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Development Bank of Namibia Head of Risk and Compliance Saima Nimengobe says that by incorporating environmental and social management principles into financing decisions, providers of finance can avoid unnecessary risks and secure their investment outcomes.

The global need for sustainability is widely communicated, says Development Bank of Namibia Head of Risk and Compliance, Saima Nimengobe. The ongoing unfolding of climate change, as well as advocacy for fair social impacts highlight the imperatives that face entrepreneurs, governments and economic planners.

She says however that many pay lip service to the practice of sustainability. This is driven by the vast scope of the need and the collective nature of the responsibility, which enables players to shift responsibility to others who are perceived to be willing to take meaningful action. It is also motivated by the assumption that cutting corners will reduce costs.

The counter to this is to understand the hidden costs and risks that arise from environmental and social management (ESM) avoidance, and factor these into due diligence and governance of financing covenants. Financing which avoids elements of ESM is a risk to the provider of finance as well as the enterprise, says Nimengobe. By refocusing on risk and potential cost, the requirement for ESM adherence can be properly evaluated and understood in operational and accounting terms.

The first point Nimengobe makes is that ESM avoidance has licensing implications. The field of ESM in Namibia is primarily governed by the Environmental Management Act No 7 of 2007 and its regulations and the Labour Act No 11 of 2007 and its regulations. These are augmented by regulations of local authorities.

At the outset, all three make licensing conditional on preliminary adherence, however all provide for withdrawal of licenses and clearance certificates in the event of infractions of ESM conditions. This is the trigger for a sequence of events which could have severe financial implications, Nimengobe points out.

The most obvious implication is a halt to operations. In the case of an enterprise the impact will be felt in loss of revenues. In the case of infrastructure or an economic project, the outcome and revenue streams will be delayed. In both instances returns to the provider of finance will either be delayed or placed in jeopardy.

The immediate impact is also a set of costs that adds to expenditure. Although a fine may be seen as a limited cost for a mature and profitable operation, it may be significant and restrict a new or tenuous operation. In addition to this direct cost, there may be additional legal costs associated with the administration of a legal action and further fines if culpability warrants it. Rehabilitation of environmental and / or social damage becomes a vital further cost. The cost of insurance may also increase. If the fault was in the equipment or processes, corrective measures and potential capital investments will also add to the expense.

In the event of the enterprise or project resuming, it may also face licensing reluctance and rounds of inspections which may further delay resumption of operations.

At a more fundamental level, the enterprise is likely to lose market share. This can take place along the entire value chain. Suppliers may seek other opportunities and partners. Retailers, resellers, customers and consumers may respond negatively. Finally, competitors may step into market gaps further challenging the enterprise.

Nimengobe also notes that enterprises and projects that have been culpable of ESM failures will face reluctance from providers of finance.

Nimengobe advises providers of finance to develop ESM as a formal risk mitigation measure for their own sustainability as well as that of their borrowers, on whom repayment depends. Nimengobe also counsels inspections of enterprises, which might be carried out by a dedicated function in the organisation or by outsourced consultants. This, she says will also be a safeguard against inadvertent gaps in ESM adherence.

By developing strong relationships based on understanding of ESM, Nimengobe concludes, outcomes and projections can be secured for both financiers and borrowers.