The Role of Environmental Risk Management in the Credit Process
Robbins, Lorne, Bisset, Douglas M., Journal of Commercial Lending
It may not have been the lawmakers' intent, but the passage of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) has brought new meaning to the term risk management as far as bank credit officers are concerned. With threats of massive cleanup costs hovering over loan proposals and the vulnerability of businesses to environmental issues converting sound companies to highrisk prospects overnight, banks are spending more and more time training lending personnel on the hows and whys of factoring CERCLA-related subjects into their credit analyses.
Legislators, regulators, and judges have sent the business community a very clear message: This is the only planet we occupy. The net covering those responsible for protecting the planet has been widened, as has the scope of liability for cleanup costs when damage has been determined. And this responsibility extends beyond those who actually caused the environmental damage.
As property owners and as financial advisors to customers, banks are clearly at the top of the list of those to whom others look when billing for environmental repairs. The fact that the cost of environmental repairs can exceed the amount of a loan--sometimes many times over--is justification for establishing internal alarms to monitor risk. The prospect of state or federal government imposing fines as added punishments is another consideration. In addition, there is always the likelihood of more onerous regulations and penalties.
Equally pertinent, banks and other financial institutions face these environmental risks not only as lenders, property owners, managers, and tenants but also indirectly through their agents, receivers, or trustees.
These realities--plus the uncertainty generated by such court cases as Kelley v. EPA (1994), U.S. v. McLamb (1993), U.S. v. Fleet Factors Corp. (1990), U.S. v. Burns (1988), and U.S. v. Cauffman (1984)--create a serious challenge for all those involved in credit and fiduciary decisions.
Financial considerations aside, what can be done to ensure that the customer and the bank are not at risk from an environmental point of view? And how permanent are court decisions and congressional actions that alternately raise and dash bankers' hopes for relief?
From an internal point of view, an equally critical question is, How skilled are a bank's personnel at identifying environmental risk when analyzing a proposed financial arrangement? Even more important, how can financial institutions help their employees acquire the necessary skills to assess environmental risk, and how can a culture be established that commits all personnel to protecting the planet, the borrower, and the financial institution against environmental risk?
An integral part of the answer to these questions has to be the formation of an environmental policy, the principles of which are communicated throughout the organization. See the sidebar for Canadian Imperial Bank of Commerce's environmental policy.
A Policy Statement of the Board of Dorectors of Canadian Imperial Bank of
Canadian Imperial Bank of Commerce is committed to responsible conduct in all its activities to:
1. Protect and conserve the environment.
2. Safeguard the interests of the corporation, its employees,
customers, and shareholders from unacceptable levels of
3. Support the principles of sustainable development.
To this end, Canadian Imperial Bank of Commerce will:
Meet or exceed all environmental standards, regulations, and legal requirements applicable to its operations and to the health and safety of its employees, and where no regulations exist, set its own standards.
Minimize any environmental impact of its operations by incorporating the concept of sustainable development and following sound environmental practices in design, planning, maintenance, purchasing, and management. …