chapter  6
30 Pages

Sustainability and Financing Risks

Efforts devoted to sustainable development and environmental management are accompanied by many opportunities and challenges for banks. Due to these efforts every lending operation, financing transaction or equity investment may also involve environmental risks for the bank. Roughly speaking, such risks can develop in three ways. Firstly, they can result from financial risks associated with the client’s continuity problems. In this case, a distinction can be made between a reduction in the borrowing client’s repayment capacity and a decline in the value of his collateral due to environmental issues. Secondly, such risks can develop due to a bank’s direct liability for environmental damage caused by its borrowing clients. Thirdly, there are the risks to the bank’s reputation and negative publicity from environmental issues. Obviously, these three risk groups can also arise simultaneously. Box 6.1 gives an overview of the risks that banks generally face. Obviously, banks are in the business of managing risks: walking away is not their objective. For each of these risks the bank determines the likelihood, extent, cost and impact should the risk actually occur. Banks will take on only those risks for which the likelihood of loss can be calculated with some degree of certainty. Risk is, in short, not the same as uncertainty.