By Elizabeth Krol, National Client Director at EBI Consulting
The Environmental Bankers Association (EBA) recently held their annual summer conference. If you missed it, we’ve got you covered!
Among the various discussions, an important theme emerged: finding balance between quality and utility for Phase I Environmental Site Assessments (ESAs). Due to the numerous types of transactions and properties in our industry, the levels of due diligence needed during the purchase or refinancing process vary. Phase I ESA report utility requires working with a trusted advisor who understands your risk tolerance and scales their services to ensure the scope, schedule, and budget fit the bank’s needs.
Thorough and complete Phase I ESAs incorporate the appropriate, deal-specific balance between quality and utility to help financial institutions to assess and mitigate risk and prevent unfortunate outcomes after the loan is extended. Working collaboratively, effective Environmental Professionals (EPs) help lenders protect their interests and mitigate risk within their risk management framework.
ESAs: Quality vs. Utility
During the “Phase I ESA: The Pursuit of Quality” session, high quality and high utility ESAs were defined as:
High Quality: clear, concise reporting that adequately explains environmental risk, meets the client’s expectations, is priced reasonably for the lender and the due diligence provider, and meets or exceeds ASTM standards
High Utility: useful, profitable, and beneficial reporting sufficient to close the deal and protect the bank’s interest
A low quality report may not be thorough or sufficiently detailed enough to protect the bank’s interest and mitigate lender risk. High quality reports may be too expensive for some borrowers, who then provide a lower quality and less expensive report to their lenders.
The bank’s environmental risk management (ERM) team must then review the borrower-provided report to ensure it meets the lending institution’s minimum scope requirements. Often, supplemental research is required, either by the ERM team, a third-party reviewer, and/or the original consultant who produced the report. This increases costs and delays the loan closing.
To balance quality and utility, ideally the due diligence provider collaborates with the lender to define needs and objectives for the Phase I ESA, defining the scope of work, and ensuring adequate time and budget to meet objectives. For example, a quick turnaround time should not negatively impact quality, but may increase price to reflect the additional time needed to expedite creation of the report. The need for a highly detailed report may increase the turnaround time, but won’t necessarily significantly increase costs if the report is prepared by an experienced EP who understands the lender’s scope requirements and objectives.
No two Phase I ESA reports are the same, and customized scopes are often key to meeting the lender’s due diligence needs and ensuring a consultant delivers a report that meets bank objectives.
Another key message from the session included the importance of ongoing communication between lender and consultant, especially for property-specific and/or deal-specific scope considerations.
Because each transaction is unique, the balance between quality and utility may vary. Effective risk management is based on understanding where the balance lies for each loan. Working collaboratively with an EP and trusted advisor, lender ERM teams can access technical resources deployed to meet their internal risk management needs, while successfully supporting loan closing requirements for borrowers.
