The following Environment practice note provides comprehensive and up to date legal information covering:
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:
it can reduce the credit-worthiness of a borrower or guarantor
it can divert the cashflows on a project finance
it can negatively affect the value of the lender’s security
it can create direct liability for the lender (civil, criminal, requirements to remediate or comply with enforcement notices), and
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:
fines and/or imprisonment
damages under civil actions
costs involved in upgrading operations in compliance with required standards, and
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 and any obligors by collecting information
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