Environmental and social risk (E&S risk) is the potential for loss or harm, directly or indirectly, resulting from environmental or social impacts or concerns, including climate change related to BMO, our customers, suppliers or clients, and our impact on the environment and society. Environmental and social factors may give rise to the risk of both direct and indirect impacts over both the short and long term, including but not limited to:

• Climate change
• Pollution and waste
• Energy, water and other resource usage
• Biodiversity and land use
• Human rights
• Diversity, equity and inclusion
• Labour standards
• Community health, safety and security
• Land acquisition and involuntary resettlement
• Indigenous peoples’ rights and consultation
• Cultural heritage.

We may indirectly be exposed to financial loss or reputational harm if our customers, suppliers or clients are affected by E&S risk. Our approach to managing environmental and social risk is part of our Enterprise-wide Risk Management Framework.

The Enterprise Risk and Portfolio Management and Sustainability teams work with the lines of business and Corporate Services to manage BMO’s E&S risk and achieve our sustainability goals. This includes integrating E&S risk into our operational and business decision-making processes, including financing and lending activities, procurement of goods and services. We regularly report to various management committees, forums and Board committees on key developments in sustainability and climate change.

Corporate Audit independently evaluates the quality and effectiveness of internal control, risk management and governance systems and processes within BMO using a dynamic, risk-based plan. Audit results are reported to management regularly. Each quarter the Chief Auditor reports results to the Audit and Conduct Review Committee together with key themes, trends and views of matters of high criticality to the bank.

BMO integrates environmental, social and governance (ESG) considerations into decision-making and activities relating to financing and lending. We have sector-specific financing guidelines to help us identify environmental and social issues in higher risk sectors, which require enhanced due diligence, escalations and exception processes.

Our Environmental and Social Risk Financing Guideline provides overall direction for identifying, assessing and managing E&S risk in the context of credit risk decision-making processes. Our Enterprise and Credit Risk Management Frameworks outline our governance and accountabilities, enhanced due diligence, escalations and exceptions processes. We have sector-specific financing guidelines to help us identify and manage E&S risks in higher risk sectors and determine how to factor these risks into our decision-making. Social and environmental requirements in transaction agreements are monitored by the lines of business as part of our overall monitoring process.

Higher risk sectors and activities are subject to enhanced due diligence, escalations and exception processes. Transactions with significant environmental or social concerns may be escalated to BMO’s Reputation Risk Management Committee for consideration. Restrictions are in place for lending to companies involved in the sale of firearms and ammunition or weapons banned by existing international arms control treaties or involving international transfer of military or civilian equipment for military or internal security purposes and business activity affecting UNESCO World Heritage Sites or High Conservation Value Forests. It is the bank’s intention to avoid direct financing for any project or transaction that involves exploration or development in the Arctic National Wildlife Refuge (ANWR). In 2021, we introduced a Statement on Coal Lending that describes our approach to extending credit for transactions that involve thermal coal through BMO’s Commercial Banking and Corporate Banking lines of business.

We track and report on our lending to carbon-related assets and are implementing the processes for financed emissions quantification and target setting established by the Partnership for Carbon Accounting Financials (PCAF) and the Net-Zero Banking Alliance (NZBA), and also track and report on transactions within the scope of the Equator Principles.