Recent events like the massive Deepwater Horizon oil spill demonstrate the critical importance of adequately managing the risk of an environmental loss. For certain organizations, such exposure is obvious; for others it is less so. Financial institutions (FIs), in particular, often do not fully understand the extent of environmental risk they face as a result of their real estate holdings, investments, lending, and trading activities. 

A number of emerging environmental issues should be top of mind for FI risk managers:

• Lending activities. The recent financial downturn has exposed FIs to considerable risk through growing portfolios of foreclosed properties that can include environmental risks.  Absence of adequate due diligence or “active” management can expose FIs to operator liability and foreclosed assets can become difficult or impossible to dispose of due to environmental stigma.

• Corporate assets. Corporate assets, including owned real estate, also can expose FIs to environmental risk. Issues such as water intrusion, mold, legionella, and historic contamination can quickly escalate into material costs.

• Investment activities. Exposures related to investment activities are of particular concern to FI risk managers. These “passive” investments can pose significant risk.  Environmental damage from these operations can directly impact FIs in certain industries where non-operating owners contractually share with the reward and the risk.  In addition, “passive” investors can still be subject to third party mass tort actions related to pollution events.

• Trading activities. Companies involved in commodity trading can be considered “owners” which can bring them into the chain of environmental liability under environmental regulations or from third parties.

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