GLOBAL PROGRESS REPORT of the Sustainable Banking Network Innovations in Policy and Industry Actions in Emerging Markets October 2019 Case Studies: Inspiring Practices from SBN Members © International Finance Corporation [2019], as the Secretariat of the Sustainable Banking Network (SBN). All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of ap- plicable law. IFC and SBN encourage dissemination of their work and will normally grant permission to reproduce portions of the work promptly, and when the reproduction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as they may reasonably require. IFC and SBN do not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accept no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. This work was prepared in consultation with SBN members. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank, IFC or the governments they represent. The contents of this work are intended for general informational purposes only and are not intended to constitute legal, securities, or investment advice, an opinion regarding the appropriateness of any investment, or a solicitation of any type. IFC or its affiliates may have an investment in, provide other advice or services to, or otherwise have a financial interest in, certain of the companies and parties named herein. All other queries on rights and licenses, including subsidiary rights, should be addressed to IFC Communications, 2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433. International Finance Corporation is an international organization established by Articles of Agreement among its mem- ber countries, and a member of the World Bank Group. All names, logos and trademarks are the property of IFC and you may not use any of such materials for any purpose without the express written consent of IFC. Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. The following sections present case studies drawn from SBN countries and from leading financial institutions. Inspiring practices from SBN members Pillar I: Strategic Alignment ....................................................................................................1 Morocco – Developing sustainable finance roadmaps through collaboration and alignment with international and regional goals .................................................................................................. 1 Paraguay – Sector guides developed by a coalition of FIs, public agencies, and civil society organizations ............................................................................................................................... 1 Pillar II: Climate and Green Finance ........................................................................................2 Brazil – Tracking environmental benefits achieved by banks ......................................................2 China – Banking regulator defines and tracks green loans.......................................................... 2 Mongolia – Proposing a broad taxonomy for green investments ...............................................3 Morocco – Capital market regulator provides definitions and operational guidelines for green, social, and sustainability bonds ................................................................................................... .5 Bangladesh – Central bank requires detailed reporting of green investments ........................... 5 Vietnam – Central bank issues Directive to promote green loan growth and E&S risk management ............................................................................................................................... 5 OECD example – Dutch Central Bank introduces risk assessments and advanced tooling .........5 Pakistan – Central bank asks FIs to monitor climate risk exposure through the Green Banking CASE Guidelines ................................................................................................................................... 6 STUDIES Brazil – Banking association provides methodological considerations to calculate climate risk exposure ...................................................................................................................................... 6 China – Central bank leverages refinance and macroprudential tools to incentivize reen finance; local governments also provide financial incentives ................................................................... 6 Bangladesh – Central bank introduces incentives for sustainable finance ..................................7 Pillar III: ESG Integration .........................................................................................................7 Emerging approaches by banking regulators to promote sustainable finance through engagement with FIs .................................................................................................................. 7 South Africa – King Code on Corporate Governance sets out governance responsibilities for environmental and social performance ...................................................................................... 8 Bangladesh – Central bank specifies governance of E&S and clarifies the use of E&S covenants .................................................................................................................................... 8 Nepal – Central bank provides detailed guidance on expectations toward an E&S Policy, the appropriate steps of an ESRM system and supervision ............................................................... 8 Nigeria – Sustainable Banking Principles Guidance Note asks banks to perform internal and external E&S audits .................................................................................................................... .10 Emerging practices to encourage FIs’ reporting and transparency efforts .................................10 Inspiring practices from SBN members Pillar I: Strategic Alignment Paraguay – Sector guides developed by a coalition of FIs, public agencies, and civil society organizations Morocco – Developing sustainable finance roadmaps through collaboration and alignment with international and regional goals In 2012, four Paraguayan banks formed a Roundtable for Sustainable Finance (RSF) and took the lead in developing and implementing During the 2016 United Nations Climate Change Conference of sector guides for the cattle, agriculture, and agro-industry sectors. the Parties (COP 22) held in Marrakech, Morocco’s financial sector These sectors are an important source of economic development for regulators committed to fostering green finance in Morocco and in Paraguay, but also face the challenge of farming and cattle ranging that Africa. led to illegal deforestation. Morocco launched two sustainable finance roadmaps in 2016: i) RSF’s member banks, which have grown to 14 banks, commit Roadmap for Aligning the Moroccan Financial Sector with Sustainable to voluntarily check whether their clients are involved in illegal Development, and ii) Morocco’s roadmap for the alignment of the deforestation and whether they comply with necessary environmental financial sector with climate change commitments. Both initiatives legislation and licenses. These guidelines and criteria were developed represent alignment with international sustainability goals and in consultation with multiple stakeholders, including FMO, WWF, IDB extensive interagency collaboration. Case Studies – Inspiring Practices from SBN Members – Pillar I Invest, UNDP, and several Paraguayan government agencies.15 The Roadmap for Aligning the Moroccan Financial Sector with The results of this collaborative work include the strengthening of Sustainable Development was coordinated by the Bank Al-Maghrib, the environmental and social management systems in partner banks and Morocco central bank, with contributions from seven regulators: promoting the work of the Roundtable itself. ► The Ministry of Economy and Finance ► The Moroccan Capital Markets Authority ► The Supervisory Authority of Insurance and Social Welfare ► Casablanca Finance City Authority ► Casablanca Stock Exchange ► The Moroccan Bankers’ Association ► The Moroccan Federation of Insurance and Reinsurance Companies. The Marrakech pledge was also launched in parallel, focused on “Fostering Green Capital Markets in Africa.” It is a commitment by all African capital markets regulators and exchanges to act collectively in favor of sustainable development in order to promote Africa as a prominent regional green financial marketplace and an attractive destination for green and climate-resilient investments. 15 www.fmo.nl/news 1 Pillar II: Climate and Green Finance Brazil – Tracking environmental benefits achieved by banks China – Banking regulator defines and tracks green loans In 2014, FEBRABAN (the Brazilian Federation of Banks) facilitated In 2014, the China Banking Regulatory Commission (CBRC) introduced a working group that included representatives from banks to draft a the Green Credit Statistics System (GCSS), which includes definitions methodology to measure financial resources allocated to the Green for green loans and a tool for banks to calculate the environmental Economy. benefits against seven parameters of green loans. The largest 21 banks, representing over 75 percent of China’s banking assets, are requested The methodology is based on the identification of economic activities to report to CBRC on these statistics every six months. As of June 2017, considered as Green Economy sectors by UNEP, and activities that the aggregate balance of 21 major Chinese banks’ green lending was potentially contribute to socio-environmental impacts, according to the 24.17 billion Yuan, with a non-performing loan (NPL) ratio of 0.37 Resolution 237/1997 of the National Environment Council (CONAMA). percent which was 132 percent lower than the average NPL ratio. National Classification of Economic Activities (CNAE) codes were also identified for the activities that comprise the mentioned sectors. Table 5: 12-category of green credit loans As of December 31, 2017, the balance of credit portfolios (financing 12-category of green credit loans and loans) for sectors in the Green Economy was R $412,271 million, Case Studies – Inspiring Practices from SBN Members – Pillar II 7) renewable energy and clean which represents 27.6 percent of the total corporate portfolio of the 1) green agriculture energy banks in the sample, which adds up to R $1,495 billion. 8) rural and urban water 2) green forestry projects Table 4: Green economy sectors 3) industrial energy saving, water 9) building energy efficiency conservation and environmental Green Economy Sectors and green building protection (1) sustainable agriculture (8) water 4) natural protection, ecological 10) green transportation restoration, and disaster prevention (2) renewable energy* (9) forestry 11) energy conservation and (3) sustainable transport (10) waste efficiency 5) resource recycling environmental protection services (4) products with a specific purpose (11) cities 12) overseas finance projects 6) waste disposal, pollution (5) productive inclusion and local and applying international best (12) fishing prevention and treatment regional development practices and standards (6) education (13) sustainable tourism Figure 15: Green credit loan balance of 21 major banks in China (Units: USD million; Exchange rate: RMB/USD=0.15) (7) health 90000 82957 80000 75047 Figure 14: Balance of credit portfolios (financing and loans) for sectors in 66361 70066 72635 70000 the Green Economy 60000 51983 57217 60128 48527 (Unit: USD million, Exchange rate: BRL/USD=0.27) 50000 40000 30000 120,000 111,313 20000 10000 100,000 0 85,572 83,452 80,000 60,000 41,424 Source: China Banking and Insurance Regulatory Commission 40,000 33,402 20,000 0 2013 2014 2015 2016 2017 Source: FEBRABAN 2 Table 6: Environmental benefits of 21 major banks in China (units: tons) Environmental benefits Reporting date Chemical Oxy- SO2 Saved Wa- Nitrogen Ox- Standard Coal CO2 equivalent NH3 – N Saved Water gen Demand ter ides 2013.6.30 31,839 71,939 465 43 1,014 256 99,629 2013.12.31 186,718,002 479,026,642 3,300,261 356,630 6,649,186 1,550,799 438,080,487 2014.6.30 188,721,269 456,875,178 2,957,844 310,667 5,377,719 1,313,854 425,699,055 2014.12.31 167,188,855 399,580,836 3,412,996 340,847 5,876,541 1,600,911 933,672,533 2015.6.30 173,631,504 418,766,896 6,740,299 405,640 4,586,645 1,158,785 745,681,127 2015.12.31 221,228,894 549,793,199 3,552,271 384,296 4,849,558 2,269,962 756,053,681 2016.6.30 187,395,852 435,416,666 3,977,344 434,506 3,996,489 2,005,966 623,040,781 2016.12.31 188,482,671 427,197,846 2,714,590 358,947 4,882,658 2,826,861 601,975,909 2017.6.30 215,095,946 490,563,965 2,834,517 267,643 4,645,253 3,131,057 715,006,525 Source: China Banking and Insurance Regulatory Commission Case Studies – Inspiring Practices from SBN Members – Pillar II Mongolia – Proposing a broad taxonomy for green investments16 Green activities are categorized into three tiers of sectors and assets. The broadest level sector includes eight sectors, including renewable The Mongolian Sustainable Finance Association (MSFA) has proposed energy, low pollution energy, energy efficiency, resource efficient a taxonomy to clarify the definitions of green sectors, assets, and buildings, pollution prevention and control, sustainable water and financial products available to FIs in Mongolia. This would be subject to waste use, sustainable agriculture (including land use, forestry, review and clearance by the Financial Stability Council, which consists biodiversity conservation, and eco tourism), and clean transport. of the Central Bank of Mongolia, Financial Regulatory Commission, and Alignment with Mongolia’s environmental objectives is also provided Ministry of Mongolia.  ​ for each green asset defined. Below is an illustration for renewable energy. 16 MSFA, 2019 3 Table 7: Overview of Mongolia Taxonomy Alignment with environmental Level I Level 2 Level 3 SpecificaƟon/defining criteria objecƟves ConstrucƟon and operaƟon of PolluƟon prevenƟon and control 1.1.1 Wind power 1.1 Wind power onshore wind farm and other wind faciliƟes power faciliƟes Climate change miƟgaƟon 1.2.1 Solar PV ConstrucƟon and OperaƟon of power faciliƟes solar PV power faciliƟes 1.2.2 Concentrated ConstrucƟon and operaƟon of PolluƟon prevenƟon and control solar power and concentrated solar power and 1.2 Solar heaƟng faciliƟes heaƟng faciliƟes Climate change miƟgaƟon ConstrucƟon and operaƟon of 1.2.3 Solar water device/facility using solar energy, heaƟng and other e.g., solar water heater, solar applicaƟons of energy and air source heat pump solar power hot water system, etc. ConstrucƟon and operaƟon of 1.3.1 Hydropower PolluƟon prevenƟon and control Case Studies – Inspiring Practices from SBN Members – Pillar II device/facility using solar energy 1.3 Hydro-power generaƟon 1.Renewable - Criteria:power density>5W/m2 or faciliƟes Climate change miƟgaƟon energy emissions of electricity generated ConstrucƟon and operaƟon of PolluƟon prevenƟon and control 1.4 Geothermal 1.4.1 GeneraƟon geothermal power plants and power power and heaƟng thermal applicaƟons of geothermal Climate change miƟgaƟon energy. InstallaƟon and operaƟon of faciliƟes for producing solid biomass, biogas, bio-liquids and 1.5.1 Bio-energy other bio-energy products. product faciliƟes - Criteria: only if they result in net reducƟons in emissions, taking into PolluƟon prevenƟon and control account producƟon, processing 1.5 Bio-energy and transportaƟon Climate change miƟgaƟon ConstrucƟon and operaƟon of 1.5.2 Biomass or biomass or biogas power plant. biogas power - Criteria: only if net emission faciliƟes reducƟons, including carbon pool balance can be demonstrated 4 Morocco – Capital market regulator provides definitions and Vietnam – Central bank issues Directive to promote green loan operational guidelines for green, social, and sustainability bonds 17 growth and E&S risk management The Moroccan Capital Market Authority (AMMC) has issued Through its 2015 Directive on promoting green credit growth and guidelines on green, social, and sustainability bonds. These E&S risk management in credit granting,19 the State Bank of Vietnam guidelines provide useful information on: requires FIs to report the quantities and values of their green credit transactions, as well as to disclose information on their E&S risk ► Definition and typologies of bonds (green, social, and sustainable management processes to the SBV on a quarterly basis. SBV provides a bonds), and links between each product and the SDGs. reporting template for this purpose: ► The issuance process of such bonds. The guidelines outline clearly Medium and the benefits and good practices of each product, covering the Short-term credit long-term credit different stages of the life of a bond: funds allocation, evaluation No. Criteria granted granted and selection of projects to be funded, management of the funds Quantity Value Quantity Value raised, external reviews, reporting and communication. 1 Credit/loan application Credit/loan applications declined after 2 being E&S risks evaluated Bangladesh – Central bank requires detailed reporting of green Credit/loan applications approved 3 investments after being E&S risks evaluated Total outstanding value of credits/ Case Studies – Inspiring Practices from SBN Members – Pillar II In 2014, Bangladesh Bank (BB) set FIs a minimum annual target to 4 loans granted which have been evalu- disburse 5 percent of all loans or investments as green finance. To ated on E&S risks Total outstanding value of credits/ clarify what constitutes green finance, in 2017 BB issued an exhaustive 5 loans being on hold due to E&S risks list of 52 products that contribute to this target. 6 Value of green credit/loan granted Total outstanding value of green cred- A circular from BB requires FIs to submit quarterly information on 7 its/loans granted their green finance flows, using a standardized reporting format. It also Total outstanding value of green cred- expects FIs to report on their green marketing, training, and capacity 8 its/loans granted Total outstanding development; their utilization of climate risk funds; their strategic value of credits/loans granted plans and steps for green banking; their sector-specific green finance policies; and other topics. OECD example – Dutch Central Bank introduces risk assessments and advanced tooling Bangladesh Bank monitors FIs’ progress towards the 5 percent target using a dedicated Monitoring & Evaluation tool. This allows for yearly In recent years, several central banks and regulators have started to reporting on green financing by local FIs, as shown below. measure and evaluate climate risks. The Dutch Central Bank (DNB) has been one of the frontrunners. In 2015 and 2016 DNB started measuring financial sector exposures to highly CO2-intensive assets, as part of an The graph below shows the share of different green finance products in exploration into transition risks that could come from policy efforts FY1818: to keep global warming below 2 degrees Celsius above pre-industrial levels. Their assessment showed that Dutch FIs have sizable exposures to fossil fuel producers and power suppliers, but also exposures to economic sectors like steel, cement, agriculture, and transport, as well as the built environment. In the 2017 study Waterproof, these measurements were further refined, and a broader risk assessment was done on all the ways that climate change can affect the Dutch financial sector, including impacts of floods on assets and the effects of climate change on insurers.20 Along the way, the Dutch also worked on advanced assessment tools, including stress tests for insurers, as well as a macro stress test on the 19 State Bank of Vietnam, 2015. 17 http://marrakechpledge.com/news 20 Waterproof: an example of climate-related risk for the Dutch financial sector, 18 Bangladesh Bank Annual Report 2018. DNB, 207. 5 替换P51 右上的图 impact of an energy transition on the Dutch financial sector.21 Other Actions Potential results • Improved understanding of the materiality of climate central banks, including the Bank of England and Banque de France, 1. Application of the Climate Risk issues Sensitivity Tool • Action prioritization have also performed more advanced measurements. 2. Revision of governance around • Increased transparency regarding the responsibilities climate-related risks and opportunities within the risk management structure (who is responsible, what are the • Assignment of responsibilities for the implementation Pakistan – Central bank asks FIs to monitor climate risk exposure responsibilities) of the TCFD Recommendations 3. Revision of publicly available • Diagnosis of current alignment to the through the Green Banking Guidelines22 information in bank documents and Recommendations and the main gaps, in order to other reporting frameworks bridge them 4. Incorporation of a specific • Top management involvement Pakistan’s central bank has introduced guidelines that require FIs to implementation agenda for the TCFD recommendations by sustainability • Design of a work agenda in line with the Action Plan of the Social and Environmental Responsibility Policy committees and the board monitor their climate risk exposure at portfolio level and encourage 5. Monitoring of the corporate credit • Identification of critically exposed sectors to prioritize portfolio’s exposure to critical sectors sector-specific actions to manage climate risks & them to take steps to mitigate the risks they identify. Banks are also and climate opportunities opportunities provided with a taxonomy of environmental risks. Risks are classified by level (direct, indirect, and reputational) as well as by source (linked In addition, FEBRABAN’s Working Group on Climate Risks has to client’s behavior or outside its influence). The role of climate change developed a Climate Risk Sensitivity Tool. This supports the and climate-related risks are highlighted, as shown below. identification and preliminary measurement of climate risk exposures at three levels: i) by economic sector in the credit portfolio; ii) by client; and iii) by financial transaction. Levels of Variables assessment Relevance Proportionality Case Studies – Inspiring Practices from SBN Members – Pillar II • Likelihood of climate-related financial impacts, by economic sector* • Credit exposure, by economic Sector risk • Credit quality of each economic sector in sector the portfolio (based on credit ratings) • Likelihood of climate-related financial • Weighted average tenor of Client risk impacts, by economic sector client exposure • Client credit rating • Credit exposure, by client • Likelihood of climate-related financial impacts, by economic sector • Transaction tenor Transaction risk • Credit rating of the financial transaction • Transaction amount • Locational risk of the transaction *It was based on the TCFD list of sectors potentially most affected by climate change. China – Central bank leverages refinance and macroprudential tools to incentivize green finance; local governments also provide financial incentives In 2018, the People’s Bank of China (PBOC) issued the Green Credit Performance Evaluation for Deposit-taking Financial Institutions, incorporating the green credit performance evaluation into PBOC’s Macro-Prudential Assessment (MPA). The evaluation is undertaken Brazil – Banking association provides methodological on a quarterly basis, and evaluation results are assessed based on considerations to calculate climate risk exposure quantitative (80 percent weighting) and qualitative basis (20 percent weighting). In 2018, with the support of its members, FEBRABAN (the Brazilian Federation of Banks) designed a Roadmap for implementing the In addition, PBOC announced that green financial debt and green recommendations of the Task Force on Climate-related Financial loans are accepted as collateral for the PBOC’s Medium-term Disclosures (TCFD).23 The Roadmap identifies a list of challenges and Lending Facilities. On June 1, 2018, PBOC issued a public notice on enablers for FIs implementing the TCFD’s recommendations, and “Appropriately expanding the scope of collateral for medium-term suggests a set of actions to help banks address any gaps identified: lending facilities (MLF).” AA-rated green bonds and green loans fall within the scope of MLF collaterals. Some local governments have provided non-financial and financial 21 An energy transition stress test for the financial sector of the Netherlands, NDB, incentives and support for green finance, including a streamlined 2018. approval process for green finance products, a government guarantee 22 State Bank of Pakistan, 2017. 23 fund to provide risk-sharing and loss-sharing, subsidies for green bond Implementing the TCFD recommendations: a roadmap for the Brazilian banking sector, FEBRABAN, 2019. interest, and tax deductions for green bond issuers and investors. 6 Bangladesh – Central bank introduces incentives for sustainable Pillar III: ESG Integration finance24 Bangladesh Bank has implemented several incentives – both financial Emerging approaches by banking regulators to promote and non-financial – to promote sustainable finance in the country: sustainable finance through engagement with FIs25 ► Non-financial incentives: Seven SBN member countries regularly verify or collect information o Bangladesh Bank asks for quarterly reporting from local FIs on green finance flows. from FIs about their implementation of ESRM requirements. These activities can be grouped into three typical engagement strategies: o The licensing of new bank branches is fast-tracked i) self-reporting by banks with regulatory oversight, ii) engagement for banks that have adopted environmental and social risk management best practices. by banking supervision department (BSD), and iii) engagement by specialized sustainable banking unit. Some members start with one ► Financial incentives: approach and subsequently move to another approach, while some o Bangladesh Bank has set up refinancing schemes members use a combination of the approaches. for projects related to energy efficiency, kiln efficiency, and textile and leather production Model 1: Self-reporting with regulatory oversight o Bangladesh Bank has designed its supervisory “CAMELS” rating to incorporate sustainability When self-reporting is employed, banks are tasked with assessing Case Studies – Inspiring Practices from SBN Members – Pillar III performance for each local FI. and reporting on their ESRM implementation, with no onsite and limited offsite verification by the regulator of the reported data. The role of regulators is primarily to ensure that reporting is done and the information received is analyzed on a firm and/or industry level. This model can be considered to form the foundation or first step for banks before more intensive monitoring is implemented. For example, in Nigeria, following the development of the Nigerian Sustainable Banking Principles monitoring report, the banking sector was given fifteen months (March 2014 – June 2015) to self-report on their compliance through one-off and biannual reports, before more active regulatory engagement commenced. In this model, limited capacity is required on the part of the regulator, and thus it is the most cost-effective for the regulator. However, this approach relies heavily upon the regulator’s ability to provide a robust monitoring framework to ensure that the data collected is concise and relevant. For example, China’s banking regulator CBIRC has introduced a comprehensive set of 200 indicators for banks to self-report on their E&S performance. A review committee and third party verification is also introduced to verify data collected. Model 2: Engagement by Banking Supervision Department (BSD) In this model, the Banking Supervision Department (BSD) monitors and engages with banks both onsite and offsite, sometimes along with the credit risk supervision of the banks. Given the existing structure and experience housed within the BSD, this model may be the most seamless for the regulator. However, for this model to be successful, there must be a clear strategy with regard to the process for ESRM engagement, and there must be a capacity 24 25 Policy Guidelines for Green Banking, Bangladesh Bank, 2011. This case study was written by Damilola Rachael Sobo, IFC. 7 development plan for the Supervisors. manage environmental and social (E&S) performance. A structure is suggested for: Model 3: Engagement by Specialized Sustainable Banking Unit ► Design and approval of the E&S policy In this model, there is a specialized team created within the Central ► Reporting by management and by operational Bank whose task is the implementation and monitoring of banks’ committees (e.g. risk management committee) adoption of sustainable finance and ESRM principles. The team could be a sub-unit within the BSD or reside in another department and work ► Involvement of operational teams across an FI’s closely with the BSD to ensure that processes and tools are aligned with activities (credit/investment risk, commercial, the current reporting obligations for the banks. For example, in 2015 SME, retail banking, and corporate banking) Bangladesh Bank created a sustainable finance department that carries working alongside the sustainability unit. out onsite and offsite monitoring. It also introduced sustainability Board of Directors ratings for banks, which are integrated into CAMELS26 ratings. Approval A key challenge to this model is the resources needed to set up and of high E&S rated Risk Management Committee operate the specialized sustainable banking unit. Unlike the other two loans Periodic models, this model requires recruitment of a new team, with associated Managing Director reporting of ESRM of costs required for implementing their mandate. bank Case Studies – Inspiring Practices from SBN Members – Pillar III South Africa – King Code on Corporate Governance sets out Head of Credit/Investment Risk Management Head of Corporate/ Commercial/SME/Retail banking Head of Sustainable Finance Unit governance responsibilities for environmental and social Periodic reporting of E&S rating performance of loans Monitoring of compliance of Released in 2016, the King IV Code on Corporate Governance is E&S rating the fourth iteration of South Africa’s pioneering King Code which complements the Companies Act. It applies to all types of organizations Bangladesh Bank further provides the following information on E&S and governing bodies, including FIs. In October 2017 the Johannesburg covenants: Stock Exchange made it mandatory for listed companies to apply and disclose their adherence to the King Code. • When E&S covenants should be considered • What type of covenants can be implemented King IV is pioneering in i) its broad recognition of company stakeholders beyond just shareholders, ii) explicit expectations • Who within the bank should be involved for companies to be good corporate citizens, iii) the requirement • How compliance with E&S covenants should be monitored to establish social and ethics committees, and iv) instructions for • How the FI can work with the client towards complying with E&S governing bodies to consider risks and performance related to six covenants capitals: financial, manufactured, intellectual, human, social and The involvement of the Legal Department is also suggested. Examples relationship, and natural capital. are provided of positive and negative covenants, conditions precedent, King IV requires companies to publish integrated reports that include default events, and corrective action plans to be included as annexes to sustainability performance. All South African banks are expected to legal agreements. apply King IV as a minimum. The King Code also incorporates specific expectations for responsible investing practices by pension funds. Nepal – Central bank provides detailed guidance on expectations toward an E&S Policy, the appropriate steps of an ESRM system and supervision Bangladesh – Central bank specifies governance of E&S and clarifies the use of E&S covenants27 Through the Guideline on ESRM for banks and financial institutions,28 The Bangladesh Bank Guidelines on Environmental and Social Risk Nepal Rastra Bank provides a full checklist for a sound E&S policy. Management provide a clear outline of an organizational structure to This checklist covers typical E&S risks for FIs, applicable local and international standards, propositions for a full E&S process, and 26 The acronym “CAMEL” refers to the five components of a bank’s condition reporting templates. that are assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth component, a bank’s Sensitivity to market risk, was added in 1997; hence the acronym was changed to CAMELS. 27 28 Bangladesh Bank, 2017. Nepal Rastra Bank, 2018. 8 A flow chart details all the steps for FIs to follow through the The following flow chart summarizes the steps to be followed while investment cycle, including loan categorization, generation of E&S risk conducting ESDD: ratings (low, medium, or high risk), E&S risk management and control, escalation (for medium and high risks) and E&S risk monitoring. Figure 16: Steps for conducting ESDD Step 1 - EXCLUSION LIST SCREENING: Is the client involved in activities listed under the Exclusion List? YES NO (Reject) Step 2 - LOAN CATEGORISATION (based on the size and type of loan) SMALL LOAN SMALL TERM FINANCE PROJECT FINANCE (in critical sectors) LOAN (in non- Case Studies – Inspiring Practices from SBN Members – Pillar III critical Step 3 - E&S DUE DILIGENCE: sectors) Step 3 - E&S DUE DILIGENCE: Step 3 - E&S DUE DILIGENCE: • Documents check (E&S permits • Documents check (certificates) • Documents check (certificates) and certificates), review of E&S • Review the IEE/EIA (if required) • Site visit (always recommended) compliance history • Site visit (always recommended) – discussions and observations • Complete the ESDD Checklist – discussions and observations of E&S issues (Annex 5) of E&S issues • Review the project’s EIA and • Complete the ESDD Checklist mitigation (Annex 5) • Complete the ESDD Checklist (Annex 5) Step 4 - GENERATE E&S RISK RATING: • Based on the results of the ESDD Checklist (Annex 5) the E&S risk rating will be automatically generated LOW RISK MEDIUM RISK HIGH RISK Step 5 - E&S RISK MANAGEMENT & CONTROL: Step 5 - E&S RISK MANAGEMENT & CONTROL: • Prepare E&S Risk Summary (Annex 7) • Prepare E&S Risk Summary (Annex 7) • Draft E&S Covenant or E&S Action Plan • Draft E&S Covenant or E&S Action Plan (Annex 9) required to correct for non- (Annex 9) required to correct for non- compliance issues compliance issues • Complete the loan file with copies of • Complete the loan file with copies of permits, IEE/EIA and supporting documents permits, IEE/EIA and supporting documents Step 6 - ESCALATION: • For MEDIUM and HIGH risk, the transaction will have to be escalated to the one-level higher relevant credit authority Step 7 - E&S RISK MONITORING: • Monitor and review (Annex 10) the implementation of the required E&S measures/actions (if any) and continued compliance with applicable E&S standards (e.g., national E&S regulations) Step 8 - E&S REPORTING: • Report on the B/FIs E&S performance internally to senior management and externally to NRB on an annual basis (using the template in Annex 11) 9 A checklist is also provided for continued E&S monitoring after Emerging practices to encourage FIs’ reporting and transparency loans are disbursed (See the “E&S monitoring checklist” below). efforts The checklist provides a list of questions to be answered, including A growing number of SBN members are requiring or encouraging local about environmental, health, and safety (EHS) management linked FIs to disclose information on their sustainable finance performance. to the project, permits and compliance certificates, and grievance Typical indicators include: management. Page 55, 左上： E&S monitoring • Number of loan requests rejected due to exclusion list or checklist 替换图 Table 8: E&S monitoring checklist E&S risk Sl. No. Question /Issues to check Response • Share of transactions subject to ESG due diligence within the Project Summary Information 1 Reporting period covered by this supervision report total loan portfolio (per project type) 2 Specification of project stage (design, construction, operation or closure stage) 3 Key developments and any major changes in project location and design, if any • Number of “high risk” projects identified from the time of loan disbursement or from the last supervision period. General Information • Number of site visits conducted 4 Status of implementation of covenants/corrective action plan. Is it in line with the agreed timeframe? (i.e.,if all covenants are implemented or partially • Number of ESRM training programs conducted implemented or not implemented or delayed implementation). If partially implemented or not implemented or delayed In Brazil, FEBRABAN’s framework formalizes fundamental procedures implementation, RM to please mention the reason in the response column along with a timeline for completion of implementation as committed by the for its signatories, including an obligation to report on E&S related client during supervision. EHS Management losses. 5 If there was any incidence of accidents, spills, leakages, explosion etc. during the reporting period. Case Studies – Inspiring Practices from SBN Members – Pillar III If yes, what was the scale of damage (e.g. if there was any fatality, monetary In Indonesia, OJK outlines the need to disclose information on a “Target loss etc.)? What was the action taken in response to the incident? Achievement Strategy” that must include the following: 6 If there were any recent fines or penalties issued by the regulatory body. If yes, RM to please mention the nature of violation, amount of fine/penalty paid, action taken by the client to address the issue to avoid any such • Risks management due to the application of Sustainable fine/penalty in future. Finance concerning economic, social and environmental aspects; • Seizure of business opportunity and prospect; and Nigeria – Sustainable Banking Principles Guidance Note asks banks to perform internal and external E&S audits • Description on economic, social and environmental external situations that may potentially affect FSI, Issuer and Publicly The Nigerian Sustainable Banking Principles Guidance Note outlines Listed Company sustainability.” the need for internal, and external verification of E&S Governance The table below provides an indication of the elements covered by structures and processes (see green frame below). a sample of country FI reporting templates issued by regulators or Target Requirement/Deliverable Due Date associations: Establishment of a Board-level Sustainable Banking Governance Sustainable Committee to oversee the development of Sustainable Banking Banking commitments, which should include governance and accountability for Q3 2012 Policies/ Green finance governance ESRM data committee E&S issues and ensure the measuring and monitoring of progress governance data against those commitments. E&S A Bank’s Sustainable Banking policies and procedures should include a governance governance structure, which details roles and responsibilities relating Bangladesh   integrated into to assessing and categorising E&S risk potentially associated with Q1-2 2013 risk committee clients/engagements. This responsibility could be integrated into and functions existing risk committee structure and function. Cambodia  A Bank should align Sustainable Banking governance and E&S Performance- accountability performance metrics with its existing performance Q1-2 2013; on-going China    management indicators and processes to ensure that employees linked thereafter across all relevant functions are incentivised to deliver against agreed incentives (only for E&S related responsibilities and targets. As part of a commitment to continuous improvement, a Bank should the FIs undertake, on an annual basis: themselves, • Internal audits to assess progress and monitor the effectiveness of Indonesia   but not Internal and E&S governance structures and accountability practices and external E&S procedures. Q3-4 2013; on-going for their annual audits audits • External audits, using independent third party assessors to review borrowers) Sustainable Banking and E&S governance and accountability processes, which should be consistent with standard audit Mongolia (list)    processes. Nepal   10 Access the SBN Global Progress Report and Country Reports at: www.ifc.org/SBN2019Report Supported by: