Risk managers at financial institutions of all sizes rely on the outside expertise of environmental consultants for their environmental due diligence. Yet not all firms are created equal. One of themes raised by lender panels in nine cities at EDR’s fall Due Diligence at Dawn workshops this fall is that the quality of work from one consultant to another can vary widely. EDR Insight’s 3Q12 Benchmark Survey of Financial Institutions included a question to explore which elements of an environmental professional’s service risk managers value more than others. This brief highlights the findings combined with some of the most insightful comments brought to the surface by risk managers across the country at the DDD workshops.
The question was as follows:
We are looking for aggregate survey data on the value lenders place on various aspects of a consultant’s service. On a scale of 1 to 3 (1=not important, 2=somewhat important and 3=very important), indicate the value you place on each of the following.
Based on a weighted average score for each, the accompanying graphic summarizes the findings. At the top of the list sits technical expertise (scoring 2.91) followed by thoroughness of report (2.86). Early communication of environmental issues rounds out the list (2.81). As noted by Ed Morales, VP, Environmental Risk Officer at Sonoma Bank (Walnut Creek, CA), “Communication is critical when conducting due diligence. It provides information and information is money.”
It is important to note that the majority (61 percent) of the survey sample is comprised of smaller community banks that typically do not have environmental staff. These institutions look mainly to outside experts to identify potential environmental issues, interpret findings and, in some cases, provide recommendations. And even at the largest institutions in the country, staffing cuts in risk management divisions mean doing more with less—and a greater reliance on outside environmental professionals to meet due diligence needs as commercial real estate lending begins to ramp up. Also interesting to point out about the findings is that the results showed very little differentiation by bank size, which suggests that the issues that are critical to small community banks are equally valued by their counterparts at the largest institutions in the country.
The lender sector is one of the most price-competitive sectors of the Phase I environmental site assessment market so it was somewhat surprising to see that ‘competitive price’ (2.64) was not among the top three on the list. One explanation may be that many institutions rely on lists of approved vendors and price is often one variable that is already considered in adding a firm as a pre-approved vendor. And while lenders anecdotally share that time pressures can be as intense as cost pressures, ‘fast turnaround time’ ranked sixth on the list. Knowledge of technical issues, particularly at institutions that do not have environmental risk managers on staff, is valued more highly than low price or fast turnaround time.
Reinforcing these findings, below are some of the comments that risk managers at lending institutions shared with EDR Insight during our DDD panels:
- “The findings/conclusions sections are the most important to me. I value most the reports that tie everything together into one complete picture for me.”
- “We’ve got a lot of other parties at my bank looking at reports so it’s become critical that my consultants write Phase I ESA reports in such a way that others at the bank who may not be familiar with the property, or with Phase I terminology, can still understand it and follow the logic.”
- “A perfect Phase I ESA contains true analysis. It does not just present data on a property. It answers the questions I am thinking, lays it out on a platter for me. It minimizes data gaps, and explains those that are unavoidable. It has conclusions that are clearly presented and logically substantiated. In short, it goes the extra mile for me so I can do my job better.”
Asked what advice they would give to environmental professionals on how best to meet the needs of their lender clients, DDD panelists had some valuable advice:
- “Help me manage expectations. I don’t want any surprises in the 11th hour about some environmental risk that’s going to hold up the loan.”
With 2013 now underway, although the economy is technically in recovery, in many ways, risk managers are still mentally stuck in a recession. Despite market improvements, the prevailing mindset is still one of caution and a focus on “What could go wrong with this property?” This sentiment is driving lenders to more risk aversion in commercial real estate lending, and an important role for environmental professionals to play.
NOTE TO READERS: This brief is based on a question posed to lenders in our 3Q12 survey. The survey was open from October 4-17 2012. A total of 176 risk managers from credit union, large national financial institutions, regional banks and community banks from across the country participated.