with legislationn reduction in our environmental footprint – through continuous improvement in our operations
• consideration of environmental risk – in our products and services and through provision of socially responsible investment products
• building environmental awareness – among our employees, key stakeholders and through support of community and industry activities
• public reporting and disclosure of our performance
• assurance of our environmental performance and reporting.

The following section outlines our environment-related performance for the 2005 year. The ‘Progress on our promises’ highlighted below provides an update on the promises we made about the environment in our 2004 CSR Report.

Management of our indirect environmental impacts is carried out by relevant business units in consultation with regional and corporate CSR functions. Further detail about how we manage our indirect impacts is outlined in this section of the report.

Our EMC meets every two months and includes CSR representatives from across the Group, as well as Property and Procurement and information technology, and our Australian facilities management contractor. This year the EMC has overseen:

• improvements in our ability to capture and report on environmental performance so that we better understand our environmental footprint
• extension of our environmental procurement policy to our businesses in the UK and New Zealand
• an audit of the alignment of our Environmental Management System (EMS) with ISO 14001 and between the environmental management systems of NAB’s Australian business and its facilities management contractor. This has a particular focus on property management.

• selection, fit-out and operation of buildings (including use of back-up generators, heating, cooling and ventilation)
• maintenance, cleaning, and waste disposal
• selection, operation and maintenance of equipment (electrical)
• travel (by land and air).

In the past year, our UK operations have reduced their greenhouse emissions by approximately 32%. This is the result of energy efficiency initiatives and an increase in quantity of green energy purchased. In 2005 we began purchasing green energy for nine commercial buildings, in addition to that already purchased for all our UK branches. This represents a significant increase in our purchase of green energy in the UK.

In Australia, our energy use has increased by 1.8%. This has accompanied an increase in the building portfolio area of about 14%, and as our energy consumption per m² of property occupied illustrates, we have kept our energy intensity fairly constant. Our occupancy of the Docklands building has helped to achieve this result through the use of energy efficient design and equipment.

Our Australian greenhouse emissions have stayed relatively constant, despite the increase in energy consumption. This is primarily due to a change in the Australian greenhouse co-efficients applied for the purposes of calculating greenhouse emissions and is reflective of a change in the energy mix and efficiency in the electricity grid. We do not currently purchase green energy in Australia. However, we will investigate the opportunity for this in 2006.

This year in New Zealand, we have employed a contractor to help us better manage and monitor our energy use. This has helped us to fully capture all sources of energy use in New Zealand and to identify some sources of stationary energy use that were not included last year. On the basis of this new information, we have restated our 2004 energy figures (please see comments in footnote to Table 14). Moving forward, we now have a sound understanding of our energy use and we will begin to implement a number of energy efficiency initiatives in New Zealand.

In New Zealand, we have seen a large increase (approximately 30%) in total greenhouse emissions, which is primarily due to a switch in base load network supply from gas-fired to coal-fired generation during the year. A 10.2% increase in the quantity of green energy purchased has helped minimise this increase.

In Australia, our estimated water use has remained relatively constant. We are currently unable to obtain metered billing data in New Zealand to allow us to estimate water use. In the majority of New Zealand’s main centres, water is charged on a property-rate basis rather than a user-pays or measured-volume basis.

This year, our water use in the UK has decreased by around 12% due to changes in building water infrastructure such as toilet and tap fittings. In the UK, we have been implementing a program of water meter installation in our Yorkshire and Clydesdale bank sites. This has allowed us to more accurately measure our consumption and to implement water saving measures.

In the UK, the change in our general waste to landfill is primarily due to the sale of the Irish banks. We were unable to remove the contribution of the Irish banks to the 2004 data. Therefore, we are unable to quantify the impact of our waste management activities this year. Paper recycling has remained relatively constant.

In New Zealand, our paper recycling has remained relatively constant.

In Australia, we developed an inventory of ODS and we have estimated that around 7,724 kg of ODS are contained within our cooling and refrigeration equipment. We do not currently have data on recharge volumes to allow us to estimate the potential contribution to greenhouse emissions from this source. However, we are now planning a replacement and phase out program for refrigerant gases with the highest global warming potential. In the UK, we undertook phased replacement of some refrigeration and cooling equipment, which saw the reduction in our use of ozone depleting substances. We also expanded our preventative maintenance program to help early detection of refrigerant gas leaks.

• being a signatory to the United Nations Environment Program Statement for Financial Institutions (UNEP FI) on the Environment and Sustainable Development in 2002. We are active members of three Australasian UNEP-FI working groups including the Operational Environmental Management and Reporting Advisory Committee, the Credit Risk Advisory Committee, and the Asia Pacific Task Force Outreach Group.
• participation in the Carbon Disclosure Project, as both a signatory and respondent (www.cdproject.net ).

In June this year, we held a briefing on climate change and its relevance to the finance sector for IMS, corporate banking, economics and risk management employees. More than 40 employees participated and were addressed by a panel of experts from industry, government and environmental NGOs.

This section provides an overview of some of the activities we conduct that have indirect impacts on the environment.  Further information about how we manage supply chain impacts and our community-based environmental initiatives are listed in the relevant sections of this report.

Managing environmental risk in lending
Our lending and investment policies and processes reflect our corporate principles, changing regulatory requirements, our approach to risk management and our commitment to meeting international benchmarks such as the International Finance Corporation (IFC) and World Bank Safeguard policies when providing project finance in developing countries. We also avoid lending to certain types of industry, such as those who engage in nuclear weapons development, pornography, and testing on animals. All lending transactions across the Group are covered by our environmental credit risk policies.

Our environmental credit risk assessment policies and processes have been in place since 1992 and reflect our commitment to balancing social and environmental impacts and risks with the need for economic development. Our project finance environmental risk policy was reviewed in 2004 against the World Bank and IFC Safeguard policies and is automatically applied if the credit is for specialised project finance transactions. All other general credit applications are screened to see if the environmental credit risk policies should be applied. They are applied if the credit is for a housing development or for a total value greater than $500,000 and involving an industry with potentially high environmental risk, or in cases where a valuer has made adverse comment in regard to an environmental risk.

Key elements of our environmental credit risk assessment process include identification of potentially high environmental risk industries and sites, and where appropriate:

• expert third-party reports and Environmental Impact Assessments (EIA)
• review of a customer’s environmental compliance record
• site visit(s) and assessment of a customer’s environmental management policies and procedures
• assessment of liability transfer risk in regard to environmental issues
• inclusion of covenants in lending contracts with annual reviews
• mandatory notification of breaches against environmental licence conditions
• specific acknowledgment of community concerns and values.

In our corporate and business banking areas we use environmental checklists and questionnaires to assist bankers to assess whether customers meet our environmental credit risk requirements. We monitor customers’ implementation of actions arising from the initial credit risk assessment, particularly loan covenants, through client relationships and through an annual review process.

Making a credit risk decision is not always an easy process. Where societal and regulatory standards change, our approach is to work with our customers to help them meet these standards and to improve their social and environmental performance. For example, we support the adoption of best available proven technology and have provided financing for customers in the energy sector to help them introduce new and less greenhouse intensive technologies for generating power or to use renewable energy sources. Credit and risk managers embedded in corporate and business banking units oversee credit quality and provide training and mentoring of our bankers to ensure they can properly apply the environmental risk policy.

We came to the conclusion that a simple assessment by industry type is not adequate. Simple classification of lending by industry type does not allow recognition of the purpose of the lending. Lending to a traditionally polluting industry for cleaner technologies may actually result in a net environmental benefit, even though the industry may be regarded as having potentially high environmental risk.

Reviewing our lending is a retrospective and manually intensive process. For this reason, we have limited the scope of our reporting on the social and environmental impacts of our lending to our project finance portfolio. In the next year, we will investigate the viability of extending this assessment to report on other areas of our lending. We will also have further discussions with our stakeholders to reach a shared understanding of what constitutes high social or environmental impact and benefit in lending because of the value judgements embedded in these decisions.

Table 15 (below) provides a summary of our current project finance lending portfolio, with commentary showing our assessment of associated potential social and environmental outcomes.

NAB through our wholly owned subsidiary MLC has a ‘manager of managers’ approach in the provision of investment products. The outcome of MLC’s manager of managers’ investment process is an efficiently implemented portfolio which is diversified across asset classes, within asset classes and across investment managers. This approach is based on a number of fundamental investment beliefs, one of which is diversification leads to more consistent outcomes.

• continuing to improve our ability to measure and monitor our environmental performance
• implementing energy, paper and waste reduction initiatives
• investigating opportunities to increase our use of green energy
• investigating the viability of extending assessment of environmental and social impact or benefit to an increased proportion of our lending, and consulting with stakeholders to develop a shared understanding of what this means.