Summary
- Environmental pollution above Tier 1 guidelines makes asset transfers nearly impossible.
- IoT sensors like SoilSense help create retroactive and proactive solutions to pollution.
- Continuous, robust pollution monitoring is another tool in the financier’s toolkit to make assessing, pricing, and incorporating risk into contracts easier and the planet safer.
Environmental Risks Too Often Ignored by Finance
A key aspect of the financing and insurance industry is the need to assess and price risk for each contract. The industry has a long history of pricing environmental risks, such as flooding, tornados, and fires (oh my!) into its financing strategy. However, the industry’s approach to environmental quality risks is rarely proactive and usually reactive. A typical example would be during asset transfer. If a Phase I and a short form Phase II indicate environmental pollution above Tier 1 guidelines, it can be difficult, if not impossible, to acquire financing associated with that asset transfer.
For the property owner, this can be ruinous. Take the following case study. A rented building and land are valued at $4.6M. Previous tenants had impacted the land with hydrocarbons and the plume now sits below the building. The owner attempted to sell the building, but even at $3M, was unable to find a buyer because financing was not available. Financing was not available because the environmental liability was estimated at $8.5M. So not only is the property not liquid, but it actually represents a $3.9M liability to the owners.
Smart sensors, such as SoilSense, can help in two ways with this situation.
1. Retroactive responses to pollution
IoT sensors like SoilSense, linked to AI software analytics, can provide an ongoing assessment of how quickly natural processes are depleting hydrocarbons and if the hydrocarbon plume is migrating. Rather than a single snapshot (i.e., Phase II), which will cost the owner approximately $70,000 and provides no ability to predict future liability. SoilSense sensors allow the owner to assess, track, and predict liability continuously at a fraction of the cost. After a period of monitoring, the owner can once again approach lenders with a clear and compelling story of how their site is improving over time, and how environmental liability is decreasing in a clear predictable trend. In so doing, the financing team can enter a futures contract in which the decreasing environmental liability is priced into the financial contract.
2. Proactive responses to pollution
Financing is secured against assets like land and (sometimes) high quality commercial property. Financial teams will routinely lend 50% of land value and up to 80% of building value to owners and operators. The bank and financial team assume the land and the building will retain their value over the lifetime of the financing. But if pollution occurs on that land, the collateral has dramatically lost its value. Take the example above. If the original land and building had not been polluted, a reasonable financing option would have been to borrow $3M off the land and building, using the land and building as collateral. However, if the tenant polluted the land. Then, the bank effectively has no collateral (remember the polluted land and building have a negative value of $3.9M). The owner has no value either and an illiquid asset. Imagine instead if the owner and bank had insisted on SoilSense sensors. SoilSense sensors can detect hydrocarbon or organochlorine pollution within 30 minutes of release. An immediate response would not only protect the owner and bank investments, but also would help to protect the planet.
Smart Capital Needs Smart Sensors
The financing industry has developed tools to assess, price, and incorporate risk into contracts. These tools are a cornerstone of how the financial industry stimulates economic activity. IoT sensors and their data analytics can provide those teams with timely, continuous information of environmental performance across their insurance and financial portfolios. These sensors will allow smart capital to deploy more capital that will help secure our common future.