Day 1, Session 5 – ESMS Components,

Case Studies

Managing Environmental and Social Risks For Energy Efficiency and Renewable Energy Investment Projects

in Global emerging and developing markets Training workshop – GCPF FI Partners

Environmental and Social Management System (ESMS) Components - Policy

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Overarching Environmental and Social Policy Statement

Describes Objectives and Principles to achieve sound E&S performance

ESMS Components Policy Endorsement and Sharing

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Policy signed by Company Representative who will ensure

conformance with the Policy

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Policy signed by Company Representative who is responsible for putting Policy into effect - shared with all employees and stakeholders

ESMS Components Procedures / Responsibility Diagrams

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Write procedures: tasks to convert Policy into actions

Create document management system accessible to all

ESMS Components Job Profiles and Work Instructions

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Prepare job profiles to describe required

actions, tasks, duties and responsibilities

Incorporate actions, tasks, duties and responsibilities into employee contracts

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ESMS Components Orientation, Training, Performance Reviews

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5Performance reviews and improvement plans based on assigned responsibilities in procedures and job profiles

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Ongoing employee orientation and training

using procedures and job (position) profiles

ESMS Structure

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Overarching Environmental and Social Policy Statement

Describes Objectives and Principles to achieve sound E&S performance

Policy Signed by Company Manager who is responsible for putting it into effect given to all employees and stakeholders

Create document management system accessible to all

Write procedures: tasks to convert Policy into action

Prepare job profiles to define required Policy actions

Incorporate job responsibilities into employee contracts

Ongoing employee orientation and training

Ultimate Objective/Outcome: Trained employees carry out repeatable processes, tasks and duties to achieve

objectives and principles

Performance reviews and improvement plans based assigned responsibilities

Policy Signed by Company Manager who will ensure conformance with the Policy

ESMS Implementation

Preliminary Designation of E&S Risks and Impacts

Define the Scope of Environmental Assessment Definitive Designation of E&S Risks and Impacts

• Category A Projects• Define baseline environmental and social conditions including stakeholders• Superimpose project on baseline• Define impacts from collocation of project and baseline• Prepare E&S Management Plan to mitigate impacts on baseline and stakeholders

• Category B Projects • Define project, baseline conditions, regulatory requirements, stakeholders• Develop information required to obtain construction/operation permits• Prepare E&S Management Plan to mitigate impacts

• Category C Projects • Construction permits required and little else needed• Transformer dielectric fluids may contain polychlorinated biphenyls (PCBs) • Stakeholder engagement may be required

Post Investment Monitoring & Measurement

IFC Measures Portfolio Health to Focus Required Improvements

▪ Credit Risk Rating▪ >25 years institutional use▪ Portfolio officers and Managers monitor scores and take appropriate actions▪ Early warning of business difficulty and possible default▪ Credit Risk Ratings signal:

▪ Healthy Projects or▪ Projects in difficulties

▪ Environmental and Social Risk Rating (ESRR)▪ >20 years institutional use▪ ESRR Ratings define environmental performance

▪ 1- Excellent – intended performance▪ 3-4 Partly Unsatisfactory or Unsatisfactory

▪ Failure to comply with positive/negative covenants▪ Management Plans and Improvement tasks behind schedule▪ Have stopped reporting

Post Investment Monitoring & Measurement

IFC Environmental and Social Risk Rating (ESRR)

Evaluation of Management, Performance and Communication Factors

▪ ESRR 1 - Excellent (very low risk)

▪ ESRR 2 – Satisfactory

▪ ESRR 3 - Partly Unsatisfactory (high risk)

▪ ESRR 4 - Unsatisfactory (very high risk)

Consequences for Investments with ESRR Ratings of 3 & 4

▪ Appraisal - Disbursements contingent upon completion of milestones

▪ Supervision - No new investment until ESRR status returns to Excellent or Satisfactory

▪ Investment Project Placed on Watch List - increased management scrutiny

▪ Not eligible for Advisory Services assistance or technical support

IFC FI Banks SurveyDirect correlation between E&S Performance & Loan credit risk

Environmental and Social Risk Rating (ESRR)

IFC Credit Risk Rating (CRR)

> 75% loans with ESRR 4 Have a CRR >5

> 97% loans with ESRR 4 Have a CRR >6

IFC FI Banks SurveyDirect correlation between Equity Investments returns and E&S Performance

Environmental and Social Risk Rating (ESRR)

Investment Rate of Return (IRR)

1 very low risk ~8%

2 ~4%

3 -1%

4 very high risk -31%

CASE STUDIES

Environmental Assessment and Management

Legally Obligated to Promote Sustainable Development▪ DBSA’s focus is on institutional capacity

for environmental management

▪ Requires environmental assessment of all investments• Initial Screening

• Site Visits

• Meetings/interviews

• ID Impact mitigation and management

• Environmental Impact Rating

Environmental Impact Appraisal Report▪ Initial Screening

▪ Loan Condiitons

Loan Conditions

▪ Incorporated into the loan agreement

▪ Environmental permits mandatory for funds disursement

▪ Conditions for loan acceleration or cancellation (DBSA Liability)

During and After Investment

▪ Monitoring

▪ Post Investment Evaluation

Development Bank of South Africa (DBSA)

Environmental Policy Framework

International Investments – Apply International (e.g. IFC) E&S Framework

National Investments – Applies South African E&S Framework

DBSA

DBSA

▪ Before Joining EU - portfolio of Eastern European Banks

▪ National Requirements Applied

▪ Diverse Requirements – confusion for borrowers

▪ After Joining EU - applied international standards: IFC and EBRD

▪ RE/EE portfolio projects: reconstruction, renovation, refurbishment of fixed assets to decrease energy consumption, improve energy use efficiency

▪ Risk Assessment Process:

• Subproject review information contained in the client's Loan Application

• Environmental, social, health and safety protection regulations and requirements, audit and other control activities

• Borrower responsible for obtaining licenses and permits in compliance

• Loan Agreement defines EA Management and Action Plans, reporting requirements

▪ Environmental Supervision and Audits, Monitoring and Reporting

UniCredit Bank D.D.

▪ Large portfolio in Eastern Europe

▪ Before 2016 Applied Many Different E&S Standards to Credit Lines

▪ In 2016 Decided to Apply Performance Standards Across the Portfolio

▪ 2012 Performance Standards not applicable to every project

▪ If Category C – PS Not applicable

▪ If <US$5 million – PS Not applicable

▪ If Tenor <5 years – PS Not Applicable

▪ Loan Agreement contains specific project E&S requirements

▪ E&S Yearly Performance Reports in form and substance satisfactory to international financial institutions requesting such reports

Société Générale Serbia

▪ 2016 Developed Environmental and Social Responsibility Procedure

▪ Backbone of Banks’s ESMS - agreement with environmental protection laws

▪ Applied to all credit files regardless of amount or source of funding

▪ Procedure requires

▪ E&S Screening (EBRD/IFC Exclusion Lists) - No further evaluation if project is on exclusion lists – some exceptions

▪ E&S Impact and Risk Evaluation; and E&S Monitoring

▪ Medium and High Risk evaluation

▪ Medium: regulatory compliance check and documentation review

▪ High: regulatory compliance check, due diligence, site visit

▪ E&S opinion and due diligence incorporated into credit file & exec summary

▪ Loan Agreement contains specific project E&S requirements

▪ Post Investment E&S Risk monitoring▪ Client advised of deficiencies and urged to achieve compliance

Société Générale Serbia

Hungary Exim Bank

▪ Environmental and social Assessment Procedure▪ Applied to officially supported export credit insurance ▪ Prescreening and screening; Classification (Categorization) A, B, C▪ Review

▪ A – ESIA, Environmental & Social Questionnaire, Human Rights Impact Assessment where necessary

▪ OECD sensitive sectors and areas▪ B –Environmental & Social Questionnaire and ESIA where necessary

▪ Decision▪ Accepted – subject to conditions (ESMP)▪ Rejected – if implementation does not meet national/international standards

▪ If implementation would result in severe negative E&S Impacts▪ If restoration, mitigation or compensation fail to balance adverse

environmental impacts▪ Monitoring

▪ Occasional tracking of project environmental impacts▪ Customer may be required to submit environmental impacts at regular intervals

Hungary Exim

Land Bank ESMS – Adaptive Management

▪ Focused entirely on Agribusiness and Agribusiness Risks

▪ Habitual client payments after harvest

▪Previous 5 years climate change increased NPLs due to

▪Droughts

▪ Changing agro climatic zones

▪ Clients suffered from reduced crop yields

▪ Couldn‘t make payments

▪Land Bank Response – provide advisory services

▪ Climate scientists and agronomists reconfigured farming techniques

▪ Modified investment constituents e.g. greenhouses, drip fertigation

▪ Advisory for teams converted disaster to improved opportunities

Land Bank ESMS – Adaptive Management

▪ Land Bank ESMS/E&S Risk Management is a constituent of Land Bank Group (LBG) Risk Management

▪ Policy commitments, procedures, tools and internal capacity to assist LBG identify and manage E&S risks from client activities

▪ Each operation/division has custom guidelines integrated in credit policy ▪ Implementation guidleline: screening, categorizaiton, E&S due diligence, monitoring

▪ ESMS constituents ▪ Step 1 - E&S Screening as Low Risk (C); Medium Risk (B) and High Risk (A)▪ Step 2 - E&S Evaluation and Reporting (Credit Appraisal )▪ Step 3 - E&S Risk Approval and Control (Credit Approval)▪ Step 4 - Loan E&S risk monitoring

▪ Client Roles: public consultation; cumulative negative impacts must apply to relevant Minister, third party performance, must notify LBG of changes of nature and scope of projects

▪ LBG compiles Annual E&S Performance Report for Bank‘s Sustainabilty Report

Land Bank

Land Bank