The World Bank Kyrgyz Republic Developing A Sustainable Finance Market For Msmes (P505643) Appraisal Environmental and Social Review Summary Appraisal Stage (ESRS Appraisal Stage) Public Disclosure Date Prepared/Updated: 09/24/2024 | Report No: ESRSA03658 Sep 24, 2024 Page 1 of 9 The World Bank Kyrgyz Republic Developing A Sustainable Finance Market For Msmes (P505643) I. BASIC INFORMATION A. Basic Operation Data Operation ID Product Operation Acronym Approval Fiscal Year P505643 Investment Project Financing (IPF) KR SF4MSMEs 2025 Operation Name Kyrgyz Republic Developing a Sustainable Finance Market for MSMEs Country/Region Code Beneficiary country/countries Region Practice Area (Lead) (borrower, recipient) Kyrgyz Republic Kyrgyz Republic EUROPE AND CENTRAL Finance, Competitiveness ASIA and Innovation Borrower(s) Implementing Agency(ies) Estimated Appraisal Date Estimated Board Date The Kyrgyz Republic The Ministry of Finance 31-Oct-2024 12-Feb-2025 Estimated Decision Total Project Cost Review Date Public Disclosure 50,000,000.00 Proposed Development Objective To support the development of a sustainable finance market for MSMEs by mobilizing green and sustainable private finance, and building the capacity of financial institutions. B. Is the operation being prepared in a Situation of Urgent Need of Assistance or Capacity Constraints, as per Bank IPF Policy, para. 12? No C. Summary Description of Proposed Project Activities The proposed project will develop a sustainable finance market for MSMEs by leveraging the National Development Financial Institutions (NDFIs) and private capital. The State Development Bank (SDB) and the Guarantee Fund (GF) will need to play a catalytic role not only to narrow the large climate financing gap by mobilizing private capital, but also to ensure that women and vulnerable populations and MSMEs are not left out in their adaptation and transition to green economy. Component 1 (sustainable finance) will be implemented by the SDB, Component 2 (green guarantees) by the GF, and Component 3 (project management and capacity building) by the MOF PIU. The funding is expected to come from IDA Scale-Up Window (SML). Participating Financial Institutions (PFIs) will be commercial banks and, in some cases, Sep 24, 2024 Page 2 of 9 The World Bank Kyrgyz Republic Developing A Sustainable Finance Market For Msmes (P505643) microfinance institutions and credit unions if they meet the PFI criteria, which will be detailed in the Project’s procedural manual. PFIs may participate in both Component 1 and 2 or only either. D. Environmental and Social Overview D.1 Overview of Environmental and Social Project Settings The Kyrgyz Republic, a land-locked, lower-middle-income country in Central Asia, was hit hard by the pandemic in 2020. The economy began recovering with real GDP growth of 5.5 percent in 2021, 6.3 percent in 2022, and 6.2 percent in 2023 and exhibited high resilience from the polycrisis, including Russia’s invasion of Ukraine. The Kyrgyz Republic is a landlocked, mountainous country, and highly vulnerable to climate change, natural disasters, and natural resource degradation. It ranks as the third most vulnerable country to climate change in the Europe and Central Asia region, using the simplified index of vulnerability. As a mountain economy, the Kyrgyz Republic is highly vulnerable to climate change, natural disasters, and natural resource degradation, driving vulnerable populations in rural areas that depend on natural resources for their livelihoods to face increasing risks. While the Kyrgyz Republic’s contribution to global greenhouse gas (GHG) emissions is small, heavy use of coal for heating contributes to the country having one of the highest winter air pollution rates in the world, with severe impacts on local health. Strengthening climate change mitigation and adaptation mechanisms, including more efficient management of natural resources, investments in adaptation, and reducing emissions in energy and agriculture, are not only needed to strengthen the resilience of livelihoods and ecosystems but also present an opportunity to support a more diversified, greener growth path. Therefore, strengthening climate change mitigation and adaptation mechanisms, investments in adaptation, and reducing emissions in energy and agriculture are not only needed to strengthen resilience of livelihoods and ecosystems but also present an opportunity to support a more diversified, greener growth path of the small and medium size enterprises. Public Disclosure MSMEs need to transition to low-carbon and climate-resilient businesses and adopt green technologies, and MSMEs should focus on environmental compliance to boost export competitiveness. However, the sustainable finance ecosystem in country is still at a very nascent stage, and the provision of sustainable finance is extremely limited. Therefore, concerted efforts are needed to create a market to scale and to support MSMEs to become a competitive force in the local, regional, and global markets. The proposed project is expected to contribute to greening the financial sector in the Kyrgyz Republic. The project will cultivate a “low carbon footprint mindset” by educating MSME beneficiaries about business practices that promote the use of energy-efficient materials and ‘green’ technologies. Moreover, the project will bolster climate resilience and reduce GHG emissions by supporting the adoption of renewable energy and energy efficiency technologies. Furthermore, MSMEs will also become more competitive in the export markets as they adapt to the green standards that are accepted in the destination markets. The integration of sustainability into the credit risk management of the banking sector is particularly important because most of the financial intermediation flows through the banking sector in the Kyrgyz Republic. The project will support the Participating Financial Institutions (PFIs) to develop an Environment and Social Management System (ESMS) that meets national requirements and is in line with the World Bank Environmental and Social Framework (ESF). In addition, the project will provide capacity building and training for sustainable finance in the financial sector with a particular focus on Women-headed MSMEs (WMSMEs). D.2 Overview of Borrower’s Institutional Capacity for Managing Environmental and Social Risks and Impacts The proposed project builds on and complements to the World Bank-supported Emergency Support for MSMEs project (P174028), including its Additional Financing (P177962), which is implemented by the Ministry of Finance (MoF) in collaboration with the Open Joint Stock Company Guarantee Fund (GF). This Project will be implemented by the State Development Bank (SDB) for Component 1, the (GF) for Component 2, and the Credit Line Management Unit (CLMU) at Sep 24, 2024 Page 3 of 9 The World Bank Kyrgyz Republic Developing A Sustainable Finance Market For Msmes (P505643) the MoF (PIU) for Component 3. The project’s management, including environmental and social management for the entire project, will be with the MOF PIU. The MoF PIU and GF have gained sufficient experience in development and introduction of the ESMS in the PFIs under the existing project. The PIU is experienced in effective stakeholder engagement. The environmental and social performance of this project has been Satisfactory throughout the project implementation. The existing MoF PIU is staffed with one environmental and social specialist responsible for coordination of environmental and social (E&S) management, and additional one specialist provides communications support. The GF, under the MoF PIU coordination, manages E&S risks and impacts with support of short-term consultants. Additional E&S staff will be recruited as needed to undertake the additional tasks for the new project. The SDB, a third implementing agency, is a new development bank established in December 2022, and the WB is currently providing technical assistance to operationalize the bank. The SDB will also need to ensure the PFIs’ compliance with the WB ESF, the SDB will hire one Environmental and one Social Consultant to undertake this task. Given the SDB’s lack of experience in project implementation under the WB ESF, the capacity of SDB will need to be enhanced. II. SUMMARY OF ENVIRONMENTAL AND SOCIAL (ES) RISKS AND IMPACTS A. Environmental and Social Risk Classification (ESRC) Moderate A.1 Environmental Risk Rating Moderate The environmental risk of the project is Moderate with the activities proposed. Overall, the project has positive long- Public Disclosure term impacts associated with promoting renewable energy sources, enhancing energy efficiency across various sectors, and supporting sustainable agricultural practices that reduce environmental impact. However, some potential adverse environmental risks include temporary ones with site specific construciton of the renewable energy installations, renovation of the manufacturing/processing lines, and use of pesticides, soil loss related to agricultural activities. The project is also expected to produce minor environmental impacts such as emission of dust, water use, noise, limited waste generation, and similar that will be readily addressed by national legislation and regulations. Some project activities may cause direct and indirect disturbance of natural habitats. These are expected to be site specific, temporary and can be readily addressed through standard mitigation measures. As per national environmental regulation, companies developing renewable energy sources are subject to environmental impact assessment and environmental permitting that includes mitigation measures for environmentally significant installations. Minor OHS risks are related to renewable energy construction and installation works and these will be addressed by application of national legislation, the World Bank Environmental and Social Framework (ESF) and general Environmental, Health and Safety Guidelines (EHSGs). To address these risks, the PFIs will be required to prepare, adopt, and implement an Environmental and Social Management System (ESMS) in accordance with the Bank’s ESSs relevant to the project, as per ESS9. The World Bank will maintain oversight, particularly in the early stages of implementation. In summary, project activities are not expected to have large-scale, significant, and/or irreversible environmental and social impacts, the exclusion list for financing under the project, acceptable to the Bank, will exclude sub-projects with high or substantial environmental and social risks. Moderate A.2 Social Risk Rating Sep 24, 2024 Page 4 of 9 The World Bank Kyrgyz Republic Developing A Sustainable Finance Market For Msmes (P505643) The Social risk rating is Moderate. The Project will be beneficial for both (i) new and existing MSMEs, as it will narrow the large climate and green financing gap and help ensure that women and vulnerable populations and MSMEs are not left out in their adaptation and transition to a green economy; and (ii) PFIs through development and integration of an ESMS aligned with the national requirements and the WB ESF, and creating an enabling environment for sustainable finance. Possible exclusion of potential beneficiaries, including vulnerable groups as WMSMEs, disabled, and youth, from access to project benefits (credit lines, capacity building) will be addressed through awareness campaigns, transparent communication about project scope, clear eligibility and selection criteria, and application procedures. No significant risks related to labor influx, sexual exploitation and abuse/sexual harassment (SEA/SH), child labor or community health and safety are expected. To address social risks, the Project will implement throughout the Project implementation a Stakeholder Engagement Plan (SEP), Labor Management Procedures (LMP). An environmental and social management system (ESMS) of selected PFIs will be developed and implemented in accordance with the Bank’s ESSs relevant to the project, as per ESS9. The Grievance Redress Mechanism (GRM) will be established to receive, accept, review, and resolve any project related concerns or feedback, and be easily accessible to project-affected parties and workers. The investment activities with potential impacts under ESS5 will not be eligible for the project financing. It is expected that enterprises will use existing land/facilities in which they currently operate or are locally available. The exclusion list for financing under the project, acceptable to the Bank, will exclude sub-projects with impacts under ESS5 and significant social risks. B. Environment and Social Standards (ESS) that Apply to the Activities Being Considered B.1 Relevance of Environmental and Social Standards Public Disclosure ESS1 - Assessment and Management of Environmental and Social Risks and Impacts Relevant The standards relevant to the Project are ESS1, ESS2, ESS3, ESS4, ESS6, ESS9, and ESS10. The overall environmental and social impacts of the project investments are expected to be generally positive. The project’s potential environmental and social risks and impacts include temporary risks associated with transportation, water use, energy use, limited air and noise emissions and waste management resulting from the ongoing activities, equipment supply and limited construction and repair/maintenance/refurbishment activities, use of pesticides, soil loss related to tillage activities; and risks related to renewable energy installations; health and safety of the communities and workers (OHS); labor issues; and beneficiaries’ exclusion. Possible exclusion of potential beneficiaries, including vulnerable groups as WMSMEs, disabled, and youth, from access to project benefits, will be addressed through effective citizen/stakeholder engagement activities as designed under the Project as well as the Project's SEP. PFIs under this project will be required to develop and operate satisfactory ESMS proportionate to the project risks and impacts. The PFIs will screen MSMEs activities against the Exclusion list which will be part of the Project Manuals. The exclusion list for financing under the project, acceptable to the Bank, will exclude the sub-projects with substantial and/or high environmental and social risks, land acquisition, involuntary resettlement, livelihood and cultural heritage impacts, and activities involving child and forced labor. The risk of the Project as the ability of the SDB, GF and PFIs to implement a satisfactory ESMS to manage the E&S risks of the supported MSMEs will be managed through hands-on capacity-building support for all stakeholders involved in the project implementation. ESS10 - Stakeholder Engagement and Information Disclosure Relevant Sep 24, 2024 Page 5 of 9 The World Bank Kyrgyz Republic Developing A Sustainable Finance Market For Msmes (P505643) The project recognizes the need for an effective and inclusive engagement with all of the relevant stakeholders and beneficiaries. It will use the mechanism established under the Emergency Support for MSMEs project (P174028) which demonstrates pro-active measures for extensive outreach to the project’s beneficiaries. As part of the Project design, the MoF PIU will be encouraged to establish an online citizen engagement platform for collecting feedback from the project’s beneficiaries, especially given the existence of a successful platform established for another WB- funded project in the Kyrgyz Republic. The project will ensure that women and vulnerable populations and MSMEs are not left out in their adaptation and transition to a green economy. The mapping of all stakeholders with planned engagement modalities and GRM are presented in the SEP. Under the active project (P174028), the MOF PIU has in place established GRM to receive concerns, complaints, suggestions and feedback from beneficiaries as well as those who may be adversely affected. Detailed GRM procedures adapted for this project has been presented in SEP including responsible agencies (SDB, GF) to receive and address grievances, different means of receiving grievances and stipulated time frames to address and respond to grievances. GRM will have a special window to address sexual exploitation and abuse/sexual harassment (SEA/SH) complaints, if any, to ensure the privacy, protection and dignity of the affected persons. SEP prepared, consulted upon and adopted for the Project will be disclosed before the Project Appraisal. ESS2 - Labor and Working Conditions Relevant ESS2 is relevant. The project will include direct and contracted workers. The project will be carried out in accordance with the applicable requirements of ESS 2, in a manner acceptable to the World Bank, including, inter alia, implementing of adequate occupational health and safety measures (including emergency preparedness and response measures), setting out grievance arrangements for project workers (including the workers of MSMEs Public Disclosure assisted by the project), and incorporating labor requirements into the EHS specifications at all levels including the assisted MSMEs. These measures are described in the Labor Management Procedures (LMP) prepared and consulted upon for the Project. LMP will be adopted as part of the POM, including a Code of Conduct, SEA/SH prevention measures, and the Project workers’ GRM. PIU has to ensure that all workers have an access to the project specific GRM. Employees of beneficiary MSMEs and their labor risks will be addressed under the ESMS’s of PFIs acceptable to the Bank. The procedures will include initial screening & due diligence exercises of potential MSMEs with a focus on OHS performance, labor terms and working conditions, and SEA/SH risks in workplaces. ESS3 - Resource Efficiency and Pollution Prevention and Management Relevant The nature and scope of the project activities, it is expected that only small-scale impacts that are site-specific, temporary and manageable will be generated. As the main E&S risks of both Components involve implementation of ESMS by PFIs, potential risks related to the project such as air emissions, water releases, noise, odor, water use, energy efficiency and waste and wastewater management at the sub-project level will be mitigated through implementation of the respective ESMS of PFIs, to be incorporated into the POM and to be implemented by the PFIs and will be mitigated through implementation of respective national laws and regulations. Environmental risks of sub- projects which may cause significant pollution, will be rated as Substantial or High, and thus, will be considered ineligible for financing. The ESMS which is fully discussed under ESS 9, will include all the necessary processes and procedures to ensure site specific considerations related to resource efficiency, pollution prevention and management at beneficiary MSMEs are addressed and managed. ESS4 - Community Health and Safety Relevant Sep 24, 2024 Page 6 of 9 The World Bank Kyrgyz Republic Developing A Sustainable Finance Market For Msmes (P505643) This standard is relevant since some of the project activities may pose negative risks and impacts on the wellbeing of the beneficiaries, workers in various sectors of economy, and community members. Potential community health and safety impacts, including non-discrimination for female beneficiaries and mitigation measures to address SEA/SH risks will be addressed under ESS9. The exclusion list for financing under the project, acceptable to the Bank, will exclude sub-projects with significant risks or impacts related to ESS4. If subprojects are likely to have minimal or no adverse environmental or social risks or impacts and national law for addressing those risks is sufficient, then these provisions should be reflected in the ESMS of the PFIs. ESS5 - Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Not Currently Relevant This Standard is not relevant as any activities having the potential for temporary or permanent land acquisition, involuntary resettlement and livelihood impacts, or restriction of access to resources will not be financed under the project. It is expected that enterprises will use existing land/facilities in which they currently operate or are locally available. For the new MSMEs as well as the business expansion, it’s expected that MSMEs will acquire land in the open market on the basis of a willing buyer-willing seller situation or use available state/municipal land allocated through legal procedures established by the national legislation. In this respect, to ensure that individuals and communities are not adversely impacted all activities will be screened for impacts related to land acquisition, involuntary resettlement, loss of livelihood and restrictions on land use and an appropriate grievance, monitoring and reporting mechanisms will be considered in the project procedures. ESS6 - Biodiversity Conservation and Sustainable Management of Living Natural Relevant Resources Public Disclosure ESS 6 is relevant for this project at this stage, since project implementation locations are not identified yet. Project construction activities may cause direct and indirect disturbance of natural habitats or have an indirect adverse impact on flora and fauna through contamination of soil, water and air pollution. Furthermore, the project activities will be subject to environmental screening and procedures to exclude any activities with a potential negative impact on biodiversity. ESS7 - Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Not Currently Relevant Local Communities ESS 7 is not relevant as there are no Indigenous people as described under the Standard in the Kyrgyz Republic. ESS8 - Cultural Heritage Not Currently Relevant ESS 8 is not considered relevant for this project. The MSME activities are unlikely to affect built heritage, intangible heritage, or natural heritage. As a precautionary measure, chance find procedures will be included in the ESMS. ESS9 - Financial Intermediaries Relevant This standard is relevant. All eligible PFIs under Component 1 and 2 will be required to establish and maintain an ESMS, satisfactory to the Bank, to identify, classify, assess, manage, and monitor the environmental and social risks and impacts. The ESMS should also allow for screening of MSME activities against the World Bank’s and Project’s exclusion lists and compliance with national laws. The Project will finance only those MSMEs whose activities involve Sep 24, 2024 Page 7 of 9 The World Bank Kyrgyz Republic Developing A Sustainable Finance Market For Msmes (P505643) moderate or low environmental and social risks classified in accordance with the ESS 9. Each PFI will also maintain clearly defined E&S procedures that are proportionate to the level of potential E&S risks and impacts associated with the PFI’s sub-projects. The PFI’s ESMS will include (i) environmental and social policy; (ii) clearly defined procedures for the identification, classification, assessment and management of the environmental and social risks and impacts of sub-projects; (iii) organizational capacity and competency; (iv) monitoring and review of environmental and social risks of the portfolio; and (v) external communications mechanism. All relevant elements of ESSs 2-8 will be addressed under the project as per the requirement of this ESS. All relevant aspects of ESS 2 will apply to the PFIs including maintaining appropriate labor management procedures. The SDB and GF will require all PFIs to implement an external communications mechanism in a manner proportionate to the risks and impacts of the PFI’s sub-project. All PFIs’ ESMS will be shared with the Bank for approval before allowing said PFIs to participate in the project. The ESMS will be disclosed and PFIs will conduct consultations with potential MSME beneficiaries. Given the SDB in April 2024 approved its policy on green financing and sustainable development and this is a new area of engagement, both SDB and PFIs will require in-depth capacity building which will be supported under the Project. B.2 Legal Operational Policies that Apply OP 7.50 Operations on International Waterways No OP 7.60 Operations in Disputed Areas No B.3 Other Salient Features Public Disclosure Use of Borrower Framework No Borrower's E&S Framework will not be used for the project. Use of Common Approach No No financing partners are involved. C. Overview of Required Environmental and Social Risk Management Activities C.1 What Borrower environmental and social analyses, instruments, plans and/or frameworks are planned or required by implementation? As per the ESF requirements, the Borrower developed, publicly disclosed and consulted with stakeholders the following ESF instruments prior to Appraisal: 1. Draft Stakeholder Engagement Plan (SEP), including project GRM 2. Draft Labor Management Procedures (LMP), including GRM for Project Workers. 3. Draft Environmental and Social Commitment Plan (ESCP). The SEP and draft ESCP will be finalized and disclosed prior to Appraisal. The LMP fill be finalized as part of the Project Operational Manual. Sep 24, 2024 Page 8 of 9 The World Bank Kyrgyz Republic Developing A Sustainable Finance Market For Msmes (P505643) III. CONTACT POINT World Bank Task Team Leader: Emiko Todoroki Title: Senior Financial Sector Specialist Email: etodoroki@worldbank.org TTL Contact: Tatiana Segal Job Title: Senior Operations Officer Email: Tsegal@worldbank.org IV. FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects V. APPROVAL Public Disclosure Task Team Leader(s): Emiko Todoroki, Tatiana Segal ADM Environmental Specialist: Almaz Asipjanov ADM Social Specialist: Syrga Asanalieva Sep 24, 2024 Page 9 of 9