1. Day 1: Business Case and Concept for a Sound ESMS
Managing Environmental and Social Risks For Energy Efficiency and Renewable Energy Investment Projects  in Global emerging and developing markets Training workshop – GCPF FI Partners
Day 1: Business Case and Concept for a Sound ESMS

2. 09:30-10:00 Overview and E&S Management Principles Global E&S Trends, Stakeholder Engagement, Risk Management/opportunities Implications for Financial Intermediaries (FIs)

3. World Energy Consumption

4. Market Opportunities Developing Countries Drive Energy Demand
Global energy efficiency requires investments of ~US$50 billion/year for the next decade
Developing Countries Drive Energy Demand
Population , economic growth and shift from agricultural to industrial economies are contributing to this change
Renewable Energy Potential in Developing Countries
RE generation in developing countries expected to attract >half of the US$230 billion in average annual investments in renewable capacity up to 2023
Energy efficiency potential in developing countries
Using less energy is paramount for sustainably meeting fast-growing energy demand

5. Global E&S Trends - Lender Requirements oriented to risk management
 1. Inter-American Development Bank (IDB) and the Inter-American Investment Corporation (IIC) [IBD Invest]
– ESMS - Policies, Exclusion List, IFC Performance Standards, EHS Guidelines
2. Equator Principles Banks – 90 Financial Institutions – global benchmark for determining, assessing and managing environmental and social risk in bank financed projects
ESMS - Policy, Exclusion List, IFC Performance Standards
3. European Development Finance Institutions (EDFI) Principles for Responsible Finance
ESMS - E&S Policy, Harmonized Exclusion List, Performance Standards
4. World Bank Group (IBRD, IFC. IDA, MIGA)
ESMS - E&S Policy, Exclusion Lists, Safeguards, Performance Standards, EHS Guidelines

6. National Requirements
Energy investment complexity and scope dictate E&S assessment and impact mitigating tasks
Environmental Assessment (EA): judgment of +/- environmental/social consequences for a proposed energy project
Limited impacts (e.g. efficiency improvements) – juxtaposition with regulations, obtain approval to construct/operate
Medium (solar, wind, river run hydro, photovoltaic, biogas ) EIA study, approval to construct/operate
High - diverse, unprecedented, irreversible impacts; mandatory ESIA, local/national approvals, E&S license too operate
Mandatory Management Plans – tasks to eliminate/reduce impacts;
Incorporate into loan contracts’ positive/negative covenants
Content: Task title, description, Indicator of completion, required completion date

7. 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!

8. Stakeholder Mapping Tool Identification and Analysis

9. 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
A risk management process is one that systematically applies management policies, procedures, and practices to a set of activities intended to establish the context, communicate and consult with stakeholders, and identify, analyze, evaluate, treat, monitor, and review risk

10. Build and Institutionalize an ESMS
Environmental & Social Management System
What is it?
Framework integrating environmental and social risk management into FI’s business processes
A set of actions and procedures implemented concurrently with the FI’s risk management procedures
Mandatory environmental and social due diligence prior to loan and supervision for the term of the loan agreement
Loan agreements contain covenants requiring project compliance with FI’s environmental and social requirements
What does it do?
Ensures that the Financial Institution’s activities are in compliance with its environmental and social standards
A ESMS helps the Financial Institution to avoid or manage loans with potential environmental and social risks

11. Understanding an Environmental and Social Management System (ESMS)
Processes and practices to implement your policies (business objectives)
The management system helps to assess and control risks
Foremost importance - continuous improvement an ongoing process of reviewing, correcting
Plan-Do-Check-Act cycle (PDCA) (Deming Cycle)

12. Continuous Improvement Methodology

14. Environmental and Social Risks for companies and financial institutions are business risks, the main types of risk for banks are
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 in rectifying social and environmental damage by virtue of 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, with the business and financial community, and even with their own staff
Media coverage
Local resistance /consumer campaigns
Governmental investigations

15. ESG in Banking Opportunities Risk Reduction
lending to businesses that engage in environmentally friendly and socially responsible business
Renewable/ energy
Clean energy
Energy efficiency
Corporate management endorses Risk (E&S) Mitigation Policy and practices (ESMS)
assessment of E&S impacts to environment/people caused by projects financed by the FI
Integrate risk mitigation tasks in lending contracts
Sustainable Banking spans two important aspects of a bank’s operations:

16. Does Sustainability Pay Dividends?
90% of studies looking at the cost of capital indicated that sound sustainability standards reduced companies 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 From the stockholder to stakeholder: How sustainability can drive financial outperformance”, p. 9

17. Integrating E&S Considerations - 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