Day 1, Session 2 – Overview of E&S Risk Management

Principles

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

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

2

Risk Management

▪ Risk is the effect of uncertainty on objectives▪ Risk is the chance that there will be a +/- deviation from the objective

you expect to achieve

ISO 31000

▪ Risk Management▪ Systematic application of

policies, procedures, and practices to

▪ Identify, assess, evaluate, treat, and monitor risk

▪ Continuous Improvement

E&S Risks for Financial Institutions ?

Type of Risk Impacts

Credit Risk = Client is not able to repay the loan

on account of social and environmental issues

▪ Escalation of project costs (e.g. delays, additional investments)

▪ Fines/penalties due to non-compliance with E&S national requirements (OHS, emissions/discharge permits)

▪ Loss of production capacity (e.g. closure of business) ▪ Poor efficiency leading to low competitiveness/low sales ▪ Increased insurance costs

Liability Risk = FI faces legal complications, fees,

and/or fines to correct environmental and social damage by taking possession of collateral

▪ Obtaining ownership of contaminated collateral ▪ Direct liability in the case of strict lender liability ▪ Class action suits if made responsible for negative impacts

Reputational Risk = Negative aspects of a

project harm a financial institution's image in the

media, with the public, in the business and

financial community, and even with their own staff

▪ Public name/shame campaigns ▪ Media coverage▪ Local resistance /consumer campaigns ▪ Governmental investigations ▪ NFO/CSO Campaigns (e.g. Citibank 2000-2004)

E&S Risks for Financial Institutions = Business Risks

▪ Equator Principles Banks - 90 Financial Institutions

▪ Global benchmark assessing and managing environmental and social risk in bank financed projects

▪ ESMS - Policy, Exclusion List, IFC Performance Standards

▪ European Development Finance Institutions (EDFI) - 15 member institutions ▪ Principles for Responsible Finance

▪ ESMS - E&S Policy, Harmonized Exclusion List, IFC Performance Standards

• World Bank Group (IBRD, IFC. IDA, MIGA)

▪ ESMS - E&S Policy, Exclusion Lists, Safeguards, IFC Performance Standards, EHS Guidelines

Global Lenders’ E&S Requirements Define and Mitigate E&S Risk

▪ Environmental Assessment (EA): judgment of +/- environmental/social consequences for a proposed energy project

▪ Limited impacts – (energy efficiency) documented compliance with regulations to obtain approval to construct/operate

▪ Medium (solar, wind, river run hydro, photovoltaic, biogas) EA and Management Plan to obtain approval to construct/operate

▪ High – Baseline, EA and Management Plan, local/national approvals, E&S license too operate

▪ EA Outcome = E&S Management Plan (ESMP) – required tasks to eliminate/reduce defined impacts

▪ Incorporate ESMP into loan contracts

▪ Ensure clarity of content: Task description, Indicator of completion, required completion date

National Lenders’ E&S RequirementsDefine and Mitigate E&S Risk

7

What is it?

▪ Framework integrating environmental and social risk management into FI’s business processes

▪ Actions and procedures implemented concurrently with the FI’s risk management procedures

▪ Mandatory environmental and social due diligence prior to loan and during supervision for the term of the loan agreement

▪ Loan agreements contain covenantsrequiring project compliance with FI’s environmental and social requirements

Manage Risk Through An

Environmental & Social Management System

What does it do?

▪ Ensures that the FI’s activities are in compliance with its environmental and social standards

▪ A ESMS helps the FI to avoid or manage loans with potential environmental and social risks

▪ Processes and practices to implement your policies (business objectives)

▪ The management system helps to identify, assess and control risks and impacts

▪ Repeatable processes and continuous improvement to identify and mitigate E&S risks and impacts

▪ Deming Cycle: recognized methodology to identify and correct E&S risks▪ Foundation of all management systems

Environmental and Social Management System (ESMS)

▪ Policy▪ Exclusion list▪ Procedures▪ Employee training

• Screen• Categorize • Conduct EA• ID stakeholders• Prepare E&S

Management Plan

▪ Monitor project performance

▪ ESMP Compliance▪ OHS performance▪ Stakeholder

interaction

▪ Implement remedial measures

▪ Encourage client to complete ESMP

Repeatable Processes to Identify and Eliminate E&S Impacts

Stakeholder Identification and Engagement

▪ Investments may impact many people and organizations

▪ People and organizations are your stakeholders

▪ Stakeholders have an economic or emotional interest in your financial, environmental and social performance

▪ Identification, acknowledgement and management required

▪ ESMS Function!

Stakeholder Mapping, Identification and Analysis

E&S Management System StructureUltimate Objective

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2

3

4

5

Overarching Environmental and Social Policy Statement

Describes Objectives and Principles to achieve sound E&S performance

Signed by Company Representative who is responsible for putting it into effect - shared with 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 responsibilities into employee contracts

Ongoing employee orientation and training

Ultimate Objective/Outcome: Trained employees carrying out required actions, tasks, duties and responsibilities to

achieve objectives and principles

Performance reviews and improvement plans based assigned responsibilities

Signed by Company Representative who will ensure conformance with the Policy

How to institutionalize E&S Risk Management

Does Sustainability (risk management) Pay Dividends?

▪ 90% of studies looking at the cost of capital indicated that sound sustainability standards reducedcompanies cost of capital

▪ 88% of studies found that robust ESG practices boosted firms’ operational performance

▪ 80% of the studies indicated that good sustainability practices had a positive impact on the performance of companies’ stock prices

Source: University of Oxford and Arabesque Partners 2015. From the stockholder to stakeholder: How sustainability can drive financial outperformance”, p. 9

Harvard Business School Evaluation of 180 Companies

Integrating E&S Risk Management - Benefits

Integrating ESG into investment decisions yields greater accounting performance

Better ESG performance => superior risk adjusted returns

ESG is increasingly a strong decision factor for investors, regulators, and asset

managers