Our Approach to the Environment

Environmental governance is provided through our Group Environment Committee (GEC), chaired by the Group Executive – Group Governance & Legal. Membership of the Committee includes senior representatives from key businesses across the Group in Australia, New Zealand, the UK, Asia and the US.

The GEC is responsible for leading management in respect to the three pillars of the Group’s Environmental Agenda. This includes providing oversight in relation to environmental culture (engagement and awareness), integrated environmental governance processes and environmental strategy, risks and performance (which includes consideration of climate change, resource efficiency and natural value strategy, risks and opportunities). The GEC meets on at least a quarterly basis to review progress against key deliverables that form part of our Environmental Agenda.

Management at a regional level reviews performance regularly, usually on a monthly basis.

Environmental reporting is also presented to our:

• Group Risk Return Management Committee – which reviews our environmental risks and approves relevant Group-wide environmental policies;
• Executive Committee CR Council – which provides oversight of our overall CR Agenda and related corporate responsibility matters; and
• Board.

Our carbon neutral commitment in 2007 stimulated significant employee interest and enthusiasm towards creating a more environmentally sustainable workplace, and this remains true today. Through our environmental programs, such as resource efficiency, we aim to involve every employee in our environmental agenda, and we're continually working to increase environmental awareness across our business.

In Australia

We aim to continue to increase employee engagement further through our ever growing Green Action Program (GAP) champion network and Green Team Community. In promoting environmentally sustainable behavior, our voluntary green champions are advocates for our environmental agenda and programs. They also support events like Ride to Work and Earth Hour, and help deliver in-house initiatives such as environmental expos and campaigns including our My PaperCuts challenge and My 20% waste awareness campaign.

We have developed an environmental behaviors online learning module - My Wasteline - to help promote our increased focus on waste reduction. We have also incorporated Environmental and Social Governance risk (ESG) into our internal risk compliance training. To communicate with our people we use a range of channels - for example, our intranet, email updates, Yammer and video, as well as regularly posting environmental updates and news for employees.

Additionally, we monitor employee awareness of, and attitudes to, environmental issues along with workplace behavior change. We do this through employee surveys and participation in our behavior change programs and initiatives. Since 2007, when we made our carbon neutral commitment, our people have become more interested and enthusiastic about making our workplaces more environmentally sustainable.

In September 2012, we surveyed Australian employees and found that 91% knew about NAB’s environmental programs. Up 10 % on the previous year, this is a fantastic result and a testament to success of our employee engagement programs.

NAB recognises that in addition to reducing our own environmental footprint, significant opportunities exist to help our customers address environmental challenges, including transitioning to a lower carbon way of operating, and adapting to, and managing, the risks of climate impacts, natural resource constraints, biodiversity losses and changing environmental policy and regulatory requirements.

We are committed to:

• being a leading financier of renewable energy development;
• building capability in servicing carbon markets; and
• offering new financial products and services with environmental benefit to meet growing consumer demand.

Business opportunities, such as the provision of environmental products and services, are identified and prioritised through the strategic planning process both at the Group and business line level. We have developed a number of new products including:

• energy efficiency financing for commercial buildings in the form of Environmental Upgrade Agreements, an innovative new funding source for environmental retrofits of commercial buildings in collaboration with Low Carbon Australia and Eureka Funds Management;;
• asset finance solutions for energy efficiency products such as LED lighting and solar systems;
• financing forestry developments specifically targeting carbon sequestration in New Zealand.

Our environmental product and advisory teams in Australia and New Zealand provide:

• advisory and financing work around Clean Development Mechanism (CDM) and Carbon Farming Initiative projects; and
• are a leading arranger in the Kauri bond market.

Our Environmental Markets team continues to build carbon market trading capability which currently includes Renewable Energy Certificates, Certified Emission Reduction Units and European Union Allowances. They also assist in the purchase of voluntary carbon offsets for NAB's own offset portfolio. In addition, they participate in a range of other activities to support development of market-based products.

Our Project Finance team is a leading provider of project finance to the renewable energy sector in Australia. During 2012 we provided project finance for an additional 62 MW of renewable energy generation projects, effectively maintaining our level of finance to renewable energy projects. Accounting for projects removed from our project finance portfolio in 2012, this resulted in a marginal net decrease in the design rated megawatt (MW) generation capacity of projects financed – which now totals 2,359 MW globally.

We recognise that we can have a significant indirect impact on the environment through our purchasing decisions.

As part of our approach to corporate responsibility, we're committed to having a positive impact through our purchasing decisions to ensure our business practices are fair and responsible.

• More information on Supply Chain engagement.

We are working to continually improve the way in which we incorporate environmental risk into our risk management framework, policies and processes. The information below outlines a number of ways in which we do this.

• Environmental risk in lending;
• Project Finance and the Equator Principles ; and
• Responsible investment.

Environmental risk in lending

Since 1992, NAB Group has had environmental credit risk assessment policies and processes. These help protect our investment, and are consistent with our broader corporate responsibility objectives to understand and minimise the indirect impacts potentially created by our lending activities.

Our lending and investment policies and processes reflect our beliefs and behaviours, changing regulatory requirements, our approach to risk management and our commitment to meeting voluntary standards, such as the Equator Principles.

Each of our businesses has policies and processes to identify, assess and manage environmental risks in dealing with customers. Among other things, these policies require that each of our businesses is able to:

• identify environmentally sensitive industries¹ ;
• identify relevant environmental legislation and regulatory requirements and assess a customer's compliance with these requirements;
• assess how our customers' manage environmental risks;
• consider the impact of changes in legislation and regulations on a customer's business;
• consider the impact of changes in societal expectations on a customer's business and reputation risk that may be associated with a customer; and
• assess the risk of liability for environmental issues being transferred to the Group entity

1. Environmentally sensitive industries or activities are those that: (1) have capacity to contaminate land, water, air or other natural resources; (2) require a licence or permit to use natural resources, without which they cannot operate; (3) require a licence for emissions and discharges, without which they cannot operate; (4) may incur penalties for environmental reasons; (5) may need to remediate contaminated land or install equipment to treat waste.

Our businesses screen general credit applications to see if the environmental credit policies should be applied. They are applied if the lending has the potential to involve environmental risks due to:

• the nature of the industry in which the borrower is involved;
• the location or nature of the property owned by the borrower - for example, environmentally sensitive sites; and
• an adverse comment made by a valuer in regard to an environmental risk.

Each of our businesses is also required to develop and maintain an environmental risk assessment checklist to guide our bankers through the environmental credit risk assessment process. These checklists are updated as required to reflect changing regulatory requirements and regional operating contexts.

Key elements of our environmental risk assessment include understanding the:

• customer's current operations;
• historical uses of a customer's site;
• customer's environmental practices, management systems and compliance records;
• risk of liability transfer in regard to environmental issues;
• nature of any licences, permissions or consents held by a customer;
• outcomes of any previous site investigations, environmental surveys or audits; and
• community concerns in relation to the customer's operations

Our assessment may also include expert third-party reports, environmental impact assessments, and site visits. This may result in the inclusion of covenants in lending contracts with annual reviews.

It is our policy to encourage customers to establish good environmental management practices and to seek reliable advice on environmental matters. Environmental risks and opportunities are discussed in the normal course of customer-relationship management. Through the use of our policies, bankers are able to better identify and manage risks specific to a particular customer.

Credit and risk managers in corporate and business banking units oversee credit quality and provide on-the-job training to bankers so that they can properly apply the environmental risk policy.

Group level policy also requires that we should avoid lending to certain industry sectors.

For example:

• industries with which our Group, for ethical reasons, does not wish to be associated. Examples include pornography, arms dealing, and testing on animals
• non-government regulated gambling.

Project Finance and the Equator Principles

We signed the Equator Principles in 2007, committing ourselves to a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing.

The Equator Principles are a set of globally recognised, voluntary guidelines to assess and manage social and environmental project financing risk, especially in emerging markets. NAB's project finance activities reside within Wholesale Banking. In Financial Year 2012, project finance accounted for 1.46% of gross loans and advances including acceptances (including loans at fair value).

When we assess project finance opportunities within high-income Organisation for Economic Co-operation and Development (OECD) countries, we evaluate them for compliance with the relevant domestic regulatory requirements. For projects in all other countries, we apply International Finance Corporation (IFC) and World Bank safeguard policies (as a minimum). We apply these policies - regardless of the monetary value of the project - if there are concerns that environmental habitats, Indigenous peoples and community rights may be at risk. Our internal standards require an environmental impact assessment for all projects we finance. In FY12, around 93.5% of our project finance portfolio was in OECD countries.

We apply our specialised finance environmental risk policy to all our project finance deals. The technical review of these deals is managed from Australia.

Our assessment and management of risk in project financing is based on independent expert due diligence, active risk management and continual review of policy specifically applicable to project finance. We have identified a wide range of environmentally sensitive industries which require a higher level of due diligence. Each year, we review the performance of our project finance portfolios' assets. This review may assess actual environmental performance of the financed asset against the contractually required baseline performance. We require our project finance clients to consider environmental compliance risks and we encourage them to consider broader social and environmental risks - and to seek and follow relevant expert advice.

Responsible Investment

As a 'manager of managers', MLC does not select stocks directly; but it researches leading investment managers. An important characteristic of best practice investment managers is the approach they take to assess environmental, social and governance (ESG) issues. MLC believes that sustainable company performance is aligned with strength and leadership in ESG issues. 0.26% of funds under management are in socially responsible investment funds. Full reporting can be found in our Customer Dig Deeper report on our performance and reporting page

We believe that business has a role to play in advocating on environmental issues.

From providing advisory services, information sessions and workshops, to taking part in consultation on policy developments and joining industry initiatives, we are committed to engaging in meaningful dialogue on environmental issues with our employees, customers, government, our industry peers, business and the broader community.

In 2012, we continued to participate in Government and industry consultation processes related to the development of a range of environmental policy. This included consultation processes on the development of carbon policy both at (i) a national level through our participation in the Energy Efficiency Opportunities Program and a number of industry working groups including the Carbon Working Group of the Australian Financial Markets Association and (ii) through interactions with Australian and international climate policy negotiators on climate finance as part of activities undertaken through our membership of the United Nations Environment Programme Finance Initiative (UNEP FI). NAB participated in UNEP FI’s delegation to the United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties in Durban, South Africa.

Industry Initiatives

NAB Group is also a member of global finance sector and industry-led initiatives including:

• Carbon Disclosure Project –Investor, Reporter Services and Supply Chain
• CDP Water Disclosure Project
• United Nations Environment Programme for Finance Initiative (UNEP FI)
• Water Stewardship Australia
• Sustainable Business Network NZ
• New Zealand Business Council for Sustainable Development
• Sustainable Business Australia

We are also signatories to the following initiatives:

• 2ºC Communiqué
• Natural Capital Declaration
• Australian Government’s FluoroCycle Scheme
• United Nations Global Compact
• Equator Principles