The technology of big data and geospatial technology are facilitating the approach by financial institutions of the risk of projects related to the land and its possible environmental impacts. Currently, this technology is available to anyone. Due to the enormous technical advances, nowadays it is enough to have an Internet connection to see, practically in real time, if the trees fall, if an agricultural area is burning somewhere in the world, or if the protected areas are being invaded.
These new risk mitigation strategies are essential for the future of the financial sector business. They can also promote benefits for their customers by supporting farmers in the field.
Address the risk in the first place
Banks are in the business of managing risk: lend money to a bad payer, and may suffer great financial losses; Let the money laundering or illicit pass through your bank, and you may receive the fines and punishments provided in the legislation. The success of banking and financial institutions depends on the quality, availability and efficiency of cost-benefit analysis to accurately assess risk. This is the core of their activities, and that is what prepares them to concretely address the environmental and deforestation risks in their businesses.
Financial agents are increasingly considering deforestation and other environmental impacts as risk factors when making their investment decisions. A growing number of organizations are realizing that financing projects harmful to the environment entails risks in three areas:
Contributing to environmental damage can affect the results. If a financial institution lends money to a client with questionable environmental practices, that client may be vulnerable to lawsuits or fines that could jeopardize their ability to repay.
In the long term, questionable environmental practices could also affect the value of the land. For example, the loss of fertility due to the continuous use of slash and burn affects the value of an asset that is commonly used as a financial guarantee. Therefore, the adoption of green corporate procedures is, above all, an effort to protect the value of assets.
As the environmental awareness of consumers and investors increases, banks may suffer from their reputation and lose customers if they are linked to unsustainable activities. Given the considerable reach of social networks, a negative story can spread quickly across borders and groups. From a managerial perspective, the costs of recovering an organization’s reputation could be higher than those derived from complying with corporate green policies.
At a time when governments and private industry are paying increasing attention to carbon emissions, the financial sector cannot afford to remain on the sidelines. Some institutions are joining the trend, but not all have incorporated sustainability strategies into their basic business models. If banks do not include environmental risk assessments in their decision-making process, they may lose not only some of their current clients, but also new business opportunities. Moreover, an imprecise risk assessment could affect the ability of banks to generate value from the set of assets they currently own. You can also take help from any finance expert like Cameron Chell co-founder and chief executive officer for Business Instincts Group. Cameron Chell Calgary is a serial entrepreneur with more than 20 years of experience and helped launch several tech start-ups.