I had the good fortune of moderating a panel at the Environmental Bankers Association (EBA) January Conference on the subject of QA/QC of Phase I Environmental Site Assessments and the entire environmental management process during underwriting.
The premise of the panel was to study error in order to make future environmental due diligence better. Senior credit officers are asking the environmental risk managers: How did this REC site slip through the cracks (or did it)? Why are we having to do Phase II Environmental Testing on fully underwritten loans?
Environmental Risk Management
The panel provided tremendous insight into better technique in environmental risk management. My take-aways from the EBA panel discussion were the following:
- Environmental loss (an environmental “mistake” that caused the bank a financial loss of some sort) during this downturn was way lower than previous downturns, but environmental loss is still occurring.
- A lot of environmental loss was attributed to loan where less than a Phase I Environmental Site Assessment was required. Lower-tier products like Records Search and Risk Assessments and other Desktop Environmental reviews (which do have their place in a risk management strategy), let some polluted properties through.
- Consultant errors on Phase I ESAs were generally a small fraction of environmental loss for environmental bankers who spoke—in my opinion these bankers generally maintain higher standards for Phase I ESAs than the average lender.
- The frequency of environmental loss experienced on loans with Phase I ESAs was way higher when the bank accepted a borrower-supplied report!
- Environmental waivers from bank credit staff was a major category for environmental loss. Often the strength of the borrower was the justification for not requiring Phase II Environmental Testing on a site with a Recognized Environmental Condition.
- Environmental Risk Managers struggle at times to get their entire bank to comply with their environmental policy.
During the question and answer secession, Mike Kulka asked if any lenders in the room had sued a consultant that had completed a bad report. No lenders cited an example. The implication of his question was that an occasional lawsuit might force the worst proprietors of Phase I ESAs out of the field. I certainly share Mike’s frustration with having to compete with unregistered and less experienced professionals.
The overall message was that our industry had successfully reduced environmental loss considerably, but that there was plenty of room for improvement. Finally, a sound environmental policy is as important as a good environmental consultant.