Environmental risk - a banking industry perspective

The Environmental Bankers Association of Australia (EBAA) provides information on risk management, sustainable product finance, community responsibility and due diligence to its members. CEO of EBAA Grant Scott* provides us with an insight into managing environmental risk from a banking perspective.

There is definitely a heightened awareness and more professional approach to environment risk and ethical investments in the banking industry in Australia, especially with the big four. Mainly stemming from commercial factors (such as stricter regulatory enforcement, tighter margins and profit potential) there is also an emerging need for a moral oversight relative to the asset being funded by the bank.

In a recent example, a bank was put through the ringer for providing funding to a new coalmine. It is hard to argue that investing in a new coalmine is a ‘clean’ investment; however, part of the EBAA’s function is to develop discussion at the base foundation and look at what processes could be put into place to minimise the impact on the environment and what management systems and controls could be put in place relative to the life cycle of the mine and future closure plans for the site. Rather than rule out the investment based on the perception of environmental risk, we provide information and guidance on what could be done to improve this risk to determine the real environmental risk.

One of the research projects we are currently working on is looking at legacy or orphaned sites at various locations across Australia in order to determine the environmental risks associated with the banks taking on some of these sites with developers. Judging by some of the comments made by the EPA regulators at our first EBAA roundtable (which was held in November 2012), there are a large number of legacy or abandoned sites across Australia in need of development.

This is an area which is ripe for commercial development and this got us thinking how we might be able bring the regulators, banks and developers together to realise some real value out of these sites. We are hoping to work together with the banks and regulators to prioritise a list of abandoned sites to determine which have the most development value and what are the real contamination risks in order to develop a model on how to assess the real environmental risks of these sites and how we can facilitate working with the regulators to manage these risks.

When it comes to environmental risk, it’s sometimes about separating the wheat from the chaff - what are the real risks and what is just a perception of risk? A lot of the issues out there on these contaminated or legacy sites are one of perspectives because there is often a misperception of the real risk involved in the development of these sites. These sites tend to get stuck on a council corner - it’s an old site that’s been fenced off for ages and in the end no one knows why it’s fenced off and vacant. We want to try and jump-start some of these developments by getting a true picture of what is actually required.

In some respects it’s the certainty of what you need to do on that site to improve environmental risk that provides you with an understanding on whether development of the site is going to be commercial or not. There is a lot of uncertainty out there but what we want to do is get the banks and regulators together so that there is a certainty in the process. Once the certainty is known, you can work the situation to make it commercially viable and determine what you can and can’t develop.

*Grant Scott is founding Director of the EBAA, a chapter of the EBA (Environmental Bankers Association). He is an Australian Lawyer and Certified Practising Engineer with expertise in the environmental management, petroleum engineering, earth sciences and natural resources sectors; providing the benefit of unique professional experience in both industry and consulting, with his practical, commercial, technical and legal understanding.