Social and Environmental Risks Assessment in Banks' Lending Decisions

Purpose - The purpose of this research is to create complex approach for assessment of social and environmental risks, which includes additional phases of lending process for examining social and environmental issues and the model for assessment of social and environmental risks. Design/methodology/approach - In order to achieve the aim of this research, the authors made qualitative analysis of: 1) scientific literature in the area of social and environmental risk assessment; 2) good practice of several banks in Europe; and 3) information about three Latvian commercial banks publicly available from their home pages and banks' internal documentation and procedures. Findings - The authors came to a conclusion that local banks in Latvia, which implement the procedure of social and environmental risk assessment, do it formally, and after the lending decision is taken no further monitoring is performed, as a result the image and reputation of the bank are exposed to the social and environmental risks. In contrast, international banks with branches in other countries strictly monitor both risks. Therefore, for local banks it is important to determine and introduce lending criteria taking into consideration the issues of social and environmental risks and implement further monitoring of risk until the termination of the lending agreement. Research limitations/implications - The amount of publicly available information on procedures of social and environmental risk assessment in local banks is limited. Originality/value - The lending assessment approach developed by the authors will play an important role in lending decision making process in local banks.