Financing a Sustainable Low Carbon Indian Economy Sustainable Lending Guidelines for FIs: IFC’s E&S Performance Standards Financing a Sustainable Low Carbon Indian Economy Mumbai, May 13, 2010 Richard English Principal Specialist, Environmental & Social Development IFC South Asia Region, New Delhi, India

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 Equator Principles By Jan 2010, adopted by 70 Equator Principles financial institutions (EPFIs) 17 EPFIs in emerging markets Over 70% of project financing in emerging markets and over 85% of global project financing in accordance with Equator Principles (Source: Infrastructure Journal, July 2008)

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 PS3 PS4 PS 1 PS5 PS6 PS7 PS8

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 This slide sums up IFC’s approach to sustainable private sector development

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  8

9 Agribusiness 265m 4% Manufacturing 1,915m 28% Health and Education 197m 3% Financial Markets 1,212m 18% Private Equity and Investment Funds 405m 6% Infrastructure 1,558m 23% Information and Comm. Technologies 304m 4% Oil, Gas and Chemicals 900m 13% Subnational Finance 50m 1% Department 6,804 100% 9

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

Key Social & Environmental Risks Identified by Commercial Banks Banking on Sustainability Report that IFC published in 2007

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 The E&S Policy is a DECLARATION of a Bank's commitment to Sustainability Management It articulates the FI’s E&S commitment based on the mission and mandate of the organization It Indicates how this commitment is integrated into your institution’s priorities It clearly states the requirements (i.e. national law, best practices) that apply in implementing the policy It defines the scope and objectives of the SEMS It should be communicated to the entire internal workforce, as well to all External stakeholders It must have management support Procedures Procedures are a series of defined steps following in a definite order that enable Bank to meet requirements of its policy. Initial screening Categorization Due diligence E&S Covenants (including Action Plan) Monitoring Reporting Organization, Responsibilities, Resources and Training Internal screening capacity/supervision of due diligence process – various options: Environmental Coordinator Sustainability Departments Multidisciplinary committees Business as usual (Head of Project/Structured Finance) Resources for: E&S staff Out-sourcing due diligence process – external consultants Out-sourcing monitoring and reporting – external consultants Internal training Annual Report 12

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 13

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 CGPL Traditional communities in a rapidly developing coastal area – consultation and local development benefits Large migrant construction workforce – labor conditions and community safety Int’l lender reputational risk & BAT Vicat Sagar Cumulative impacts/carbon hot spot (Gulbarga District) Extensive landtake for plant and quarries Ground water supply Int’l lender reputation (CO2) Cairn Energy Tangible benefits to a widely dispersed, impoverished population Enterprise Development Center – vocational training for 2500; HSE training for 55,000+ oilfield & pipeline workers Pulp & Paper Producers ECF Farm Forestry Technical Assistance