The Role of Private Banks in Promoting Sustainable Development, from outside Counsel's Perspective (1998)

I. INTRODUCTION A lawyer advising a financial institution in any type of financing does not and should not concern himself (unless the client asks him to) with whether the activity being financed will have a beneficial or a deleterious effect on the environment, whether it will be good or bad for the indigenous population, or even whether it is (at least beyond the term of the financing). Rather, the lawyer's role, both in addressing environmental matters and in general, is to identify, assess, and allocate risk. From this perspective, a project with the potential for significant adverse effects on the environment may be no less desirable than one with little or no identified environmental impacts, so long as the risks in the former case can be effectively allocated entirely to the borrower and the borrower's creditworthiness is sufficient to cover those risks. Likewise, the financial institution itself, unless its board of directors or shareholders have instructed otherwise, will necessarily be guided by what will provide the most financial benefit to it, not by what will provide the most benefit (or least detriment) to the environment. Nevertheless, lenders and the lawyers who represent them have, in the past decade, been a major force in promoting sustainable development, especially in the less-developed countries. If environmental due diligence and environmental protections in loan documentation are not the product of some moral imperative, then what does motivate lenders and their counsel to emphasize environmental issues in making, and increasingly in policing, their loans or investments? It is the perception that projects with environmental problems may result, directly or indirectly, in adverse economic consequences for the institution. While most lenders historically perceived this concern as less compelling or even absent in less-developed countries, increasingly they understand that environmental issues may have just as serious implications for them in Amazonia as in Amsterdam. II. REASONS FOR ENVIRONMENTAl, DUE DILIGENCE There are a number of reasons why financial institutions find it good business practice to evaluate environmental risks carefully before making a loan or investment.(1) A. Legal Authority to Construct and Operate the Facility Typically, there will be numerous permits, licenses, and other authorizations, issued by several levels of government authorities, necessary to construct and operate the facility. The lender wants to be sure that all such authorizations have been obtained and, preferably, are no longer subject to judicial challenge. If they have not been obtained, the lender will want to be reasonably certain that there will be no problem obtaining the authorizations before they are legally required for construction or operation. Likewise, the lender wants to know that the facility does or will comply with all applicable environmental laws and implementing regulations. The lender's lawyers or environmental consultants will look carefully to make sure that the authorizations and statutory and regulatory requirements are consistent with the assumptions upon which the financing decisions are based; i.e., that the facility will be able to operate at a rate and in a manner consistent with the financial projections for at least as long as the term of the loan. The lender's concern here is not only that the borrower can build and operate the project as anticipated, but also that, if the developer defaults and the lender has to take control of the facility, the lender or a third party who might wish to purchase the facility can legally complete its construction or continue to operate it. B. Impairment of Borrower's Ability to Repay Even if the facility has legal authorization to operate, it is possible that environmental liabilities could be so great as to impair the borrower's ability to make the payments contemplated in the loan agreement. …