INTERNATIONAL FINANCE CORPORATION WORLD BANK GROUP 2003 sustainability review Innovation, Impact, Sustainability IFC's COMMITMENT 2003 Sustainability Review SUSTAINABILITY FACTS AND FIGURES 1 MESSAGE FROM THE EXECUTIVE VICE PRESIDENT 2 INNOVATION, IMPACT, SUSTAINABILITY--IFC'S COMMITMENT 4 FINANCIAL HIGHLIGHTS 16 ANNUAL REVIEW 17 Organization of the Review 18 What Does Sustainability Mean to IFC? 19 Sustainability Outreach and Training 20 Implementing Sustainability 23 Operational Performance 24 IFC's Own Environmental and Social Impacts 31 INTERNATIONAL FINANCE CORPORATION Since its founding in 1956, IFC has committed more than $37 billion of its own funds and has arranged $22 billion in syndications for 2,990 companies in 140 developing countries. IFC coordinates its activities with the other institutions in the World Bank Group--the International Bank for Reconstruction and Development, the International Development Association, the Multilateral Investment Guarantee Agency, and the International Centre for Settlement of Investment Disputes--but is legally and financially independent. Its 175 member countries provide its share capital and collectively determine its policies. INTERNATIONAL FINANCE CORPORATION World Bank Group COVER PHOTO: ABIGAIL TAMAKLOE I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N Sustainability Facts and Figures IFC identifies, tracks, and assesses new investment commitments that have positive high impact in corporate governance, economic, environmental, and social dimensions. IFC INVESTMENT IN HIGH-IMPACT PROJECTS, SNAPSHOT OF INVESTMENTS BY REGION, FY 2003 FY02-FY03 a b TOTAL DIMENSIONS 60 ectsj COUNTRIES, VOLUME PROJECTS FINANCING PROJECTS Pro OF OF ACT 40 DOLLAR FRONTIER OF REGION COMMITTED IN % NUMBER COMMITTED NUMBER HIGH-IMP Committed 20 Sub-Saharan Africa 82.05 17 5 otalT East Asia and the Pacific 29.83 25 13 of South Asia 97.41 16 12 % 0 Europe and Central Asia 9.87 52 23 TCA C , MI IAL EC Latin America and the Caribbean 11.80 51 34 O AND, N NMENT SOC Middle East and North Africa 35.98 16 12 O H-IMP Global n.a. 2 2 GI ECO VERNAN H NVIRE ANAGEMENT GO TOTAL 179 101 M OMMITMENTC aTo be considered "frontier" by IFC, a country must be either low income, as defined by the World Bank, or high risk, with a rating of 30 or below or unrated according to Institutional Investor. FY02 bNumbers differ from IFC totals because only first-time commitments are counted in high- FY03 impact calculation. ENVIRONMENTAL AND SOCIAL STAFF BREAKDOWN BY ENVIRONMENTAL AND SOCIAL AND TRAINING, FY 2003 CATEGORY OF FY 2003 COMMITMENTS Total IFC staff 2,113 CATEGORY Staff dealing with environmental 1,128 A B C FI and social issues in daily operationsa Staff in specialized environmental 86 Number of 3 80 48 62 and social business unit committed projects Staff receiving training in environmental and 480 Amount committed 169.74 1,586.3O 899.74 1,143.33 social issues during fiscal 2003 ($millions) Training time in environmental and social areas (hours) 1,940 Note: Numbers reflect recommendations for management performance indicators made by the Note: Category A projects have significant potential for adverse environmental or social impacts; EPI-Finance 2000 project on sustainability reporting for the financial services industry. Category B projects have less significant or more manageable impacts; Category C projects have a Includes mainly investment officers, portfolio officers, strategists, and attorneys. minimal or no environmental or social impacts; and financial intermediaries are treated separately. STAFF TIME DEVOTED TO ENVIRONMENTAL AND GROWTH OF ENVIRONMENTAL AND SOCIAL SOCIAL REVIEW, FY 2003 STAFF AND SPENDING, FY94-FY02 ACTIVITY STAFF HOURS YEAR NUMBER OF STAFF SPENDING ($millions)a 1994 8 2.0 Appraisal of new projects 24,510 1996 21 3.5 Supervision of portfolio projects 12,879 1998 42 5.1 2000 70 9.3 Note: Staff performed upfront appraisal and follow-up supervision work for over 1,000 individual 2002 84 11.7 investment projects in fiscal 2003. In all, 18.7 staff-years were devoted to environmental and social review of investment projects in 2003. a 2002 dollars SUSTAINABILITY FACTS AND FIGURES 1 I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N MESSAGE FROM The ExecutiveVice President A t IFC, sustainability is central to our mission of alleviating poverty and an essential part of our corporate strategy. For IFC to be a partner of choice for investment in the private sector of emerging markets,we must offer more than capital.Our experience in analyzing environmental and social impacts and ensuring that harm is mitigated has given us an expertise in sustainability that is second to none among financial institutions and multilateral development banks. We are making our knowledge and experience available to New Directions in Our Business clients,well beyond the environmental and social review tradi- During the year we intensified our efforts on trade facilities, tionally associated with our investments. Businesses equipped microfinance,housing finance,risk mitigation,local currency to focus on sustainability enjoy tangible performance benefits-- financing,and securitization.We not only responded creatively decreased use of resources,improved worker productivity,and to the evolving needs of the private sector in developing new market opportunities such as sale of carbon emissions countries but in some instances staked out new ways of credits, among others. Through more timely and effective doing business. communication with clients,IFC is working to ensure that we For example, in Brazil, Guatemala, and India, we helped are the best source of advice for emerging market firms on arrange some of the first carbon emissions transactions, financial,environmental,and social sustainability. including the biggest deal to date under the Kyoto Protocol's Executive Vice President Peter Woicke (left) and President James D. Wolfensohn. BRETON LITTLEHALES 2 MESSAGE FROM THE EXECUTIVE VICE PRESIDENT DECLAN HEERY Clean Development Mechanism.InArgentina and Brazil,we World Bank Group Collaboration played a key countercyclical role,inducing commercial banks In recent years,we have seen a greater emphasis in many coun- and other partners to establish large trade facilities that address tries,even the poorest ones,on economic growth and thus on the reduction of short-term export credit.In China,we helped establishing a better environment for the private sector.These set up one of the first major sales of nonperforming loans. countries are also recognizing the need to build a better infrastructure to attract private sector investments.The World Sustainability Impact Bank Group's expertise on investment climate issues will be Private sector development in poor countries is not just about helpful when these countries formulate private sector strategies. making investments. Enlightened companies--not only in Many projects in developing countries will come to the developed world but also in China,India,Eastern Europe, successful fruition only through public-private partnerships. and Latin America--have recognized that long-term IFC has begun to tap the International Development profitability is best secured when these investments are made Association (IDA), the source of concessional lending to the in an environmentally friendly way, when affected people world's poorest countries, for innovative projects that blend participate in the process, and when local communities public funding with private capital. receive a real benefit from the investments.The private sector The World Bank Group will also need ways of financing can often make substantial contributions to poverty subsovereign governments,which are taking on greater respon- alleviation, as many of our clients have recognized.With our sibility for water,electricity,and other infrastructure deliveries. expertise on environmental and social matters,our knowledge Having already arranged the first municipal water financing in of local supply-chain enhancement, and our HIV/AIDS Mexico,we have now created a joint IFC-World Bank unit to program, we actively support the private sector in maxi- explore the new horizons of subsovereign financing. mizing its sustainability impact. In this respect, we are pleased and proud that in June Looking Ahead 2003, ten leading international banks adopted the Equator A number of challenges remain ahead of us:competing finan- Principles.These banks agreed to a set of environmental and cial products from other multilateral development banks,volatile social policies and guidelines based on those of the World market conditions,and realizing the full potential synergies from Bank and IFC, which they will apply to their project our noncommercial activities.We also need to bring more of the financing worldwide. Four more banks have already agreed world's global businesses on board with sustainability. to these principles, and others are expected to soon. IFC As we face the new fiscal year,we are well positioned to take advised on the substance of these principles and played a on such critical tasks as revising the IFC safeguard policies, central role in negotiating the agreement. mainstreaming the implementation of environmental and social These banks see a bottom-line value in having clear, issues within our investment departments,and segmenting our understandable, and responsible standards for investing in markets and improving our business promotion. emerging markets, which perfectly illustrates the business I have every confidence that we can continue to thrive and case for sustainability.For the ten founding banks alone,the grow in the year ahead, with commitment to our overall Equator Principles will affect about $100 billion in global mission,poverty reduction. investment over the next 10 years, in industries ranging from forestry and manufacturing to infrastructure and extractive industries. For IFC, this move shows the potential for our leadership on issues of sustainability.It shows that we can help businesses recognize the ways their interests align with those of people in developing countries and with the well-being of the PeterWoicke global environment. ExecutiveVice President MESSAGE FROM THE EXECUTIVE VICE PRESIDENT 3 Innovation, Impact, Sustainability IFC'S COMMITMENT A t the International Finance Corporation our mandate is to further sustainable economic development through the private sector. We pursue this goal through innovative solutions to the challenges of development, as we invest in companies and financial institutions in emerging markets and as we help build business skills.We consider positive developmental impact an integral part of good business, and we focus much of our effort on the countries with the greatest need for investment. We recognize that economic growth is sustainable only if it is environmentally and socially sound and helps improve the quality of life for those living in developing countries. RICHARD LORD ABOVE AND OPPOSITE: Companies benefiting from IFC financing include the GIIS cardboard factory in Ghana and Asaka Bank in Uzbekistan. 4 INNOVATION, IMPACT, SUSTAINABILITY: IFC'S COMMITMENT PANOS Innovation... In fiscal 2003, IFC pioneered a number of new approaches to private sector development. · In Mexico, we entered the municipal finance market for · From India to Russia to Vietnam, we invested in the first time. cutting-edge information technology firms and trained · In China, we developed a new approach to the problem workers to increase their high-tech skills. of nonperforming loans. · In all regions, we worked to increase the role of smaller · In Tajikistan, we helped a private company restore businesses as suppliers of goods and services to the larger hydropower plants while ensuring affordable energy for companies in which we invest. local people and safeguarding the environment. IFC ENTERS THE MUNICIPAL FINANCE MARKET Municipal governments provide most essential infrastructure services in developing countries but usually lack access to market financing. With a $3 million partial credit guarantee for a water project in Mexico, IFC has entered the municipal finance market. Partnering with a private bank, IFC will provide a peso-denominated guarantee to a private Mexican trust, which will issue bonds up to $8.8 million equivalent in the local capital market. Bond proceeds will be used to provide a loan to the city of Tlalnepantla and its municipal water company for design and construction of a wastewater treatment plant. IFC also helped secure a $5 million letter of credit from a private lender. This project is both the first municipal bond offering in Mexico that is not reliant on sovereign support and the World Bank Group's first direct financial support to a municipality. It creates a model whereby municipalities in Mexico can secure financing entirely through their own revenues rather than a federal guarantee or assignment of federal transfers--and can mitigate their foreign exchange risk. The transaction also introduces a new local asset class for the country's capital markets. The wastewater treatment plant, the first in Mexico's most industrialized municipality, will stop sewage from flowing untreated into the Rio San Javier. The plant will recycle residential and industrial wastewater for industrial reuse and free up potable water. It should also relieve pressure on heavily exploited groundwater aquifers. INNOVATION, IMPACT, SUSTAINABILITY: IFC'S COMMITMENT 5 Impact... IFC seeks out business sectors with the greatest potential for raising living standards. We place special emphasis on countries that have low · But because investment alone is sometimes insufficient,we incomes or present high risks for investors,and we pinpoint provide technical assistance and advisory services to help ways that they can improve their investment climates.We ensure that business loans and equity investments,now and also remain committed to addressing the evolving needs of in the future, will have sustained economic benefits. the private sector in middle-income countries. · In countries experiencing economic downturns, we also · For our investments--ranging from a port in Pakistan to play a critical role, making working capital available and microfinance banks in Azerbaijan, Chad, and El leading the way for the private sector to invest again. Salvador--we work to leverage the positive impact of the projects we finance. THE EQUATOR PRINCIPLES In June 2003, ten major international banks adopted the Equator Principles, a voluntary set of guidelines based on the environmental and social guidelines and safeguard policies of IFC. These principles will be applied to the project finance activities of these banks, globally and in all industry sectors. In drafting the Equator Principles, the banks received extensive advice and guidance from IFC. These ten banks underwrote about $14.5 billion in project loans during 2002, representing some 30 percent of the project loan syndication market globally. The following banks adopted the Equator Principles: · ABN AMRO Bank, N.V. · HVB Group · Barclays PLC · Rabobank · Citigroup, Inc. · Royal Bank of Scotland · Credit Lyonnais · WestLB AG · Credit Suisse Group · Westpac Banking Corporation 6 INNOVATION, IMPACT, SUSTAINABILITY: IFC'S COMMITMENT Sustainability... Sustainable development--improving corporate governance and taking environmental and social issues into account--is at the heart of IFC's business. But we go even further:we explore ways to turn sustainable · We helped industrial companies reduce greenhouse gas development into commercial opportunities.Fiscal year 2003 emissions, in some cases through expected sales in the saw a range of these activities: emerging market for carbon emission credits. · We maintained our commitment to smaller businesses by · We educated employers and workers through the providing a wide range of technical assistance and IFC Against AIDS program and helped the Brazilian advisory services and by helping financial institutions government launch its Zero Hunger initiative. serve these clients. PROVIDING ELECTRICITY AND SAFEGUARDING THE ENVIRONMENT With the collapse of the Soviet Union, the subsequent civil war, and sharp economic decline, the diesel generation plants in the Gorno-Badakhshan region of eastern Tajikistan ceased to operate. As a result, the population of this very poor region has come to depend on wood as fuel, and an estimated 70 percent of the tree cover has been cut down in a decade. Schools and other public institutions have had to close during the coldest weather, indoor pollution has become acute, and economic activity has been stifled. IFC and the Aga Khan Fund for Economic Development have established Pamir Energy, a private concessionaire that is taking control of hydropower plants and other facilities that serve 250,000 residents and were previously state owned. The project, the first private investment in the power sector in Tajikistan, will double the capacity of a Soviet-era power plant, improve transmission and distribution facilities, and regulate the level of a lake to ensure adequate flow in the winter. The project also aims to reduce emissions and natural resource depletion. It will create local contract employment during construction, and a more reliable power supply will contribute to the region's economic recovery. IFC is investing $8 million in the new company, of which $3.5 million is in equity and $4.5 million in loans. With donor support, we earlier provided the technical assistance needed to structure and fund this investment. In an innovative example of IFC­World Bank cooperation, IDA is providing $10 million to the Tajik government to help keep tariff rates affordable for the local population. A further grant from the Swiss government will ensure that a minimum monthly supply of electricity is delivered at a very low rate to even the poorest households. INNOVATION, IMPACT, SUSTAINABILITY: IFC'S COMMITMENT 7 F R O N T I E R S T R A T E G Y Investments and Services WHERE THEY MAKE THE MOST DIFFERENCE FC focuses its efforts where they make the greatest difference. We invest in the sectors I and countries that the private sector is unwilling or unable to enter on its own,either because of an adverse economic situation or because business success has not been demonstrated there before. We also play a catalytic role for other project sponsors, including commercial banks, to invest in developing countries. Through technical assistance,advisory services,and research,we are helping developing countries improve their investment climates and strengthen the capacity of their private sector to expand and operate.These nonlending services from IFC and itsWorld Bank Group partners help ensure that a country's economy will benefit over the long term from private sector investment. IFC also demonstrates its commitment to countries in economic crisis, playing a key countercyclical role when there is a retreat of private capital.In fiscal 2003,we helped clients in Brazil and Argentina secure vital trade financing, in collaboration with international banks through the B-loan program. Similar investments we made in East Asia during the crisis of the late 1990s have brought long-term economic benefits. WHAT IS IFC'S FRONTIER STRATEGY? IFC places an emphasis on countries where there is little or no foreign capital flow. To be considered "frontier" by IFC, a country must be either low income, as defined by the World Bank, or high risk, with a rating of 30 or below or unrated according to Institutional Investor. IFC helps private companies and financial institutions invest in these countries. Along with the World Bank, we also look for ways to strengthen investment climates, providing advisory services and technical assistance that enable businesses to acquire the skills and know-how that lead to prosperous, sustainable enterprises. LINDA YOUNG 8 INVESTMENTS AND SERVICES WHERE THEY MAKE THE MOST DIFFERENCE PANOS Investment Climate monitor development effectiveness and allocate funding and the World Bank Group through IDA for low-interest loans to the world's poorest A sound legal and regulatory environment is necessary for countries.Doing Business is part of theWorld Bank Group's firms to invest, improve productivity, and create jobs.That increasing emphasis on investment climate issues. During environment includes protection of property rights, access 2003 the Bank Group established a new vice presidency to credit, and efficient contract enforcement. But we need for Private Sector Development to coordinate work on to know more about the specific institutional reforms that investment climate.The new vice president was also named lead to a favorable environment for doing business. IFC chief economist. The Doing Business project, a joint initiative of IFC and the World Bank, fills this gap by creating new, quantitative indicators on business regulations and their enforcement and by analyzing the relationship of these regulations to economic outcomes.The indicators can be compared over time and across more than 130 countries. Topics covered include business registration, labor regulations, contract enforcement, creditor rights, and bankruptcy. New topics will be added in 2004 and 2005 and updated annually. Findings will be published in the annual Doing Business report--launched this year in both Web and hard-copy versions--as well as an online database of indicators, academic papers, and country analyses. The Doing Business indicators can be used to identify ENGLISH specific opportunities for reforming the business environ- ment. They also enable policymakers and investors to RICHARD compare countries and monitor change. Indicators are Krishi Gram Vikas Kendra, sponsored by Usha Beltron, develops agricultural programs already being used in broaderWorld Bank Group efforts to for some of the poorest regions in India. REDUCING EMISSIONS, HELPING THE COMMUNITY Usha Beltron is India's leading manufacturer of specialized wires, steel wire ropes, and rods--and the world's fourth largest. But like other midsize companies in India, it has limited access to long-term financing. IFC played a key role in restructuring Usha Beltron's operations by providing debt and equity financing on its own account and by mobilizing loans from other investors. IFC also provided the company with valuable advice on setting up a cogeneration power plant that will reduce emissions and power costs by using waste flue gases from the company's iron plant to generate power. Usha Beltron has a strong corporate commitment to community development. It sponsors Krishi Gram Vikas Kendra, a nongovernmental organization whose activities include watershed development projects in more than 50 villages near Usha Beltron's plants; health care and agricultural development programs in two of India's poorest states, Bihar and Jharkhand; and women's enterprise development in partnership with the Self-Employed Women's Association. Usha Beltron also operates research and learning centers that offer training in business management to small businesses and other local manufacturers. FRONTIER STRATEGY 9 T E C H N I C A L A S S I S T A N C E Building Capacity for Business FC supports private sector development both by investing and by providing I technical assistance and advisory services that strengthen businesses. Key capacity- building initiatives include training and advisory services for small and medium enterprises,investments in small business,and development facilities serving regions or addressing specific issues of sustainability. INVESTMENT AT THE GRASS-ROOTS LEVEL In frontier markets where private capital flows are limited at best, grass-roots groups' income generation projects can make a big difference in poor people's lives. This year, for example, the Mekong Private Sector Development Facility helped create a commercially viable small business in partnership with Hagar, a Cambodian nongovernmental organization that has rebuilt the lives of 20,000 destitute mothers and children over the past decade. MPDF has been active with Hagar since 1999, providing business advice on the planned commercialization of the nonprofit group's silk handicrafts and soy milk production activi- ties. For the latter, MPDF conducted a market study that showed great potential demand for a repackaged product. It then helped shape the business proposal that this year attracted a $450,000 IFC equity investment in newly launched Hagar Soya Ltd. and agreed to provide postinvestment marketing and sales support to Hagar as well. This financing will allow Hagar Soya to expand its daily output from 300 to as many as 12,000 liters per day. It will use locally grown soybeans to produce a nutritious drink that is affordable for Cambodia's poor MPDF and often malnourished population. ABOVE: Hagar Soya.BELOW, LEFT: Hagar Design. MPDF has also helped Hagar Design, enabling it to obtain $65,000 in funding from IFC's SME Capacity Building Facility to improve its silk production operations. Hagar Design has established an international market and employs more than 50 previously disadvantaged women to sew high-quality handbags, table mats, and other fabric products. 10 BUILDING CAPACITY FOR BUSINESS JOSE ZEVALLOS IMPROVING PRACTICES TO MAINTAIN MARKET ACCESS Favorita Fruit, an IFC client in Ecuador, is a pioneering firm on environmental and social issues. In 1999, its banana exporting subsidiary, Agricola Bananera Reybancorp, had all the banana farms it owns certified by Rainforest Alliance for environmental and labor practices. Through Fundacion Wong, named after the company's founder, Favorita supports over 30 schools for children in the rural areas from which it sources bananas. Supporting schools complements Favorita's leadership in efforts to eradicate child labor in the banana fields through the exporters' trade association, CORPEI. In 2003, Favorita and IFC's Corporate Citizenship Facility have begun to develop and implement a program of outreach and training for independent banana suppliers, which account for over half the company's exports. The program will impart basic environmental and labor practices that are becoming essential for Ecuadoran farmers to maintain access to markets in the EU and the United States. It consists of sessions in each of four banana-growing regions and field visits to certified Favorita facilities. There is no charge for farmers to attend the training. The project has the potential to affect environmental and labor practices on 18,000 hectares of banana plantations and to influence the lives of thousands of workers. The facility is funding all training costs and materials and the rental of venues for training. Favorita Fruit is providing staff support and all transportation. Environmental and Social Facilities With support from donor governments, IFC has established resources that provide technical assis- tance and funding to help companies in specific aspects of environmental and social development: · Corporate Citizenship Facility. This facility supports the development of good practice in community develop- ment, environmental stewardship, and labor standards. The facility also disseminates good practices and helps IFC project clients take a more proactive approach to corporate social responsibility, beyond compliance with ALLOS environmental and social requirements. Costs of the ZEV programs are shared by the facility and client companies. JOSE · Environmental Opportunities Facility. This facility · Sustainable Financial Markets Facility. This facility supports projects that offer innovative private sector promotes environmentally and socially responsible lending solutions to local environmental issues. Such projects and investment, both through IFC's financial interm produce goods or services that reduce pollution or ediaries and in the financial sector of emerging markets improve the use of resources such as water and energy. generally. Funded by grants, these programs include The facility provides funds for project development and training and technical assistance to build financial flexible financing to help overcome barriers to such institutions' understanding of environmental and social projects and move them toward commercial viability. issues and the capacity to address them. TECHNICAL ASSISTANCE 11 E N V I R O N M E N T Biodiversity Conservation and IFC FC is involved in projects that permit the private sector to contribute directly to I the preservation of animal and plant species around the world.We are working to help the private sector in emerging markets be a positive force for maintaining the world's biodiversity. Through grant funding,we develop and deliver projects with specific biodiversity impacts. These include our efforts to preserve poison dart frogs in Peru and the Siberian salmon in Mongolia (see box).Another example is the Balkan Herbal Development Initiative. With partners, we have examined the prospects for marketing the region's naturally occurring herbs to the European Union, while identifying specific measures that will protect biodiversity and ensure sustainable harvesting. We also encourage attention to biodiversity through our mainstream investment projects. The effort to save the sarus crane is proceeding with financial support from HolcimVietnam,a cement producer with operations adjacent to crane habitats (see box). In the Maldives, Villa Shipping is leading efforts, through a trade association, to implement integrated shoreline protection, which should help maintain habitat for sea turtles.The company is also monitoring the health of nearby coral reefs. INTERNATIONAL CRANE FOUNDATION 12 BIODIVERSITY AND IFC NICK FLANDERS SUSTAINABLE ECONOMIC BENEFITS FROM SAVING SPECIES As part of its commitment to preserving biodiversity in developing countries, IFC has launched innovative projects in Peru and Mongolia in partnership with local civil society organizations. The projects are funded by the Global Environment Facility. In the rainforests of Peru, IFC is working with two nongovernmental organizations to establish a ranching and export business for poison dart frogs. This will help rural communities generate income from a practice that enriches the rainforest rather than depleting its diversity. The project is expected to stabilize or increase the population of at least 60 frog species, many of which have been smuggled out of the area. It will also employ about 250 families and conserve more than 3,000 hectares of tropical forest. In northern Mongolia, IFC invested in a river conservation project that will protect the Siberian salmon, a threatened fish species, and provide a sustainable source of income for local nomadic communities.The project contributes $1 million to help the Taiman Conservation Fund, a nongovernmental organization, develop a financially sustainable conservation management system for the Eg-Urr watershed. The plan allows for development of low-impact tourism in this wild and scenic waterway. PROTECTING A CULTURAL ICON The grasslands of the Ha Tien Plain in southwest Vietnam represent the last ecosystems of their type in the country and hold significant biodiversity, including the globally endan- gered sarus crane. The world's tallest flying bird, the crane is a cultural icon throughout the region, symbolizing long life and evident in every place of worship. The grasslands have been subject to rapid conversion to agriculture, much of it unsustainable. Examples of land use in the area include 22,000 hectares of failed eucalyptus plantation and low-yield rice farming. Meanwhile, a rapid increase in shrimp aquaculture leads to acidic water that is in constant need of neutralization. In collaboration with Holcim Vietnam, an IFC client based KELLER in the region, and the International Crane Foundation, IFC's SAM Corporate Citizenship Facility supported a land use mapping and critical natural habitat identification exercise in early 2003. The results of this work were presented in a workshop to key stakeholders, from which specific conservation proposals emerged. A fundraising effort is now underway to allow a detailed feasibility analysis of the proposals. TION FOUNDA TOP: Ecotourism yurts in Mongolia. ABOVE, LEFT: Poison dart frog in Peru. LEFT AND OPPOSITE: Sarus cranes in Vietnam. CRANE TIONAL INTERNA ENVIRONMENT 13 E N E R G Y Improving Use of Resources ocusing on sustainability makes good sense for business. IFC's current work in the F energy sector--with utilities, private companies, and financial institutions-- provides examples of how innovative approaches to project finance can allow the private sector to achieve environmental benefits while enhancing profitability. Our investments,for example,include projects that commercialize energy efficiency in several Central European countries (see box). IFC is also breaking new ground in the market for greenhouse gas emission reductions--also called carbon credits--together with government and private sector buyers of emission reductions and sponsors in developing countries (see box). Industrialized countries that ratify the Kyoto Protocol will be required, once it comes into force, to reduce emissions they produce domestically. These countries can also meet a part of their obligation by purchasing carbon credits from projects in developing countries. IFC supports this market-based approach through several World Bank Group facilities that purchase carbon credits.For developing countries,the sale of carbon credits will encourage the transfer of cleaner technologies at an effectively reduced cost. For developed countries,the purchase of credits increases the range of options for complying with the Kyoto Protocol. Use of a market-based system is a groundbreaking step for achieving environmentally beneficial impacts globally,and IFC is actively facilitating the development of this market. COMMERCIALIZING ENERGY EFFICIENCY FINANCE Central European countries remain three to five times more inefficient in energy use than their Western European neighbors. This inefficiency impairs economic competitiveness, creates social pressures, causes air pollution, and poses obstacles to EU accession. The demand for new, energy-efficient technologies is strong, but there is little capital available. Local financial intermediaries consider energy efficiency projects high risk because of their novelty and the difficulty in structuring collateral. To promote such projects, IFC, in partnership with the Global Environment Facility and bilateral donors, has established a $90 million guarantee facility, including up to $75 million invested by IFC. The facility provides a partial guarantee for loans made by local financial intermediaries when they invest in energy efficiency projects. This innovative structure will enable IFC to leverage more than $225 million in private capital investments. IFC launched a similar project in Hungary in 1997 and began this new initiative in the Czech Republic, Estonia, Latvia, Lithuania, and Slovakia in June 2002. The goal is to build a sustainable market for financing energy efficiency. The initiative uses a combination of technical assistance and credit enhancement instruments to enable local financial institutions to develop a profitable business in energy efficiency lending. This effort will have significant economic, environmental, and social benefits, and it supports the participating countries' targets for EU accession. Examples of program impacts in Hungary include investments in projects to upgrade street lighting in small towns in the poorest parts of the country and to replace outdated, unreliable heating technologies in hospitals. 14 IMPROVING USE OF RESOURCES NIELS VESTERGAARD MARKET MECHANISMS THAT REDUCE EMISSIONS In addition to offering project financing, for eligible projects IFC can help companies increase their income while reducing environmental impacts. For example, IFC recently committed $15 million in financing to Balrampur Chini Mills Limited, one of India's premier sugar companies, to help finance a 20-megawatt cogeneration plant that will produce electricity from the biomass waste product of its sugar operations. The IFC-Netherlands Carbon Facility is also negotiating to purchase up to 2 million tonnes of emission reductions from their operations. Another example of combining conventional project financing and carbon financing to help companies lower costs and increase efficiency is the El Canadá hydroelectric project in western Guatemala, which will displace about 144,000 tonnes annually of greenhouse gas emissions that would otherwise be generated through thermal plants. In addition to $27 million in financing (including a $12 million syndicated loan), IFC collaborated with the sponsors and the Prototype Carbon Fund to arrange carbon credit financing. IFC is also promoting the market for greenhouse gas emission reductions by helping companies in which it is not investing directly. This year the IFC-Netherlands facility struck a C15 million deal to purchase 5 million tonnes of emission reductions = from V&M do Brasil, a leading producer of steel tubes in Brazil that uses sustainably produced biomass charcoal instead of coal in its steel production. Revenues from this sale of carbon credits will be used by the company to continue maintaining its biomass plantations. IFC also facilitated a one-time sale of 400,000 tonnes of credits by V&M to Toyota Tsusho Corporation of Japan. ABOVE: A jetty used to import liquid petroleum gas to China. LEFT: Liquid steel at the Ispat Karmet plant, Kazakhstan. VESTERGAARD NIELS ENERGY 15 I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N Financial Highlights * 's own account and syndications. ** SME investments are derived from all industry sectors. Financial consists of finance and insurance, and funds. Infrastructure consists of utilities and transportation. 16 FINANCIAL HIGHLIGHTS I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N Annual Review T he International Finance Corporation, the private sector arm of the World Bank Group, is a global investor and advisor committed to developing a sustainable private sector in emerging markets.For many years,we have sought convergence and common ground between the pursuit of financial gain,the need for economic growth, and the safeguarding of the environment and people's interests.We are cognizant of lessons learned through our nearly 50 years of service and are committed to ensuring that we are part of solutions that work for all.For us to achieve this goal,sustainability must be a central theme for the institution, its staff, and the clients with whom we work.This report shares with stakeholders our intentions, means, and progress on our commitment to sustainability. SUSTAINABILITY-- MORE THAN A THEME, IT IS OUR STRATEGY Sustainability is central to IFC's move to position itself as a supplier of broad commercial expertise, not merely capital, to our private sector clients in the developing world. There were few institutions similar to IFC in the early decades of our existence. Now there are more than 30 bilateral, multilateral, and export credit agencies providing capital to private sector firms in developing countries.What differentiates IFC is our ability to provide value to our clients above and beyond financing.This value comes from the expertise we have amassed over nearly half a century,from our global reach,and from our unique capabilities--particularly our expertise on environmental and social matters. For IFC, sustainability is an essential element of business success as well as a means of achieving enhanced development impact. SUSTAINABILITY REVIEW 17 THE GLOBAL CONTEXT commercial benefits as a result. But at the same time that we The past year brought into sharp relief several major seek out new clients capable of excelling on environmental, challenges for sustainable development in IFC's member corporate governance, and social issues, we will continue nations. The global economy--facing a combination of service to those clients for whom achieving compliance with corporate governance scandals, overcapacity in key sectors, our baseline standards represents a significant achievement. political instability, slowed trade negotiations, SARS, and We bring value to our clients and the societies in which they backlashes in some places against market liberalization-- operate when we engage with a smaller firm in a low-income continued to struggle to regain momentum from its steepest country and help it move to international standards of decline since the oil crisis of 1973. performance on environmental, corporate governance, and In this context, 2.5 to 3 billion people in developing social issues.Any new system that IFC devises to encourage countries continue to live on less than $2 a day.Over the next performance beyond its baseline standards must be practical and 30 years,the world's population is expected to increase by an allow for incremental improvements in the tougher markets. additional 2 billion,with nearly all the increase occurring in These tensions and challenges guide IFC as we assess how developing countries.To address this increase in population we can do more for sustainable development around the among other challenges, growth and innovative approaches world. Our sustainability initiative is a development and an are essential. articulation of our commitments,an opportunity to refocus Together, these factors have placed private sector our efforts. investment as an engine for economic growth at the forefront Organization of the Review of the poverty reduction agenda. But theWorld Summit on Sustainable Development, held in September 2002 in IFC's 2003 Sustainability Review is designed to offer our Johannesburg, underscored the sobering reality that the stakeholders as complete a picture as possible of IFC's global growth needed in coming decades cannot be achieved sustainability efforts over the past fiscal year.This is IFC's using the methods and models of the past.Throughout the second annual Sustainability Review,and we intend for the developing world,clean water,clean air,biodiversity,fisheries, information and metrics shared in this review to form a basis and fertile soils are all at risk because of unsustainable growth. for reporting going forward. The challenges for a global development finance institu- · What Does Sustainability Mean to IFC? For our tion such as IFC have never been greater.The need for our stakeholders to gain a fuller understanding of what we capital is clear,but so also is the need for IFC to pioneer the intend to do through our commitment to sustainability, creative solutions that will contribute to the sustainability of they must know what sustainability means to IFC. We private sector activity in emerging markets. look at sustainability as a matter of making investments in firms that are profitable and competitive in their markets ENHANCING SUSTAINABILITY but also good neighbors interested in social development IFC's mission is to invest in high-risk environments, while and respectful of the environment. turning a profit, to give confidence to other private investors · IFC's Sustainability Outreach and Training. The that a given country or sector presents viable investment section gives examples of some key contributions to opportunities.At the same time, IFC must ensure that these sustainable development during fiscal 2003. investments are developmentally sound and sustainable.If they · Implementing Sustainability.This section shares details are not,then we are not delivering on our mandate. on the efforts underway to make IFC's corporate commit- IFC has always been about promoting sustainable ment to sustainability a reality.This is not so much about development (even before the term was coined), staffed by fundamental change as it is about a sharpening of focus. people with a personal and professional commitment to seeing · Operational Performance. The greatest impact IFC the private sector serve long-term objectives in human can have on sustainable development comes from our core development and environmental stewardship. But we must function,making capital available to the private sector in the ensure that lessons learned inform our commitment to doing developing world.This section details the expected devel- things better in the future. opmental impact of our new investments,our investment in While IFC has been a leader in incorporating environmental environmental sectors, and our funding of special projects and social standards in its projects since 1989, we increasingly through new environmental and social funding facilities. seek ways to encourage, through our investments in client · IFC's Own Environmental and Social Impacts. companies, even better performance in these areas. Although sustainability efforts focus on our investment A number of investments in IFC's portfolio have outperformed activities, IFC also pays attention to the environmental our high environmental and social standards--and gained and social impact of its own operations. 18 SUSTAINABILITY REVIEW What Does Sustainability found on all sides of the globalization and sustainable devel- opment agendas. Mean to IFC? There are several aspects of our role,however,that lend us a For IFC,sustainability is a matter of making investments that distinct perspective.One distinction has been our commitment serve our mission--to promote private sector investment in to articulating the reasons why businesses ought to become developing countries, helping to reduce poverty and more sustainable.We have found it important as a financial improve people's lives. A project needs to turn a profit, and thus remain in business, to serve its owners and the communities in which ENVIRONMENTAL AND it operates and to make effective use of capital. Likewise, SOCIAL RISK RATINGS AND to serve our mission, a project should not only generate COMMERCIAL PERFORMANCE profits but also respect the environment and adhere to IFC calculates an environmental and social risk rating (ESRR) labor standards. for all its portfolio projects. The ESRR is predicated on a Seeking to foster private sector growth while ensuring 1-4 scale, with a score of 1 indicating very low risk and a score that social development and environmental stewardship of 4 signaling very high risk. The risk rating is updated concerns are addressed is not a new objective for IFC. annually. This rating allows for a concise, up-to-date We have always focused on the business of working through assessment of client environmental and social risk throughout the private sector to achieve public good. the life of the project. It permits IFC to allocate staff and resources for environmental and social supervision. WHAT IS DIFFERENT NOW? IFC also has means of monitoring and assessing financial performance over the life of an investment. One such measure Whereas in the past we worked hard to ensure that the is a credit risk rating (CRR), which is done annually to offer environmental and social impacts of our projects did no guidance on the financial health of a given investment. harm, we now aim for our investments, wherever possible, The CRR is based on a 1-7 scale, where 1 is best and 7 worst. to "do good"--to achieve wider and more far-reaching For IFC equity investments, investment rates of return (IRR) environmental and social goals. are also calculated. We have developed new metrics to assess the development Having these data points at our disposal has permitted impact of our projects.We have aligned staff incentives so that IFC to examine the impact of environmental and social risk development impact is a criterion along with profitability on investment performance. Analyzing the correlation between and client satisfaction in assessing the performance of environmental and social risk and the various measures of investment staff.We have sought to develop tools and build financial health has revealed an interesting connection: internal capacity so that we can be the best source of advice over 75 percent of all loan investments with an ESRR of 4 also and guidance for our investment clients--whether on issues carry credit risk ratings of 5 or above. The story for equity of finance,corporate governance,community development, investments is even starker: over 97 percent of investments or environmental management. Finally, we are committed with an ESRR of 4 are rated at 6 or above on credit risk rating. to working with our various stakeholders on complex Investment rates of return for equity investments also issues, such as managing the revenues generated through show a strong correlation to ESRR scores. The following table our investments, the impacts of economic activity on shows the average IRR for all portfolio equity projects at each climate change, and the protection and enhancement of ESRR rating. global biodiversity. Committing to a more systematic method of assessing likely project outcomes, reporting our assessments of projects in a CORRELATION BETWEEN ESSR AND IRR transparent and comparable manner, and continuing our conversations with stakeholders on complex global issues-- ESRR IRR these are all aspects of what sustainability means to IFC. 1 8% 2 4% WHAT DOES IFC CONTRIBUTE 3 -1% TO SUSTAINABILITY? 4 -31% Corporate social responsibility (CSR) departments are found in many companies today.Sustainability and CSR reports are even more common. Specialized nongovernmental organi- zations, business associations, and consultancies are to be SUSTAINABILITY REVIEW 19 institution--whose main impacts on the environment and investments, coupled with our commitment to finding communities are not direct but through investment project win-win scenarios through application of the business case, activity--to understand the potential benefits to business that differentiate us from our peers in the area of sustainability. can arise through better environmental, social, and corporate governance performance. This "business case" is critical to Sustainability Outreach improving the convergence between our two objectives of accelerating economic growth and improving the sustain- and Training ability of economic activity in our developing member coun- In 2003, IFC engaged with sustainability leaders, partici- tries. Raising environmental and social requirements is not pated in global discussions, and conducted research on the sufficient:it can serve to crowd out investment in the toughest business case for sustainability. We also trained staff to markets and is sometimes not the most efficient means of enhance their understanding of sustainability issues and improving performance.To bring about the change we seek, familiarize them with available tools. The following are we also need an ability to appeal to firms' self-interest as a highlights from these efforts. means of enhancing the sustainability of economic activity. Little hard evidence of a business case for sustainability has WORLD SUMMIT ON previously been available in the public domain,particularly as it relates to companies in the developing world.Based on our SUSTAINABLE DEVELOPMENT experience and mission,we found ourselves in a unique posi- IFC undertook many activities in conjunction with tion to fill this gap in information,and over the past few years the World Summit on Sustainable Development in we have developed and articulated the existence of a business Johannesburg in 2002.Most notably,IFC cohosted an event case for large and small firms across many sectors. with the World Business Council for Sustainable IFC is also fortunate to have a depth and breadth of Development and its regional chapters:"The Business Case in-house environmental and social expertise.We have helped for Sustainable Development: Doing Good and Doing companies meet our environmental and social policies and Well."This event featured presentations from some of the guidelines as part of our investment operations for more than leading experts on sustainability in the developing world. a decade, giving us substantial experience in making the Four IFC investment client companies participated:DESC, subjective judgments that often arise in difficult situations. a Mexican chemicals firm; Spier Estates, a South African This expertise and experience enable us to confront environ- tourism concern; Intercell, a pulp and paper producer in mental and social issues as part of complex transactions while Poland; and Sinoforest, a Chinese forestry company. Each other financiers are often unable or unwilling to take on and shared experiences in making their operations as sustainable manage these risks. Our ability and willingness to address as possible and discussed the benefits to financial perform- environmental and social concerns as part of the most complex ance from a focus on sustainability. Commercial Banks Adopt IFC's Environmental and Social Policies Through consultation with IFC, ten major international banks have decided to adopt environmental and social monitoring procedures in their global project finance activities based on IFC and the World Bank's environmental and social policies and guide- lines. The banks have all agreed to what have become known as the Equator Principles (see box, p. 6). Four more banks have already signed on, and others are expected to adopt these principles in the coming months. Banks agreeing to the principles will review potential projects much as IFC does for its own investment activities. These investment projects will be categorized for environmental and social impact using the same criteria as IFC. Based on this ex ante categorization, projects will be expected to comply with the requirements for environmental assessments, environmental management plans, and public disclosure as similarly used in IFC projects. 20 SUSTAINABILITY REVIEW PUBLICATION OF DEVELOPINGVALUE advice that address workforce and community-related issues Although there is a growing body of literature exploring the stemming from the disease.IFC has also published a"Good business case for sustainability,most work has centered on the Practice Note on HIV/AIDS in the Workplace," which developed world. Recognizing the need to examine the provides general guidance and corporate good practice nature of the business case for firms in emerging markets,IFC examples to a wider audience.Highlights from IFC Against partnered with the U.K.-based consultancy, SustainAbility, AIDS activities for fiscal 2003 include: and with Brazil's Ethos Institute to research and publish · Jamaica Public Service Co., Jamaica. IFC provided Developing Value: The Business Case for Sustainability in guidance to this power company on how to formulate Emerging Markets. an HIV policy and develop an action plan to address The book concludes that, indeed, in many cases there is a HIV/AIDS in the workplace and surrounding communi- business rationale for seeking improvements in environ- ties. IFC will also provide guidance on implementation. mental, social, and governance performance. It draws on · KenyaTea DevelopmentAgency,Kenya. IFC provided evidence from 240 case studies spanning 60 countries in terms of reference for a technical assistance project to help emerging markets around the world.In addition to English, the agency develop an HIV/AIDS awareness, prevention, the book has been published in Chinese,French,Portuguese, and care program for its communities of small outgrowers. and Spanish.The book is available through the World Bank Group's InfoShop, and an accompanying Web site offers an · Mozal, Mozambique. IFC supported the Mozal executive summary and some interactive features. Community Development Trust in efforts on women's health and voluntary HIV counseling and testing. In IFC AGAINST AIDS particular,the program will help the trust establish a strategy for prevention of mother-to-child transmission of HIV. IFC works with clients to address HIV/AIDS in many devel- oping member countries through the IFC Against AIDS · MSI, Africa. IFC is helping the mobile telephone program.In much of the world,HIV/AIDS is as much a busi- company refine its HIV policy and develop an action plan ness issue as a health and humanitarian concern.Workforces to address HIV/AIDS in the workplace and potentially in and consumers alike are being ravaged by the virus, with surrounding communities. IFC's Corporate Citizenship economic harm likely to extend into future generations. Facility is funding a cost-benefit analysis and examining IFC Against AIDS works with client companies in the likely impact of providing antiretroviral treatment for high-risk settings to develop specifically tailored tools and employees as part of the action plan. BRAZIL: COMBATING HUNGER AND POVERTY Although a decade of economic liberalization has given Brazil a better foundation for improving living standards, millions of people still live on less than $1 a day. The new administration of President Luiz Inacio Lula da Silva has launched Fome Zero (Zero Hunger), a major campaign to address the issue of social inequality, focusing on food security for poor people and calling for involvement of the private sector and civil society. IFC is supporting this campaign and rallying the country's private sector to participate. As a first step, the Brazilian government has allocated funds to supply 1.5 million of its neediest families with a monthly subsidy to buy food. For its part, IFC is granting $300,000 to the Ethos Institute, a nongovernmental organization, and the Polis Institute, a think tank. These Brazilian partners will create innovative links between businesses and the communities to be served by the Zero Hunger program. This IFC-supported project will set up a database to record the needs of more than 900 municipalities and the contribu- tions being offered by corporate participants. Polis and Ethos will also set up a call center and a Web site where companies can receive information and be matched with local communities. IFC has many long-standing Brazilian clients with strong managerial experience and a commitment to social responsibility. With the expertise of its two local partners, IFC is well positioned to help connect private sector resources with the needs of Brazil's poorest communities. This public-private partnership is an important element in advancing the Zero Hunger program. SUSTAINABILITY REVIEW 21 · Odebrecht,Angola. Odebrecht,a Brazilian engineering handle their environmental and social responsibilities, we and construction company, earmarked $1 million of a provide advice to clients on improvements in governance $280 million corporate loan from IFC for efforts against structure. IFC has also helped lead corporate governance AIDS. In August 2002, IFC and Odebrecht launched an reform in the developing world. education,prevention,and care program reaching 30,000 To meet the growing demand for governance reform people in the communities near the company's operations worldwide,theWorld Bank Group and OECD have entered in Angola. The program places special emphasis on into a framework agreement for cooperation and are women's health and prevention of HIV transmission convening the Global Corporate Governance Forum.This from mother to infant and will assess the feasibility of initiative brings together the leading bodies engaged in providing antiretroviral therapy at the company's sites. governance reform worldwide: multilateral banks and Odebrecht has adopted an HIV/AIDS policy for all its international organizations alongside professional standard- operations worldwide. setting bodies and the private sector. · Promasidor, Africa. IFC provided an overview of the The forum has been established to provide assistance to impacts of HIV/AIDS on businesses to the food and developing and transition countries on corporate gover- beverage company's management.Using a risk assessment nance. It serves to broaden the dialogue on corporate tool that IFC provided, the company evaluated the governance, to exchange experience and good practices, relevance of a wellness program for its operations and and to coordinate activities by identifying and filling gaps decided to place emphasis on its Nigerian operations. in the provision of technical assistance. A critical task for the forum is to help countries identify GLOBAL CORPORATE GOVERNANCE priority areas for reform and implement them in a FORUM consistent and sustained manner through shared resources and expertise. IFC's Corporate Governance Unit serves as IFC views proper corporate governance as essential to the the secretariat to the forum's Private SectorAdvisory Group sustainability of private sector activities.Good management on Corporate Governance, an association of company increases a company's accountability, responsiveness, and leaders, institutional investors, professionals, and other efficiency in handling all business issues,including environ- experts dedicated to fostering improvement of corporate mental and social risks and opportunities. governance standards in developing countries. Because of the impacts of corporate governance on the quality of IFC investments and on our clients' ability to EGYPT: IFC CLIENT SUBJECT OF INNOVATIVE BUSINESS SCHOOL STUDY Alexandria Carbon Black, a client of IFC since 1992 and a company that understands the contribution that environmental and social issues make to business performance, was recently the subject of a study conducted by students at Harvard Business School. The company was selected because it has demonstrated the positive results that can be achieved by committing to sustainable development. The study attempted to calculate the returns to society and the local economy from the investment. Although carbon black, an industrial by-product that is a main component in tire manufacture, is notoriously unfriendly to the environment, ACB has succeeded in managing the production process to minimize negative impacts. The company has attained numerous certifications: ISO 14001 for environmental management, OHSAS 18001 for health and safety in carbon black, ISO 9002 for general management, and QS 9000 for quality assurance. The students identified benefits realized by the employees, the local community, customers, and suppliers, as well as the Egyptian economy as a whole. ACB provided the students with a wealth of information, not only on its environmental and social efforts but also on its finan- cial performance. IFC seeks to facilitate clients' participation in such partnerships, so that good corporate practices can be docu- mented and publicized for the benefit of the wider private sector in emerging markets. 22 SUSTAINABILITY REVIEW SUSTAINABILITY TOOLS In 2003, IFC focused much attention on providing investment personnel with the tools and knowledge they Training Increases Use need to make the business case for sustainability to clients. of Sustainability Toolkit An internal Web site offering various sustainability tools From its launch in April through September 2002, the was made available to staff beginning in early 2002. This Business Case Database, the centerpiece page of the Web site, the Sustainability Toolkit, has as its centerpiece a Sustainability Toolkit Web site, received about 400 visits. database of over 400 private sector examples of projects and The training sessions around the site raise staff awareness companies that have found financial benefits through and familiarity with the tools available online. Since October attention to sustainability.The toolkit provides real-world 2002, the first full month after the start of training, the site examples of where sustainability has worked to encourage has averaged over 3,000 visits each month. replication and stimulate ideas going forward. It seeks to highlight convergence between the aims of sustainable development and improved business performance, which is debate and discuss the role of business in sustainable increasingly where IFC's value-added contribution to clients development.The program is designed and administered by is greatest. the University of Cambridge Programme for Industry, and A corporate governance Web site with information and core faculty lead each seminar. IFC is helping the program guidance on governance issues is also available to all expand its reach beyond Europe and the United States. investment staff.The site guides investment officers through IFC has also encouraged members of its management ranks IFC's corporate governance methodology for appraising to attend the training seminars offered by the program. In companies. It also provides tools to add value to client 2003,18 IFC vice presidents,directors,and managers attended companies by improving their governance as part of an IFC a four-day session on business and the environment--there investment.These tools include examples of best practices are just four such sessions held each year,accommodating up and model documentation, which is often tailored to the to 45 attendees each.Participating as members of these small various types of companies that IFC invests in,such as listed groups of leading thinkers has helped acquaint IFC manage- companies, family companies, or financial institutions. ment with the global landscape of sustainability. Access to the network of program alumni also helps participants remain TRAINING FOR STAFF abreast of new business approaches to sustainability. IFC A training program was initiated in 2003 to acquaint also encourages and facilitates participation in the program by investment staff with the corporate aims for sustainability its investment clients. and the new tools developed to assist them. Industry and regional departments have received,or will receive,training Implementing Sustainability specifically tailored to the business environment or region in which they work. IFC believes that to make a greater contribution to sustain- Training centers on developing investment staff's ability able development through our investments in emerging to understand and then articulate the business case for markets, we must adjust the way environmental and social sustainability to clients.This is part of enhancing investment concerns are viewed within our institution. officers' inclusion of sustainability issues in their early consultations with prospective clients. Staff are given an MAINSTREAMING ENVIRONMENTAL opportunity to apply the available sustainability tools to AND SOCIAL FOCUS investment scenarios in their sectors and to practice engaging Although projects have had to undergo regular and system- in a conversation with clients about sustainability risks atic environmental and social assessments and comply with and opportunities. To date, 480 staff from eight of nine policies and guidelines in these areas for nearly 15 years, industry departments, four of seven regional departments, responsibility for these procedures rests with specialized and three support departments have received training. environmental and social staff, housed in a separate business A new, comprehensive sustainability training program for unit. Operating separately from other business units has staff has been budgeted for fiscal 2004 and is in development. certain advantages. It allows environmental and social staff greater independence to exercise judgment and has afforded TRAINING FOR MANAGEMENT the opportunity to standardize review procedures. IFC is a Global Corporate Founding Partner of the Prince The corresponding challenge is not to let environmental ofWales Business and the Environment Programme,a forum and social issues become disconnected from investment that allows business leaders and other opinion formers to decisions.Through the sustainability initiative,IFC is working SUSTAINABILITY REVIEW 23 to keep the goals of economic growth on the one hand and proportion of projects that demonstrate, on an ex post basis, sustainability on the other as integrated as possible. satisfactory or better performance on environmental and Since IFC established its environment and social business social compliance. Third is the proportion of new activity unit, the world has changed in many ways. Consumer and expected to lead to high development impact, based on our investor concern around the issues of sustainability, which framework for sustainable development impact (see"How are prompted IFC's policy structure, continues to bring changes projects assessed?"). in the way the private sector does business. The work of The department scorecard is also used as a tool to appor- advocacy groups and the coverage and timeliness provided by tion budget for staff performance awards among investment the Internet have meant that nothing occurs in a vacuum. departments.Departments that rank high in the performance As a result, companies have had to evolve. dimensions captured in the scorecard--profitability,develop- IFC believes it must transform itself in some ways to serve ment impact,and client satisfaction--receive proportionately this new business environment. Where in the past IFC's higher funding for performance awards to their staff. environmental and social review might have represented the The strengthening of sustainable development impact is first time an IFC client ever thought of sustainability issues, also a criterion for assessing the performance of investment we rarely find that to be the case now.Often,our investment staff when they are considered for promotion. clients are eager to receive suggestions and advice on how to improve resource use,emissions,community relations,or the Operational Performance health and safety of their workforce. In this new market,IFC must consider environmental and In reporting on sustainability, we focus mainly on the social concerns much earlier in the project planning and operational performance of our investments in the developing decision process. Clients have always had the benefit of our world. This is our area of greatest impact and also what financial modeling services and guidance on market trends, stakeholders emphasize. In addition, some corporate-level but we are now striving to offer the best,most timely advice indicators are shared later in this review. on environmental and social risks and opportunities.To make this happen, we are working to integrate the environmental SUSTAINABILITY OF 2003 INVESTMENT and social side of our organization more fully into our COMMITMENTS investments.We are helping our investment staff, who have IFC looks thoroughly at its investments at the front end to much broader and more frequent interaction with clients assess likely outcomes in environmental and social areas. than environmental and social staff, become more comfort- Our environmental and social safeguard policies and able with,and knowledgeable about,environmental and social guidelines provide the basis for our initial assessment. issues. At the same time, environmental and social staff are Ensuring that all IFC projects either comply with these being asked to spot opportunities, not just enforce the rules. safeguards or have plans in place to get to compliance provides tangible value to both companies and the public. INCENTIVES FOR SUSTAINABILITY We have also developed means for assessing project perform- PERFORMANCE ance in environmental and social areas that are not addressed To align itself more completely with the aims of sustainable by our safeguards, as well as performance that exceeds our development, IFC is establishing a process for basing the compliance requirements. performance evaluation of investment staff, in part, on their delivery of sustainable investment outcomes. Sustainability Working with clients to satisfy safeguards performance is now an integral part of rating criteria for Compliance with IFC's environmental and social safeguard departments and an area covered in competency models for policies and guidelines is a requirement for clients to receive investment staff. funding, but in many instances clients have also found that In keeping with our increased focus on results and the compliance adds value to their operations.Whether the move mainstreaming of sustainability concerns throughout our to internationally accepted standards prepares clients for business,IFC has put in place a new approach to assessing the unforeseen regulatory changes, cuts their costs through performance of its business units, based on the "balanced decreased resource use,or enhances their access to developed scorecard"methodology.These scorecards reflect business unit world markets and capital, we often hear from clients that performance in three areas:profitability,development impact, our environmental and social safeguards, though initially and client satisfaction. considered an additional requirement, ultimately improve Performance ratings include three measures to generate a their operations. In fact, fully three-quarters of IFC clients score for development impact. First is the proportion of surveyed in 2003 reported that they valued working with IFC activities in IFC's most difficult markets. Second is the because of its environmental and social expertise. Further, 24 SUSTAINABILITY REVIEW 48 percent of clients reported that IFC's environmental and A full environmental impact assessment, as required for social requirements and procedures had improved their Category A and some Category B projects, is a far more business performance. thorough document that differs greatly according to the Prospective clients not operating in compliance with particularities of the project. IFC's requirements at project inception are not simply The SPI and the appropriate environmental documents refused investment. Rather, actions are specified to remedy must be disclosed through the World Bank's InfoShop and noncompliance, provided the client is committed to making locally through appropriate channels (including newspaper, necessary changes to its facilities, operations, or processes. radio,and public posting).To see IFC's project information on Our environmental and social staff consult with clients to the Internet, visit http://www.ifc.org/projects. propose corrective action plans that allow for needed changes IFC disclosed 202 SPIs and 94 ERSs and environmental and assign dates for completion.A corrective action plan and impact assessments in 2003. its terms then become part of the loan agreement between the client and IFC.This engagement to improve private sector Capturing and assessing impacts outside of compliance performance, rather than simply turning away difficult IFC does not have a policy or guideline covering every investments, is key to IFC's distinctive role. possible social and environmental impact that a project may have. In some cases, too, IFC clients demonstrate a commit- Disclosure of project information ment to the environment or to social development that For all projects in which IFC invests, a summary of project exceeds what is required by our policies and guidelines. information (SPI) must be prepared and disclosed publicly IFC,like any financial institution,has to be adept at assessing 30 days prior to review of the proposed project by IFC's a project's ex ante financial prospects.Our investment staff are Board of Directors. Category A projects have significant trained to analyze business plans, to anticipate changes in the potential for adverse environmental or social impacts; market,and to forecast the future performance of investment Category B projects have less significant or more manageable targets.We also have a credit department that works in concert impacts. For all Category A projects, a full environmental with business units to agree on pricing of loans and to act impact assessment must also be disclosed 60 days before Board as a second level of analysis on financial prospects. Like most consideration. All Category B projects must disclose an other development institutions, we have long assessed the environmental review summary (ERS), in addition to the economic viability and contributions of a project to society-- SPI, 30 days before the project goes to the Board. primarily by generating expected economic rates of return. An SPI includes the following information: · Description of company and purpose of project A Principled Approach · Project sponsor and major shareholders of project company The Environment and Social Development Department of · Total project cost and proposed IFC investment IFC recently adopted principles to guide the work of its staff · Location of project and description of site in enforcing policies and guidelines and spotting opportu- nities to add value to business operations through better · Project development impact and IFC's role sustainability performance. · Environmental and social issues (includes categorization) The principles are designed to make explicit the values and beliefs that form the basis for environmental and social · Company contacts review of projects. They describe a vision that is consistent with IFC's Shared Principles and Practices and the World An ERS offers much greater detail on environmental and Bank Group's pursuit of the Millennium Development Goals. social impact and is generally composed of the following: The principles seek to ensure fairness and consistency in the application of polices and guidelines when confronted with · Project description variables such as country context, sponsor capacity, and · Environmental category and disclosure requirements project factors. Through adherence to these principles, we demonstrate international good practice and leadership, · Environmental and social issues helping influence industry sectors and markets. · Proposed mitigation for environmental and social issues · Monitoring and compliance · Additional environmental and social documentation SUSTAINABILITY REVIEW 25 COMPLIANCE ADVISOR/OMBUDSMAN Safeguards Review In 2001, IFC senior management commissioned the Office of the Compliance Advisor/Ombudsman to review the implementation and impact of IFC's safeguard policies since their formal adoption in 1998. The CAO was also asked to make recommendations on the content of the policies and their means of application in IFC's work. This review was completed in January 2003. The main conclusion is that the commitment of the client firm to environmental and social issues is the key determinant of success in implementing IFC's policies and guidelines successfully. The review points out that it is commitment, not capacity, that is crucial. An IFC client might lack the resources or expertise to implement a thorough environmental and social management system, but as long as the firm is committed IFC can work in partnership with it to improve capacity. Where commitment is lacking, however, ample capacity may not lead to positive outcomes. Hence the review recommends that commitment in environmental and social areas should be a major factor in the selection of future IFC clients. The review also calls for further simplification and focusing of the policies and guidelines to match the realities of the private sector and for IFC to be able to make periodic amendments to address changing circumstances. The review recommends improving internal processes for implementing the safeguards and mainstreaming environmental and social concerns throughout IFC's business units. The full CAO report is available on the CAO's Web site at www.cao-ombudsman.org. Compliance audit role As part of its function as an independent assurance mechanism for environmental and social concerns, the CAO is charged with ensuring that IFC diligently monitors client companies' compliance with environmental and social policies and guidelines. The CAO's office has formalized its compliance audit role for environmental and social issues by hiring a senior specialist for compliance and publishing a guidance document to explain the audit role, the triggers for a compliance audit, and the principles underpinning conduct of an audit. Compliance audits will be instituted in instances where an IFC project is alleged to be operating outside the bounds of its environmental and social policies and guidelines. Audits can be initiated by complaints made to the CAO by external stakeholders, by a request from senior management, or on the authority of the CAO. Although audits will focus on how safeguard policies and associated guidelines were applied to projects by IFC staff, the overarching goal of enhancing the environmental and social outcomes of projects will be stressed throughout the audit process. What IFC has not been able to do systematically before now How are projects assessed? is to predict a project's sustainable development impacts except IFC has developed a framework to facilitate assessments of within the context of our compliance process. Our focused projects for their potential contributions to sustainable devel- look at sustainability has led us to pioneer tools to assess the opment.This is referred to as our "high-impact" framework. environmental, social, corporate governance, and nonquan- One part of the framework focuses on economic impacts. tifiable economic impacts of investments. Economic impact assessments look at whether projects are expected to go beyond satisfactory economic impacts-- generally an economic rate of return in excess of the cost of IFC Safeguard Policies capital--in the following areas: Environmental assessment · Significant contributions to economic development: Natural habitats projects receive a high rating based either on expected Forestry exceptional economic rate of return or on more specific, Pest management substantial expected nonquantified economic benefits Dam safety resulting from the project. International waterways · Significant contributions to regulatory and investment Involuntary resettlement climate:project results in improvements in specific laws and Indigenous peoples regulations or better enforcement and administration of existing laws and regulations. Cultural property Harmful child labor and forced labor 26 SUSTAINABILITY REVIEW SUSTAINABILITY FRAMEWORK LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 COMPLIES WITH ADDED ENVIRONMENTAL, HIGH PERFORMANCE LEADERSHIP IFC AND NATIONAL SOCIAL, OR CORPORATE MINIMUM STANDARDS GOVERNANCE VALUE · The economic activity · Handling of environmental · Handling of · Company is actively conducted by the or social issues materially environmental and engaged on many fronts project or company is exceeds minimum social issues materially in the dissemination of in accordance with standards. exceeds WBG minimum best practice. accepted national and standards. Formalization · In so doing, the project or international (IFC) of practices or other steps · Economic activity well company creates local or standards for mitigating enable good practices beyond the firm is global benefits in terms of potential environmental on environmental, social, influenced in the reduced waste, emissions, or social harm stemming and corporate governance direction of improved or use of natural resources from the activity. issues to leverage change resource intensity and of its economic activity or broadly within a region, a inclusion of new helps spread the benefits sector, or a supply chain. beneficiaries. accruing from its economic activity to the · Economic activity beyond · Firm is seen as a local community or to the firm is influenced in global corporate groups that often fail to the direction of improved governance leader, benefit from such activity. resource intensity and with wide influence. inclusion of new · Corporate governance beneficiaries. practices are good enough to affect positively views of · Corporate governance investors about investing attributes of the project in the country. are sufficiently advanced that a demonstration effect is possible. · Significant contributions to poverty reduction: project · Socioeconomic development:local economic growth and results in direct identifiable benefits to employees, partnerships; community development; and health, safety, consumers, or communities counted among the poor. and welfare of the labor force. The other part of the framework developed to assess To make the sustainability framework a useful metric of whether new projects are expected to deliver higher devel- sustainability performance, we have identified four levels of opment impacts is referred to as the "sustainability frame- performance for each subtopic (see box). work."This part of the framework assesses whether expected The framework assesses expected impacts of projects project performance goes significantly beyond compliance in various sustainable development areas.We have aligned with IFC's safeguard policies and associated guidelines in the it with the ex post project reviews conducted by our following areas: Operations Evaluation Group, so that results of the project · Management commitment and governance:environmental can be assessed in terms of sustainable development. We management, social development commitment, and are also building a system that will allow us to monitor capacity; corporate governance; and accountability and performance in these areas throughout the life of a project, transparency. not only at inception and close. · Environment:eco-efficiency and environmental footprint; and environmental performance of products and services. SUSTAINABILITY REVIEW 27 High-impact projects higher wages and supplier linkages in the cotton sector, Projects that, at commitment, score at or above Level 2 for one of Tajikistan's few internationally competitive sectors. any element in the framework are classified as"high-impact It will mean a significant increase in employment of the projects." We use the percentage of newly committed poor: about 2,000 jobs should result. The company is projects classified as high impact as an annual indicator of moving toward international best practice in the the contributions expected to be made to sustainable functioning and structure of the board of directors.The development above and beyond those that would accrue company also provides training and shares standards with through compliance with our safeguards. See facts and local suppliers to meet the company's quality standards figures, page 1, for 2003 statistics. and to build local capacity to generate wealth.The project will develop links with more than 350 farm families Selected high-impact projects for 2003 include: participating in the Farmers' Ownership Model, another · Amaggi, Brazil. With the help of IFC, Amaggi, a IFC effort that raises farmers' income and productivity soybean merchandiser, crusher, and exporter, is and enables them to sell quality cotton directly to Giavoni implementing an environmental management system that on commercial terms. will help the company improve environmental and social · Villa Shipping, Maldives. One of the largest private practices in its operations and strengthen environmental firms in the Maldives,Villa Shipping operates five resorts and social due diligence by providing prefinancing to and imports fuel for sale in the country. The expected farmers.The system will also help Amaggi in its dialogue economic rate of return of IFC's investment indicates with nongovernmental organizations and limit the significant benefits to the economy as a whole.Expanding negative impact of farmers on critical natural habitats.The the company's trading activities and improving its storage system will include a monitoring program to ensure infrastructure will increase the choices available to proper implementation of these initiatives. consumers and lead to more efficient delivery and · Commercializing Energy Efficiency Finance, market-linked prices of essential goods, including diesel Eastern Europe. The project involves a facility of up to fuel, liquid petroleum gas, and cement.The project will $90 million to provide partial guarantees for energy effi- extend the fuel distribution network to the more remote ciency loans made by financial intermediaries in the Czech islands,which currently are not fully served.The company Republic, Estonia, Latvia, Lithuania, and Slovakia, also has a strong commitment to environmental protec- combined with a technical assistance facility funded by the tion beyond the scope of IFC's own investment,including Global Environment Facility and other donors. A joint shoreline protection, coral reef monitoring, sea turtle venture between IFC's Global Financial Markets and protection, and wastewater treatment.The project facili- Environment Departments, the investment leverages the tates an energy savings program that includes solar water substitution of environmentally damaging processes and heating systems,heat recovery systems,and rationalization displaces existing polluting activities.The project's inno- of the installed power-generating capacity.These systems vative structure enables IFC to leverage up to $225 million will reduce energy consumption by 10 to 20 percent. in private capital investments in energy efficiency. The result is a significant set of developmental and ENVIRONMENTALLY BENEFICIAL environmental benefits.The project is expected to mobi- SECTORS lize energy efficiency investments in countries whose IFC works on several fronts to encourage private sector economies are three to five times more energy-intensive investment in sustainable businesses.In addition to investing than the EU standard.Unlike most approaches promoting IFC's own capital, we make funding available as a private energy efficiency, the project is designed to ensure a sector implementer for the Global Environment Facility sustained developmental impact. It includes technical and through our specialized environmental and social assistance targeted at building energy efficiency finance facilities (details below). expertise in the financial sector and among local project IFC is positioned to make its most significant impact developers.It establishes a strong market orientation with through mainstream, commercial investment activity that is the guarantee's market-based pricing and availability to geared to serve the goals of sustainability--for example, in multiple financial intermediaries in each country. such areas as potable water,ecotourism,and renewable energy. · Giavoni, Tajikistan. The project will upgrade the We work across sectors including: environmental infrastruc- company's textile factory and expand its vertically inte- ture, sustainable energy, pollution prevention, sustainable grated operations through construction of a jean manu- resource use,and greenhouse gas emissions reductions.Many facturing facility. The project is expected to provide of these sectors include investment activities that cross IFC's exceptional returns to the economy as a whole, through departmental boundaries and thus present challenges from a 28 SUSTAINABILITY REVIEW reporting standpoint.Going forward,we are aligning internal IFC client companies are also expanding their efforts in processes to improve our sustainability reporting. Below are sustainable energy. In Brazil, El Paso, the sponsor of the details on investment commitments for fiscal 2003 in sustain- Macae merchant power plant that IFC helped finance, is able energy and environmental infrastructure. implementing a solar photovoltaics village power supply program to five villages not previously electrified in the Sustainable energy southern part of São Paulo state. El Paso has committed to IFC helps finance the delivery of electrical power to invest part of its plant revenues for 10 years to help support industries and communities in emerging markets.While these such alternative energy, renewable energy, and public investments are generally a response to market demand, we illumination projects.In the Philippines,IFC's client company try to lead the market toward the use of renewable sources and Mirant Philippines has established a foundation that is clean energy technologies wherever possible. involved in Project BEACON, a facility that provides When traditional production methods for power are used, electrification to previously unserved areas in the rural IFC encourages clients to improve distribution losses and countryside. Under Project AMORE in Mindanao, the management of demand.Through better efficiency in coal, foundation, together with other funding sources, is using oil, and gas-fired production networks and distribution solar photovoltaics to provide off-grid rural electrification systems, it is possible to reduce environmental impacts services to isolated rural households. significantly. For instance, $1 million spent on improved distribution efficiency and management of demand in a Environmental infrastructure network generates savings of roughly 10 megawatts of The Millennium Development Goals, articulated by the electricity. By contrast, a similar $1 million investment in United Nations at the Millennium Summit in 2000,include wind power produces only a single megawatt of energy. targets for improved water safety and sanitation.The goals are Examples of IFC's 2003 investment commitments that to halve the proportion of people without access to both safe contribute to the sustainability of power generation and water and sanitation by 2015. For these goals to be reached, distribution include the following (see also pp. 14-15). 1.5 billion people will have to receive access to water, while · Balrampur Chini Mills Ltd., India. A 20-megawatt 2 billion must receive adequate sanitation services. These biomass-fired cogeneration plant is associated with an improvements will require a doubling of current global investment in sugar mills in Uttar Pradesh.The power plant investment levels from $15 billion to $30 billion per year will use bagasse, a waste produced after sugar cane is through 2015. crushed,as the biomass feedstock to generate electricity for To meet this urgent need,private sources of capital will be the sugar operations.A surplus of nearly 16 megawatts will essential. Governments in developed and developing also be dispatched into the Uttar Pradesh electricity grid. countries alike have begun to turn to private operators to improve the efficiency and reach of their water and sanitation · El Canadá, Guatemala. A 43-megawatt, run-of-river services. IFC considers infrastructure, including water and hydroelectric project will offset 144,000 tons of green- sanitation networks,a priority sector and has made numerous house gases annually during its operational life.The project investments in the sector.Our fiscal 2003 investments in water takes advantage of this reduction by selling its carbon and sanitation include the following (see also box, p. 5). credits through the Prototype Carbon Fund. · AAA, Colombia. IFC is guaranteeing payment of up to · Jamaica Public Service Co., Jamaica. As part of the $24 million for two local currency bonds issued by a private privatization of a distribution utility, the proceeds of the company to fund improvements to water and sanitation to IFC investment will help reduce systemwide losses, over 1.5 million people in Barranquilla.The company, a yielding greenhouse gas emission reduction of 54,000 tons water,sanitation,and solid waste service utility,will expand per year on an ongoing basis. service to the city's poorest area. New construction will · Pamir, Tajikistan. The project will expand a planned connect 350,000 previously unserved people to safe water 14-megawatt hydroelectric project to 28 megawatts and and adequate sanitation services by the end of 2003.As a engineer improvements to ensure year-round water flows. condition of the concession agreement with the IFC accessed IDA's concessional funding to help make government, construction is being contracted to locals, project costs and tariffs more affordable and worked with resulting in 4,100 direct and 9,000 indirect jobs.As part of the government and other partners to establish a lifeline its solid waste services,the company has developed several tariff for the poorest consumers. programs to promote waste recycling. SUSTAINABILITY REVIEW 29 · Aguas de Panama, Panama. IFC will provide a · Favorita Fruit, Ecuador. IFC client Favorita Fruit was $5 million loan from its own account and syndicated loans the first company to have all its owned farms certified to totaling $9 million to support the company's provision of the Rainforest Alliance­sponsored Eco-OK/Better treated potable water to the urban areas of Arraijan, Banana standard for environmental and labor practices. Chorrera, and Capira. The project will construct and It is receiving facility funding for supplier training operate a 20 million gallon per day water treatment plant (see box, p. 11). to supply treated potable water to an existing distribution · Usha Beltron/KGVK, India. The facility is working network that serves 270,000. with Usha Beltron and its community development · Manila Water Co., Inc., Philippines. IFC will lend foundation on rural development (see box, page 9). $50 million to the company as it develops new water sources, expands water supply facilities and service within Environmental Opportunities Facility Manila, and improves its distribution network. The · Water recovery technology. The facility will make company pays attention to the needs of the poor.ItsTubig $120,000 available to Grupo Calidra, a Mexican lime Para Sa Barangay program increases service to the poorest producer, for installation of water recovery equipment as areas. It establishes neighborhood cooperatives to manage part of a pilot to test the feasibility of this approach.The water systems and allows for sharing of costs and use of plants are located in desert locations where water is scarce water meters among residents. Since the program's incep- but essential to the production process. The equipment tion in 1998, 306,000 residents have been connected to will be installed on one of four hydrators at one plant and safe, reliable water service. Through an expansion, the should permit recovery of roughly 10 percent of the program will provide safe water to 350,000 new partici- water used in the hydrator. If the approach is successful, pants. Connected households pay $.07 per cubic meter of the company will replicate it for all its hydrators in water compared to $1.96 per cubic meter charged by water desert regions. vendors,previously the only source of safe water in poorer areas of the city. Sustainable Financial Markets Facility ENVIRONMENTAL AND SOCIAL FACILITIES · Market Intelligence Briefs.These briefs are a series of concise publications designed to familiarize IFC financial The three new environmental and social facilities approved intermediary clients with sustainability issues relevant to by IFC's Board of Directors in June 2002 began to have an their operations. The briefs provide an analytical but impact in 2003. Using donor funds, the facilities make grant nontechnical discussion to stimulate interest, initiate a funding available in three core areas of IFC's work (also see conversation with clients about sustainability risks and box on p. 11). opportunities,and increase IFC's understanding of market · Mainstream project­related work (Corporate Citizenship trends affecting clients.A brief giving a general overview Facility) of sustainability issues affecting financial institutions is in · Projects generating local environmental benefits production, as is one on socially responsible investing and (Environmental Opportunities Facility) its applicability to emerging markets. · Capacity building in financial markets (Sustainable · Sustainable investment training. The facility ran six Financial Markets Facility) sustainability training courses for financial intermediaries in Project examples from the environmental and social facilities FY03, reaching over 160 participants. These courses are include the following. targeted at senior executives and investment professionals from developing country banks, leasing companies, and Corporate Citizenship Facility fund managers and provide a comprehensive introduction · Holcim Vietnam, Vietnam. In connection with the to the rationale and practice of environmentally and socially biodiversity conservation project featured on page 13, responsible finance. Holcim Vietnam and the facility supported a land-use mapping and critical natural habitat identification exer- cise.The work resulted in specific conservation proposals, which will next receive a detailed feasibility analysis. 30 SUSTAINABILITY REVIEW IFC's Own Environmental IFC'S HEADQUARTERS: ENVIRONMENTAL FOOTPRINT and Social Impacts When assessing IFC's contribution to sustainable develop- EMPLOYEES 1,800 ment,we emphasize the performance of the projects funded Office space 819,848 sq. feet through our investment activities. But IFC also pays atten- VOLUME OF WASTE PRODUCED tion to the environmental and social impacts of its own absolute 473.09 tons operations.For 2003,we are reporting only on performance relative 520 lbs/employee related to our headquarters inWashington, D.C. PAPER USE absolute 99.56 tons ENVIRONMENT relative 122 lbs/employee IFC's headquarters is rated as one of the most energy-efficient WATER buildings in the eastern United States and is recognized by the absolute 12,855 CCF U.S.Environmental ProtectionAgency and U.S.Department relative 7.14 CCF/employee of Energy as an Energy Star certified facility.Certification to POWER this standard indicates that a facility is in the top 25 percent absolute 16,239,247 kWh for energy efficiency among U.S. office buildings. relative 9,021.8 kWh/employee IFC has increased its attention to the impacts of its THERMAL ENERGY headquarters operations. Headquarters now participates in (Natural gas) a program through the public electric utility to ensure that absolute 1,676,969 kWh a percentage of the power purchased comes from renewable relative 2.05 kWh/sq. foot sources such as wind power and biogas (natural gas derived CO2 EMISSIONS (FACILITY-BASED) from organic decomposition).To mitigate the impact of 1,800 absolute 149.1 tons staff traveling to the office daily, IFC also encourages use of relative 166 lbs./employee mass transit through a program run by the Washington Note: Numbers are from 2002. Metropolitan Area Transit Authority. Staff who commute using bus or rail receive a monthly stipend toward their transport costs. Staff from developing countries Nationals of developing countries make up 57 percent of EMPLOYEES IFC's overall workforce.At the officer level and above,devel- A key stakeholder audience for IFC, as for any corporation oping country nationals account for 45.8 percent of positions. or institution, is its staff. We are fortunate to have a very diverse workforce,with employees from 130 different coun- Diversity and salary tries each bringing his or her own unique perspective and IFC actively seeks to maintain equity in terms of diversity in skills to the organization. its salary distributions, the key groups it examines being Diversity and gender issues remain a focus of IFC's recruit- women and staff from developing countries.Comparisons are ment and professional development efforts,particularly for the offered below for average salaries at the managerial level. higher ranks of the institution.We are proud of our record to date but aware that improvements are possible. In particular, IFC is committed to increasing its recruitment of investment MANAGERIAL POSITIONS staff from leading universities in developing countries. Gender GENDER­NATIONALITY SALARY INDEXED TO AVERAGE (100=AVERAGE) Male - Developed 99.8 Women account for 51.3 percent of the workforce at IFC. Male - Developing 101.7 At the officer level and above, 31.5 percent of positions are Female - Developed 97.8 held by women, and the intention is to raise this percentage Female - Developing 98.3 through promotions and new recruitment. SUSTAINABILITY REVIEW 31 COMMUNITY To date, disadvantaged individuals have been placed in over IFC has been based in Washington, D.C., for its 47 years of 100 jobs. Some have found permanent jobs within the service.IFC staff,and staff from theWorld Bank Group gener- World Bank Group itself. ally, have always been involved in the local community, but In identifying participants, IFC partners with homeless recently the institutions themselves have increased their focus shelters that administer substance abuse rehabilitation, on community involvement. psychological support,and education programs to residents. One example of this institutional commitment can be found Those that graduate from these recovery programs are then in a list of the leading corporate philanthropists in the offered an opportunity to work in the Legal Department, Washington, D.C., area. In 2002, the World Bank Group where they are given training in office skills and have access ranked number 19 on the annual list of corporate givers from to a support group. Washington Business Journal--the first time an international Based on the program's success at headquarters, pilots institution had ranked in the top 25. have begun in the field. In Cairo, IFC established a partner- While contributions to charitable causes are important, ship with the Mansour Group,a leading local business organ- another initiative championed by IFC is directly affecting ization,and a local nongovernmental organization to provide the lives of hundreds of formerly homeless people. The training in marketable skills for people from poor areas of program, known as A Chance to Work, is administered by Cairo. In a pilot program, 30 people received on-the-job the IFC Legal Department. It offers disadvantaged people training in Mansour Group facilities. Graduates are now an opportunity to work in data entry, filing, mailroom, and working as plumbers and automotive body workers. The other clerical services as a member of the IFC workforce. LEAD Foundation was founded to administer and scale up The program also facilitates direct placements in a wide the program in Cairo. range of jobs through partnerships with local businesses. An IFC team is also preparing a pilot project in Moscow. 32 SUSTAINABILITY REVIEW CARLOS GOLDIN SUSTAINABILITY REVIEW EDITOR: Harry Pastuszek ANNUAL REPORT EDITOR: Paul McClure PRIMARY IFC STAFF CONTRIBUTORS: Motoko Aizawa Dana Lane Imoni Akpofure Gavin Murray Stephen Bailey Joseph O'Keefe Louis Boorstin Sérgio Pimenta William Bulmer Bernard Sheahan Sabine Durier Karin Strydom Deborah Feigenbaum Sharon Sullivan Nicholas Flanders Mangala Suresh Dianne Garama Peter Taylor Ariadne Garscadden Vlasios Tigkarakis Jack Glen Daniel Jorge Tytiun Brigid Holleran Dana Younger Rana Karadsheh DESIGN: Supon Design Group/MHI Communications, Washington, DC PRINTING: Schmitz Press, Sparks, MD PHOTOGRAPHY: Carlos Goldin, Focus/Latin Stock Anvar Ilyasov & Valeriy Kharitonov, Panos Breton Littlehales Richard Lord Staff of IFC The Corporation defines a commitment to include: (1) signed loan and equity (including quasi-equity) investment agreements; (2) signed guarantee agreements; and (3) risk management facilities that are considered ready for execution as evidenced by a signed ISDA agreement or a signed risk management facility agreement with a client. Currency is given in U.S. dollars throughout unless otherwise specified. INNOVATION, IMPACT, SUSTAINABILITY IFC'S COMMITMENT 2003 sustainability review At IFC our mandate is to further sustainable economic development through the private sector. We pursue this goal through innovative solutions to the challenges of development, as we invest in companies and financial institutions in emerging markets and as we help build business skills.We consider positive development impact an integral part of good business, and we focus much of our effort on the countries with the greatest need for investment. We recognize that economic growth is sustainable only if it is environmentally and socially sound and helps improve the quality of life for those living in developing countries. INTERNATIONAL FINANCE CORPORATION 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA TELEPHONE 202-473-3800 FACSIMILE 202-974-4384 www.ifc.org www.ifc.org/ar2003 PRINTED WITH SOY-BASED INKS