Barclays believes its increasingly robust approach to screening environmental risks surrounding corporate loans is helping customers to improve their regulatory compliance and environmental management programmes. Liesel van Ast from ENDS reports :
‘As environmental risks become more complex, and the extent and timing of hazards more ambiguous, the financial community must increasingly think outside its traditional approach. Impacts may occur over longer timescales and across borders…’
To reduce the exposure of their ever-expanding commercial loans markets, banks are placing more importance on businesses’ ability to manage environmental liabilities. Barclays has become more robust in its environmental screening of clients.
Panel of consultants
Environmental consultants are used to help estimate the nature and likelihood of possible risks. Their advice informs the bank’s decisions on whether to accept, avoid, manage or mitigate risks, or whether to seek insurance cover.
This works well when risks are quantifiable and there is certainty that the future will follow the past. But it is the qualitative nature of many risks that generates ambiguity. Mr Bray says there are few explicit rights or wrongs and the bank relies on “stakeholder interests, as well as technical judgement” to inform analysis of materiality.
Therefore it relies on consultants to provide an opinion on the materiality of impacts rather than just recording observations.
Two consultant panels are used: four consultants tackled contaminated land work in the UK, while 22 consultants deal with global projects.
Consultants are asked to recommend actions to minimise risk and liability. This advice may be made a condition of lending.
Barclays is not positioning itself as an environmental consultant, says Mr Bray, but “if consultants come up with actions or gaps in terms of compliance with regulations, then that’s material and we have to require corrective action by the client.”
“For instance, where bunds are inadequate or above-ground storage does not comply with relevant regulations, putting these things right will be a condition of lending.”
Nonetheless, banks do not necessarily lose out when a business fails. Mr Wright believes that since customers carry the primary risk, “it is in their interest to have environmental risk high up on the agenda.”
Barclays has internal guidance on 32 sectors and industries designated as having high environmental risks, including waste management, forestry and oil and gas. The guidance outlines the potential environmental and social impacts of lending, covering risks, regulation and international best practice.
The bank will soon post this guidance online, following NGO criticisms about lack of transparency.
It works to identify clients’ environmental risks and, rather than decline loans, tries to help reduce their exposure. Environmental consultants are often used to find solutions. Where necessary, loans are made conditional on clients taking measures to reduce risks.
Loan decisions are informed by three risk considerations: direct, dominated by land contamination; indirect, including regulatory impacts and changes; and reputational.