They were doing this primarily by setting internal greenhouse gas reduction targets, boosting climate-related equity research, and increasing lending and financing for clean energy projects. Most of these positive actions have been conducted over the past 12 to 18 months. Most notable was the fact that the banks have issued almost 100 research reports related to climate change and related investment and regulatory strategies, which demonstrates the importance that the top tier of the industry attaches to this issue. The five highest-scoring banks were HSBC, ABN Amro, Barclays, HBOS and Deutsche Bank, closely followed by Citigroup, Bank of America and the Royal Bank of Scotland.

But it was not all good news. Many banks have done little to elevate climate change as a governance priority. Not so surprising was the fact that no bank has set a policy to avoid investment in carbon-intensive projects such as coal-fired power stations. Banks will always find a way to lend money, even to environmentally sensitive companies, but they can at least ensure any potential fallout from environmental risk is identified and mitigated against.

Another recent report from Oliver Wyman, Climate change: risks and opportunities for global financial services, argues that banks should be putting polices in place now to protect against long-term erosion of value due to climate change and related environmental issues. In the long term, climate change will contribute to an increase in defaults and a decline in asset value in credit portfolios, warns the report, but banks with their risk expertise are well placed to encourage robust risk management controls and take advantage of the investment potential of new carbon and green energy markets, products and services. But they need to prepare for this now.

"Financial services firms should be reviewing the impact of climate change on their portfolios, stress-testing their portfolios against those implications and thinking from a strategic point of view about what the implications might be for the future," says David Knipe, a director at strategy consultants Oliver Wyman and co-author of its report on climate change. "Banks need to think in a much deeper sense about the issue and about how they position their organization, because there will be profound impacts on business lines and some will be more successful than others. In general, banks are advantaged holders of risk, so they should do well from the introduction of increased risk into the fabric of society as a result of climate change."

Although the effects of climate change are multifaceted and for the most part impossible to predict accurately, the report is right to point out that firms need to be looking at the long-term consequences of climate change, specifically in view of their lending practices. Banks will be hit hardest through their investment in other industries more directly affected by climate change. If the credit risk profiles of their borrowers alter as a result of changes to the fundamentals of certain industry sectors, banks need to understand how their overall portfolio risk is changing.

"The biggest impact on banks of environmental risk will be indirect -- it will come through their customers," says Richard Cooper, head of corporate responsibility at Lloyds TSB in London. "That is where you need to do some horizon scanning and think about the effects on different sectors, what legislation might emerge and how that will affect your customers. If you are not up to date and keeping track of that, you are not lending with the benefit of all the information you need."

Environment risk teams were initially set up to protect against direct lender liability, and it is here, and in credit risk, that banks need to focus their attention.