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

Published by a ��˾��ҹ�� Environment expert

Practice notes

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

Published by a ��˾��ҹ�� Environment expert

Practice notes

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:

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it can reduce the credit-worthiness of a Borrower or guarantor
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it can divert the cashflows on a finance project
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it can negatively affect the value of the lender’s security
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it can create direct liability for the lender (civil, criminal, requirements to remediate or comply with enforcement notices), and
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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 and other consequences that could include:

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fines and/or imprisonment
•
damages under civil actions

Jurisdiction(s):

United Kingdom

Key definition:

Due diligence definition

What does Due diligence mean?

Due diligence means that all reasonable precautions were taken and all due diligence was exercised to avoid the commission of the offence. This requires the defendant to produce evidence of the system and procedures it has devised in an effort to avoid unfair practices.

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