Banking and finance—environmental due diligence and practical ways for lenders to mitigate environmental risks
Banking and finance—environmental due diligence and practical ways for lenders to mitigate environmental risks

The following Environment guidance note provides comprehensive and up to date legal information covering:

  • Banking and finance—environmental due diligence and practical ways for lenders to mitigate environmental risks
  • Why are lenders concerned about environmental risk?
  • What are the issues to consider in due diligence?
  • What are the due diligence questions to consider for specific finance sectors?
  • Real estate finance
  • Project finance
  • Acquisition finance

Why are lenders concerned about environmental risk?

The ever growing number of environmental laws has affected the way that lenders perceive environmental risk and has generally given rise to a more stringent approach.

Lenders are concerned about environmental risk for a number of reasons:

  1. it can reduce the credit-worthiness of a borrower or guarantor

  2. it can divert the cashflows on a project finance

  3. it can negatively affect the value of the lender’s security

  4. it can create direct liability for the lender (civil, criminal, requirements to remediate or comply with enforcement notices), and

  5. there can also be reputational risks in lending to businesses that are seen as being 'dirty', particularly given the trend towards environmental, social and governance (ESG) factors where a range of mechanisms and principles are fomenting responsible business practices

These risks could come about in situations where a borrower or other obligor breaches environmental laws and is faced with sanctions that could include:

  1. fines and/or imprisonment

  2. damages under civil actions

  3. injunctions

  4. clean-up works

  5. costs involved in upgrading operations in compliance with required standards, and

  6. business disruption, closure or restriction

For lenders to properly assess the ability of a borrower to pay back a loan or the value of any guarantee or third party security, they need to, among many other matters, assess the environmental risk profile of that borrower