Environmental Risk Management in Lending and Investment

Supporting Tools. Application. Credit. Appraisal. Credit. Decision. Disbursement. & Monitoring. Environmental. Screening. Environmental. Risk Control.
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International Finance Corporation

Environmental Risk Management in Lending and Investment

Agenda F Introductions F Reality

check: is environment a risk? F Systematic approaches to environmental risk management F Case study F Q&A Discussion

Reality Check F Private

equity VC syndicates F US$20 million capital to invest F Select deals from list of investment opportunities F Who has created investor value?

The Bottom Line…. F Environment

is potentially a significant business issue F There’s an upside as well as a downside F First appearances can be deceptive F Range from simple issues to complex challenges and subtle interactions

Systematic environmental risk management

F What

Do You Do When A Business Customer Asks to Borrow $$$?

Before Customer can Borrow Money ……….You: l l l l l

ASK QUESTIONS REVIEW DOCUMENTS VISIT THE SITE EVALUATE PAST PERFORMANCE ASSESS FUTURE PERFORMANCE

....You Conduct Risk Management Activities

What are the Sources of the Risks You Currently Manage? Manage è

You Manage the Bank’s Exposure to Risks Arising from: •FINANCIAL ISSUES •BUSINESS ISSUES •LEGAL ISSUES •SECURITY ISSUES •MANAGEMENT ISSUES .....Need to add ENVIRONMENTAL ISSUES

Why Add Environmentally Derived Risks? F

F

F

Every business activity has some inherent environmental, health & safety risks If clients don’t properly manage those inherent environmental health & safety risks, risks they can create environmentally derived financial, legal and repuational risks & liabilities for your clients If you don’t manage the bank’s exposure to those risks and liabilities, they can also become financial, legal and reputational risks and liabilities for the bank

FWhat

Determines The Nature and Extent of the Client’s Environmental Risks? Risks

è

The Nature and the Extent of Your Client’s Environmental Risks Are PRIMARILY DETERMINED by the INHERENT ACTIVITY RISKS: FLOW FMEDIUM FHIGH

EXAMPLE OF SECTORAL RISKS: M U I D E M ISK R

FOOD PROCESSING

F

HEALTH IMPACT if product is contaminated

F

High water use creates WASTEWATER issues*

F

High volume of SOLID WASTE for disposal*

F

Potential Nuisance due to ODOUR, ODOUR NOISE

*BUSINESS OPPORTUNITY

EXAMPLE OF SECTORAL RISKS:

H G I H ISK R

PETROCHEMICAL REFINERY

• Risk of EXPLOSIONS and FIRE F Potential for SITE CONTAMINATION F Risk of GROUNDWATER CONTAMINATION F HEALTH Risks from VAPOURS

Environmental Impact Across Sectors POLLUTING or DAMAGING

RELATIVELY CLEAN • Accountancy • Advertising

• Food Processing

• Chemicals

• Health Services

• Cement

• Banking

• Packaging

• Energy

• Insurance

• Pharmaceuticals

• Internet

• Printing

• Forestry • Mining

• Tourism &

• Paper

Services • Other services

Leisure

FWhat

Determines Whether the Client’s Environmental, Health & Safety Risks Become Financial or Legal Liabilities to the Client?

Whether Environmental Risks Become Liabilities for the Client is Determined by the Client’s.... F

Environmental Awareness

F

Environmental Behaviour

F

Resources to Manage Risks

Environmentally-Derived Risks for the Bank F

F F

F F

Inability of the client to make payments due to unexpected environmental costs Over valuation of assets offered for security Decrease in the value of security due to environmental impairment during the t