Sustainable Lending Guidelines for FIs: IFCs E&S Performance Standards Richard English Principal Specialist, Environmental & Social Development IFC South.

Sustainable Lending Guidelines for FIs:

IFC’s E&S Performance Standards

Richard English

Principal Specialist, Environmental & Social Development

IFC South Asia Region, New Delhi, India

Financing a Sustainable Low Carbon Indian EconomyMumbai, May 13, 2010

Main Topics

• IFC Sustainability Framework & Performance Standards

•Rationale for managing E&S risks

•What is E&S Risk Management System?

•Case examples

IFC & Sustainability – Managing Environment & Social Risks

• Integrate E&S risk management into business processes

For IFC: Sustainability Policy E&S Risk Review and Monitoring Procedures Organization, Responsibilities, Resources, and Training Reporting

For Clients: 8 Performance Standards and 63 Environment, Health and

Safety Guidelines Applies its Standards and Guidelines to all its investments Training, technical assistance, advisory services

PS2

PS3

PS4

PS6

PS5

PS7

PS8

PS

1

Umbrella: PS1: Social and Environmental Assessment & Management Systems

Labour and Working Conditions

Pollution Prevention and Abatement

Community, Health, Safety and Security

Land Acquisition and Involuntary Resettlement

Biodiversity Conservation and Sustainable Resource Management

Indigenous Peoples

Cultural Heritage

PS1: Social & Environmental Assessment and Management Systems

Objectives & Outcomes:

• Identify and assess social and environmental impacts and risks in the project’s area of influence

• Avoid if possible, and minimize adverse impacts on affected communities and the environment

• Promote improved social and environmental performance through the use of management systems

• Ensure affected communities are appropriately engaged

PS 1: Social & Environmental Assessment and Management Systems

PS 2-4: Frequently Used Standards

Applicable in almost all projects

• PS 2: Core labor standards; working conditions; occupational health and safety; supply chain issues

• PS 3: Pollution prevention, resource conservation and energy efficiency; wastes and hazardous materials; green house gases

• PS 4: Safety of communities from project activities that can cause accidents, diseases, emergencies

PS 5-8: Technical Standards

• Less frequently applied

• Avoidance or mitigation of: PS 5: Land acquisition and involuntary

resettlement- whether physical displacement or economic

PS 6: Habitat destruction; management and certification of renewable natural resources (e.g., forests)

PS 7: Impacts on Indigenous Peoples when they are adversely affected by the project

PS 8: Destruction or damage to cultural heritage

E&S Management System and Financial Sector

•A systematic framework to integrate E&S risk considerations into a bank’s business processes

•Bank develops its own system reflecting: Business environment Investment scope and sizes Staff capabilities Risk exposure/Risk appetite Institutional culture

Risks in Banking

• Environmental and social risks present themselves to companies and financial institutions as business risks

• Main types of risk for banks:• Credit risk (default probability; loss given default)• Liability risk• Reputational risk

• Risks present themselves• At the level of single transactions• At the portfolio level

10

Key Social & Environmental Risks Identified by Commercial Banks

11

0

20

22

27

34

37

44

49

68

83

0 10 20 30 40 50 60 70 80 90

Other

Loss of depositors or retail clients

Potential civil or criminal liability for negligence

Reduced access to capital from private financial

institutions/international bond market

Liability for clean up of contaminated

property/collateral

Loss of financing from international financial

institutions

Nonperforming loans/investments/leases

Security (devalued collateral)

Credit risk (defaults, payments rescheduling)

Reputational risk / Negative publicity with customers,

shareholders and the general public

percent

E&S Management System

•There is no one commonly accepted blue print for E&S Management System

•Core elements : Environmental and Social Policy E&S Risk Review and Monitoring

Procedures Organization, Responsibilities, Resources,

and Training Reporting

IFC Requirements for Financial Sector Clients

•Exclusion List

•Local laws and regulations

• Industry EHS Guidelines

•E&S Management System• Initial screening• Categorization• Due diligence• E&S Covenants (including Action Plan)• Monitoring • Reporting

Case Examples

•CGPL – 4000 MW Thermal Power

•Vicat Sagar Cement – 5 mtpa + 60 MW Thermal CPP

•Cairn Energy – Oil field development and pipeline

•Pulp & Paper Producers – Supply chain of 200,000+ farmers