HSBC 2006 Annual Report Download - page 229

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• hedging strategies to address inflation and the
interest rate risk inherent within the schemes.
In order to mitigate the risk of investments
under-performing and the adverse effect of changes
in long-term interest rates and inflation, the Trustee
has agreed to a programme of initiatives including
changing the asset mix and entering into long-term
interest rate and inflation swaps.
Reputational risk management
(Unaudited)
HSBC regularly updates its policies and procedures
for safeguarding against reputational and operational
risks. This is an evolutionary process which takes
account of The Association of British Insurers’
guidance on best practice when responding to
environmental, social and governance (‘ESG’) risks.
The safeguarding of HSBC’s reputation is of
paramount importance to its continued prosperity
and is the responsibility of every member of staff.
HSBC has always aspired to the highest standards of
conduct and, as a matter of routine, takes account of
reputational risks to its business. Reputational risks
can arise from ESG issues or as a consequence of
operational risk events. As a banking group, HSBC’s
good reputation depends upon the way in which it
conducts its business, but it can also be affected by
the way in which clients, to whom it provides
financial services, conduct themselves. The training
of Directors on appointment includes reputational
matters.
Reputational risks, including ESG matters, are
considered and assessed by the Board, the Group
Management Board, the Risk Management Meeting,
subsidiary company boards, board committees
and/or senior management during the formulation of
policy and the establishment of HSBC standards.
Standards on all major aspects of business are set for
HSBC and for individual subsidiaries, businesses
and functions. These policies, which form an integral
part of the internal control systems, are
communicated through manuals and statements of
policy and are promulgated through internal
communications and training. The policies cover
ESG issues and set out operational procedures in all
areas of reputational risk, including money
laundering deterrence, environmental impact, anti-
corruption measures and employee relations. The
policy manuals address risk issues in detail and co-
operation between Head Office departments and
businesses is required to ensure a strong adherence
to HSBC’s risk management system and its
corporate responsibility practices.
Internal controls are an integral part of how
HSBC conducts its business. HSBC’s manuals and
statements of policy are the foundation of these
internal controls. There is a strong process in place
to ensure controls operate effectively. Any
significant failings are reported through the control
mechanisms, internal audit and compliance functions
to subsidiary company audit committees and to the
Group Audit Committee, which keeps under review
the effectiveness of the system of internal controls
and reports regularly to HSBC Holdings’ Board. In
addition, all HSBC businesses and major functions
are required to review their control procedures and to
make regular reports about any losses arising from
operational risks.
Sustainability risk management
(Unaudited)
Sustainability risks arise from the provision of
financial services to companies or projects which run
counter to the needs of sustainable development; in
effect this risk arises when the environmental and
social effects outweigh economic benefits. Within
Group Head Office, a separate function, Group
Sustainable Development, is mandated to manage
these risks globally. Its risk management
responsibilities include:
• formulating sustainability risk policies. This
includes oversight of HSBC’s Sustainability
Risk Standards, management of the Equator
Principles for project finance lending, and
sector-based sustainability policies covering
those sectors with high environmental or social
impacts (forestry, freshwater infrastructure,
chemicals, energy, mining and metals, and
defence-related lending);
• undertaking an independent review of
transactions where sustainability risks are
assessed to be high, and supporting HSBC’s
operating companies to assess similar risks of a
lower magnitude;
• building and implementing systems-based
processes to ensure consistent application of
policies, reduce the costs of sustainability risk
reviews and capture management information to
measure and report on the effect of HSBC’s
lending and investment activities on sustainable
development; and
• providing training and capacity building within
HSBC’s operating companies to ensure
sustainability risks are identified and mitigated
on a consistent basis and to either HSBC’s own
standards, or international standards or local
regulations, whichever the higher.