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Best Practice Guide on Sustainable Finance

Practical Toolkit for Russian Financial Sector

The Guide to best practices of investments in energy efficiency, GHG


emissions reduction and renewable energy sources development
(With a particular focus on the construction, power generation and agricultural industries)

500 copies in Russian and electronic version in English

1. WELCOME WORD KfW/UNEP FI

2. WELCOME WORD WWF-Russia (Evgeny Shvarts)

3. EXECUTIVE SUMMARY

4. INTRODUCTION

5. Part 1 WHY SUSTAINABLE BANKING

Key international voluntary sustainable finance mechanisms

Key drivers for banks to be sustainable (case studies for each driver)
Environmental and Social Risk for Financial Institutions
Adopting environmental and social management system

Industries (Case studies for Energy Efficiency, Renewables, Construction,


Forestry, Agriculture)

Risks Mitigation Toolbox

6. Part 2 GREEN INVESTMENT FUNDS

Best practices of establishing and operating green investment funds

Opportunities for Russia

7. Part 3 CENTRAL BANKS GREEN POLICIES

Best international practices

Recommendations for the Central Bank of Russia

8. CONCLUSION

9. References

10.Authors profiles

1
Abstract
Executive Summary
Introduction
1 Why sustainable banking?
1.1 Key drivers
Credibility & reputation
Stakeholder demand
Inspiration from development banks
Better risk management
New business opportunities
1.2 Responsible sectoral lending policies
1.3Risk mitigation
Tables (Development and commercial banks)
2. Green investment funds
Opportunities in Russia
3. Central banks Green Policies
Conclusion
References

Best Practice Guide on Sustainable Finance: A Practical Toolkit for Russian Financial
Sector. WWF Sustainable Finance Programme report. Julia Polonskaya, Mikhail
Babenko. Moscow Berlin: WWF, 2012.

This Guide forms part of a series of studies by WWF-Russia Sustainable Finance


Programme. The Programme aims at promoting environmentally and socially
responsible finance practices among Russian financial institutions, including
Environmental, Social and Governance risk assessment and categorization of
investment projects, adoption of international voluntary mechanisms of
sustainable lending/investments, development of sectoral lending policies (e.g.
mining, energy, forestry) and assessment of environmental footprint. In this
regard, it would be a pivotal step if the Central Bank of Russia issued green credit
policy or guidelines in order to recommend local banks on responsible lending
practices.
The Programme also encourages Russian banks and investment companies to be
active players in the international and local sustainable development agenda and
to contribute to diversification of Russian economy by financing sustainable
projects, goods and services in such sectors as energy efficiency and climate
change, construction, forestry and agriculture. Additionally, WWF monitors
investment flows from China to Russian projects and ensures that they comply
with best international practices.
WWFs engagement with financial institutions has a goal to deliver consistent,
demonstrable and high impact improvements in the way that financial

2
institutions affect biodiversity and ecosystem services through their operations
(lending and investment) and the physical impacts of their footprint.
The Guide has been prepared within the framework of the project Integration of
Russias greenhouse gas emission reduction and energy efficiency targets in the
practices of its domestic finance sector implemented by WWF-Russia and WWF-
Germany with the financial assistance of International Climate Initiative of the
German Federal Ministry for the Environment, Nature Conservation and Nuclear
Safety (BMU) in collaboration with the United Nations Environment Programme
Finance Initiative and the Equator Principles Outreach Group for Russia.
The authors extend their special thanks to Ju rgen Lottmann for valuable
advisory input, to Kevin Smith for general assistance and to Ivetta Gerasimchuk
for proof-reading and reviewing the English text of the report.

Authors: Julia Polonskaya, Mikhail Babenko

Reviewers from WWF Network: Mark Eckstein, Paolo Revellino, Katharina Serafimova, Matthias
Kopp, Martin Geiger, Joshua Levin, Sue Charman, Armand Colard, Alexey Knizhnikov, Elena
Kulikova, Alexey Kokorin
Other reviewers: Ivetta Gerasimchuk (IISD); Mark King, Alistair Clark (EBRD); Wei Peng, Careen
Abb, Melissa Makwarimba (UNEP FI); (CERES); Maxim Titov (IFC); Swapan Mehra (IORA
Ecological)

WELCOME WORD KfW (UNEP FI)

WELCOME WORD WWF (Evgeny Shvarts)

EXECUTIVE SUMMARY

Several decades ago few state and commercial banks globally considered environmental and
social concerns to be particularly relevant to their operations. Today, however, they and their
key stakeholders agree that financiers bear significant responsibility for the environmental
and social impacts of the operations they finance.

Within the banking sector, addressing environmental and social issues is now considered
critical to the proper management of transaction, portfolio and reputational risks. The
question is no longer whether banks should address the sustainable development aspects of
the activities they support, but how they should do it what substantive standards should
they apply? How should they implement them? And how should they assure compliance?
However for the Russian banks the initial question Why shall banks address sustainable
development is still important.

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WWF-Russia is publishing this practical toolkit to help answer this question and to evaluate
how various banks worldwide are responding. This Guide provides a critically needed
framework for embedding sustainability into core banking business. It gives valuable insights
to the Russian financiers on ESG risk assessment, responsible sectoral lending policies, green
investment products and regulators green policies in the context of economically viable and
sustainable development perspectives.

For the purpose of this Guide it was decided to focus recommendations to the Russian banks
around fundamental drivers and sector developments basing on best world practices. In our
view, references to the practical tools and experience will make it easier to adopt and adapt
practices, which now turn from exceptional cases to casual routines.

The Guide is organized as follows: in Part 1, we consider major drivers and incentives, which
usually stimulate financial institutions to integrate Environmental, Social and Governance
(ESG) issues into their operations. For this purpose publicly available ESG policies of the banks
from around the world were reviewed, chosen for their high visibility and global reach, their
substantial presence in project finance markets, and/or their endorsement and
implementation of the Equator Principles, UNEP Finance Initiative as well as other
sustainability mechanisms applied. Second, we consider sectoral policies and environmental
impact from lending in sectors traditionally financed by Russian financial institutions that play
the most crucial role in improving energy efficiency in the Russian economy (construction,
real estate and electricity generation) and efficient land use and conservation of the countrys
biodiversity (forestry and fishery) 1. Third, we consider risks for a financial institution coming
from environmental issues and suggest how these risks can be mitigated through the
introduction of practices and policies.

Part 2 of the Guide is devoted to the practices of establishing and operating green investment
funds and gives hints to the Russian asset managers on why to diversify investment portfolios
and extend them to green options. Investment banks and companies, which are signatories to
UN Principles for Responsible Investment, were reviewed.

Part 3 covers the recent trends which are underway among the central banks in emerging
markets such as China, Brazil, Bangladesh and Nigeria as well as in developed ones like the
Nehterlands and UK. It describes how they stimulate local banks to get on less risky and
environmentally responsible financing track.

Each part of the Guide has case studies and practical tools and concludes with
recommendations regarding actions that might be implemented by domestic financial
institutions and regulators. The overall recommendations end the Guide.
INTRODUCTION

1
Pure profit for Russia: Benefits of Responsible Finance. WWFs Trade and Investment Programme report.
Ivetta Gerasimchuk, Kamila Ilyumzhinova, Alistair Schorn (Eds). Moscow Frankfurt a.M. Johannesburg; WWF,
2010. http://www.wwf.ru/resources/publ/book/eng/372
4
First call for sustainable banking practices came from the pressure on World Bank regarding its investment
projects on dams. In 1994, a coalition of 326 social movements and nongovernmental organisations (NGOs) from
44 countries endorsed a statement named the Manibeli Declaration calling for a moratorium on the World Banks
funding of large dams.2 One of the conditions for cancelling the proposed moratorium was that the World Bank
would set up an independent comprehensive review of Bank-funded large dams projects to establish the actual
costs, including the direct and indirect, economic, environmental, and social costs, and the actual realised
benefits of each project. The Declaration underlined that, The review should evaluate the extent to which
project appraisals were mistaken in estimating costs and benefits, identify specific violations of Bank policies and
staff members responsible, and address opportunity costs of not supporting project alternatives. The review
must be conducted by individuals completely independent of the Bank without any stake in the outcome of the
review.

After the Manibeli Declaration, in response to criticisms of large dams and growing anger at the continuing
involvement of the World Bank in these projects, the Operations Evaluation Department (OED) of the World Bank
undertook a review of World Bank-funded large dams in order to determine their development effectiveness. The
OED Review analyzed the performance of 50 World Bank-funded dams and revealed that only 13 out of 50 dams
funded by the World Bank were acceptable.
In 1997, following a meeting of diverse dam-related stakeholders convened by the World Bank and IUCN, the
World Commission on Dams was initiated. The purpose of the meeting was to discuss the second phase of a study
by the World Banks Operations Evaluation Department (OED) on World Bank-sponsored dams. Participants
identified the need for an independent and comprehensive review of the development effectiveness of large dam
projects above and beyond the World Banks own projects and the generation of guidelines for future water
and energy resources development.
Nowadays, World Bank has stringent policy on responsible financing of dams projects in the framework of its
Environmental and Social Safeguard Policies.3

Several years ago Governments and intergovernmental organisations have made similar calls for a shift towards
sustainable finance. In the early 1990s, the United Nations Environment Programme (UNEP) launched what is
now known as the UNEP Finance Initiative. This is a global partnership between UNEP and more than 200
financial institutions to understand the environmental and social dimension of financial performance and risk.
The banking sectors emerging recognition of environmental and social responsibility was driven to a large
degree by outside pressures. Beginning in 2000, environmental organisations such as Friends of the Earth (FoE)
and the Rainforest Action Network (RAN) challenged the industry with high-profile campaigns that highlighted
cases in which commercial banks were bankrolling disasters. In 2002, a global coalition of non-governmental
organisations (NGOs) including FoE, RAN, WWF-UK and the Berne Declaration 4 came together to promote
sustainable finance in the commercial sector. This informal network subsequently evolved into BankTrack, whose
vision for a sustainable finance sector was expressed in the Collevecchio Declaration of January 2003. Now
endorsed by more than 200 organisations, the Collevecchio Declaration remains the benchmark by which civil
society will measure the banking sectors commitment to sustainable development.

Commercial banks took their first significant step towards developing a common set of environmental and social
standards in June 2003 with the launch of the Equator Principles. The Equator Principles provide a framework
for banks to review, evaluate and mitigate or avoid environmental and social impacts and risks associated with
projects they finance. The Principles are based on the International Finance Corporations (IFCs) environmental
and social safeguard policies. By February 2012, the number of signatories to the Equator Principles had grown
from the original 10 leading banks to 73. Together, the Equator Banks are responsible for arranging well over 75
per cent of worldwide project loans by volume.

The vivid case of emerged environmental and social concerns in a project which could damage the reputation of
development bank is Sakhalin II. It is one of the worlds largest oil and gas development projects, worth some
USD 20 billion. Sakhalin has very rich environment and is the third largest producer of fish products in the
Russian Far East. A unique population of about 130 Western Pacific Grey Whales feeds on Sakhalins north-east
coast during the summer. In the framework of the project there were constructed: two very large offshore drilling
platforms with subsea pipelines to shore, onshore processing facility for the treatment of gas from one of the

2
A Watershed in Global Governance? An Independent Assessment of the World Commission on Dams. Navroz K. Dubash, Mairi Dupar, Smitu
Kothari, Tundu Lissu. World Resources Institute, 2001

3
http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/EXTPOLICIES/EXTSAFEPOL/0,,contentMDK:20543999~menuPK:1286674~pa
gePK:64168445~piPK:64168309~theSitePK:584435,00.html

4
http://www.evb.ch/en
5
platforms, two 800 kilometers long onshore pipelines across the rivers in order to transport processed gas and
oil, liquefied natural gas (LNG) plant and LNG export terminal. 5

In 2001, the shareholders of Sakhalin Energy (British-Dutch Shell controlling 55% share, Japanese Mitsui 25%
and Mitsubishi 20%) asked EBRD to provide a loan of several hundreds of million dollars to co-finance Sakhalin
II. Collaborative work with Sakhalin Energy was initiated to ensure the project would meet EBRD environmental
standards. In 2003 Environmental Impact Assessment (EIA) 6 was carried out and approved by the Ministry of
Natural resources. EBRD asked the company, which produced EIA, to provide addenda to the EIA in order to
bring it up to best international practice standard. This document had to become a part of a loan agreement and
therefore part of the leverage that Bank has over the company, if EBRD would decide to co-finance the project. In
2005 local fishermen and enterprises involved in fishing and fish processing claimed that Sakhalin II project was
adversely affecting them. WWF warned that project was not in compliance with EBRD policies. In response
EBRDs financing of the project was took on hold and the Bank hired independent Russian lawyers to investigate
Russian legal aspects of the project.

In due course of the project the following key issues were found out:
Critically endangered population of gray whales
Pipeline through feeding area
Impact of seismic surveys and noise
Inadequate Habitat Conservation Plan
Endangered salmon species on Sakhalin Island: Planned pipeline through spawning
Fisheries of local indigenous groups affected
Project implementation contained a great deal of breaches of Russian law
No Strategic Environmental Assessment of offshore oil and gas activity
Production Sharing Agreement exempts project from national environmental law
Failure to apply best practice to oil and gas production wastes and river crossings
Inadequate provisions for oil spill response

Of course, EBRD investments would mean that fundamentally flawed project would get the blessing of EBRD but
it didnt happen. In 2007, after a major change in the ownership of the Sakhalin Energy Investment Company
(Shell was forced to sell its majority stake to Gazprom with new balance of powers as 27,5% and 51%
correspondingly, Mitsuis share dropped to 12,5% and Mitsubishis to 10%), EBRD announced that it would no
longer consider financing Sakhalin II project. However, the Bank continued to monitor environmental and social
aspects of the project and together with NGO campaigns, it influenced the decision to re-route pipelines away
from a path which could affect Western grey whales. It was a strong lesson as EBRD left the project due to its
inadequate environmental impact and shown that Independent Recourse Mechanism 7 offers opportunities (even
before projects are actually financed) to influence and promote responsible behavior of clients where affected
parties have complaints about the project.

The new vector of project development was provoked by Sakhalin Energy Investment Company, which in 2011
proposed to construct a new offshore oil and gas platform dangerously close to the key feeding ground of the
critically endangered Western grey whales. WWF warned that there could be fewer than 130 of the whales
remaining, including only 26 breeding females. However, several Equator Banks, namely BNP Paribas, Credit
Suisse and Standard Chartered, have expressed interest in joining the consortium financing the Sakhalin II oil
project in the Russian Far East. In its turn, WWF-UK, WWF-Switzerland and WWF-Russia launched campaign to
protect Grey Whales urging banks to refrain from financing third platform. The project doesnt comply with
Equator Principles. Now reputation of aforementioned banks is under international careful attention. Financial
consequences in case financing might be not very bright as there is a danger of extremely deep drilling, which
may result in dangerous environmental impact.

The cases described above show how sensitive and tangible environmental risks of the projects financed
could be for financial institutions and how negligence to them may cause serious negative reputational
and financial consequences.

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Environmental Finance and Socially Responsible Business in Russia: Legal and Practical Trends, Wybe Th. Douma, Fiona M. Mucklow, T.M.C.
Asser Press, 2010

6
Environmental Impact Assessment (EIA) is the formal procedure of assessing the potential positive and negative environmental impacts
of a particular project. EIA procedures can be established by national governments through relevant legislation, or by financial institutions
and corporate entities for their own risk mitigation purposes.

7
Complaints about EBRD-financed projects are dealt with by the Independent Recourse Mechanism (IRM)
6
Green Financial Mechanisms
The Basel III requirements will come into effect in 2013 and will be progressively phased in by 2019. For
now they dont address environmental issues and NGO coalition (BankTrack, Friends of the Earth,
Campagna per la Riforma della Banca Mondiale, Berne Declaration) has prepared recommendations on
inclusion of responsible lending issues into the requirements. According to the document 8, banks
should be required to integrate social and environmental sustainability criteria in their credit risk assessment
system as part of their IRB approaches.

Below are listed the existing global initiatives, which are frameworks for environmental and social responsibility
commitments of the financial institutions.

Box 1. Voluntary international sustainability mechanisms for the finance sector*

Equator principles
IFC Performance Standards
UNEP Finance Initiative
UN Principles of Responsible Investments
UN Global Compact
Carbon Disclosure Project
CERES Principles

* For more comprehensive information on these mechanisms please refer to WWF Study Pure profit for Russia: Benefits of Responsible
Finance at http://www.wwf.ru/resources/publ/book/eng/372

For the purpose of this Guide some banking and some investment mechanisms are described.

Equator principles is a set of guidelines to determine, assess and manage environmental and social risks in
project finance. EP is a voluntary initiative, which is applicable to the projects with total capital costs over US$10
million. Equator Principles Financial Institution has to report at least annually about its EP implementation
processes and experience. The reporting should at a minimum include the number of transactions screened by
each Equator Principles Financial Institution (EPFI), including the categorisation accorded to transactions (and
may include a breakdown by sector or region), and information regarding implementation. 9 Signatories to the
principles must ensure that customers, who they lend capital to, evaluate and actively avoid, manage or mitigate
the social and environmental impacts of the projects being financed. There is a minimal fee payable by EPFI on an
annual basis in respect of external costs incurred in the management, administration and development of the
Equator Principles (EPs). The Annual Fee for the Financial Year 1 July 2011- 30 June 2012 is GBP 2,370.00.
Applying the Equator Principles will result in a number of associated benefits for the Russian banks, including:
Improved environmental and social risk management with an anticipated benefit to long-term
investment performance.
Improved relationships with stakeholders.
Improved reputation.
Addressing social and environmental impacts more systematically and accountably.
Increased potential for partnerships that address impacts on the environment and provide
environmental and social benefits to affected communities.

Increased opportunity for EPFI to be the lead arranger in large syndicated project finance loans.
Increased business opportunities in the international project finance arena.
In August 2011, the IFC Board adopted a revised set of Performance Standards. The Equator Principles, being
based on the IFC Performance Standards, are currently under revision too. In January 2012, Equator Principles
Association adopted these revised IFC Performance Standards into its Social & Environmental Standards. It is
envisaged by WWF that in about 2-3 years EP will include third party independent verification.

UNEP FI a global partnership between UNEP and the financial sector, and considers the impacts of
environmental and social considerations on financial performance.
Adopting UNEP FI principles may bring a range of benefits to Russian financial institutions:
8
How to integrate Sustainability criteria in capital requirements, Jan Willem van Gelder (Prof undo), Myriam Vander Stichele (SOMO), March 2011

9
http://www.equator-principles.com/index.php/members-reporting/reporting-requirements
7
Keepabreastofthelatesttrends,toolsandpracticesrelatingtosustainablefinance
Bepartofinternationalnetworkoffinancialinstitutionsandengageinpeertopeerinformationandexperience
sharing
TakepartinshapingtheglobalsustainablefinanceagendabyparticipatingintheInitiativesvariousthematic,
sectoralandregionalgroups
ShowleadershiponagloballevelbyendorsingandparticipatinginUNEPFIsvariousconferences,seminars
andtrainingworkshops
GainpreferentialaccesstoUNEPFIgroundbreakingresearch,implementationtoolsandcapacitybuilding
Gainaccesstokeystakeholdersfromthegovernmentandcivilsociety

Table 1. Financial Institutions-Signatories to ESG Responsibility Mechanisms in Selected OECD and OECD Candidate Countries
(March 2012)
Country Equator UNEP FI UN PRI CDP
Principles
Selected OECD Countries
Canada 7 11 44 45

France 5 7 83 16
Germany 4 14 24 40
Japan 3 18 21 21
South Korea - 8 15 13
Mexico 1 2 - -
Netherlands 6 8 63 12
UK 5 16 128 56

United States 5 15 134 77


Selected OECD Candidate Countries
Brazil 4 6 54 36
China 1 5 11 (HK) + 1 1
India - 2 2 2
Russia - - - -
South Africa 4 6 36 7
Indonesia - 2 2

Source: Equator Principles (www.equator-principles.com), UNEP FI (www.unepfi.org), UN PRI (www.unpri.org), CDP (www.cdproject.net)

Application of voluntary responsibility mechanisms can prove to be an effective tool for both protecting the
environment and enabling Russian financial institutions to minimise their risks and increase their international
and domestic competitiveness. To date there is not a single one financial institution in Russia which signed any of
these mechanisms. However, WWF has an evidence of growing interest among Russian financial institutions
towards responsible finance practices and there is a strong hope that empty cells in front of Russia row will
gradually start filling in. Among the positive trends is that in 2011 bank Uralsib adopted UN Global Compact and
is considering the possibility to become signatory to UNEP FI. One starts and snowball effect will follow.

It must be clear that most of the principles are not fixed and prescribed rules of the game, which strictly
determine actions and instruct on what to do in a certain situation. It is more a set of general principles, and
some banks have adopted more stringent policies in certain substantive areas, and have begun to apply them
beyond the narrow parameters of project finance.
Part 1 WHY SUSTAINABLE BANKING
Financial institutions play a critical role in society. Through the products and services they provide, financial
institutions are uniquely placed to influence the direction and pace of a countrys economic development and by
default, its long-term sustainability.

From the first sight sustainable development as a concept might seem strange for financial sector as soon as this
sector does not produce something tangible, it only provides services. However, in reality there exist at least two
ways in which banks can have an impact on society, i.e. the environment and the economy: direct impact through

8
the footprint they make in their day-to-day operations and indirect through the products and services they
provide to their clients.

For instance, the Royal Bank of Canada10 manages its direct footprint in the form of:
Greening real estate (1.6 mln. square feet of space certified to LEED standards; 131 branches use green
Eco-logo certified power; 82% of office, marketing and direct mail paper sustainably sourced)
Responsible procurement (Policy requires the assessment of environmental and social criteria in the
procurement process, launched in 2010)

Allied Irish Banks11 (AIB) introduced the following green office initiative:
90% of waste (food, newspapers, paper, plastic, print cartriges) at Bankcentre was diverted from landfill
and instead recycled. This has produced very positive results with the volume of general waste reducing by
11.78 tonnes per month, food waste recycled on site turned into compost which equates to 60 tonnes per
year.

However, the impact a bank can make by reducing its direct footprint is quite small. The real impact it makes
comes from the asset side, i.e. through the clients/projects that bank chooses to finance. As center players within
the economy and potential engines for GDP growth, banks have the potential to be true agents of change making
their priorities and principles for providing services and thus creating incentives for the economy in either being
business as usual or growing in a more resilient, environment and human oriented way.

From operational point of view shifting to address environmental and social issues definitely lays in the
difference between the short-term incentives and the long-term vision. In the wake of the recent financial crisis,
it has become a necessity for banks to focus more on long-term sustainable growth, instead of short-term profits
only. So how can banks change their culture of short-term thinking into a more strategic long-term perspective,
building on sustainable profits?

The answer is to take into account the interests of relevant stakeholders and the environment while maintaining
profits that are sustainable in financial terms. Some commercial banks show that sustainable banking and
healthy returns can go hand in hand. For instance, Triodos Bank, Europes largest socially responsible bank,
which strategically finances clients that add cultural value and benefit people and planet. Triodos Bank has
generated a continuous annual strong growth over the past two decades. Moreover, after the financial crisis, the
banks profits increased. Triodos is experiencing an unprecedented global interest in its sustainable approach to
banking (Table 1).

Rabobank is another Dutch bank that has shown strong results over the past two years. In their own words,
Rabobanks mission is to put the common interests of people and communities first. The bank is organized as a
cooperative bank. CSR is increasingly integrated into Rabobanks banking business.

Triodos and Rabobank have two things in common: they integrate sustainability in their long-term strategies and
operations.

Table 2. Financial performance of Triodos Bank and Rabobank

Source: http://www.europeanfinancialreview.com/?p=3228

10
http://www.rbc.com/community-sustainability/

11
http://www.aib.ie/personal/offers/add-more-green-brochure
9
As a starting point, banks can draw inspiration from successful peers, from their own clients and from niche
banks such as development finance institutions. Their successes show that for banks too, there is a material
business case for implementing a sustainable, long-term strategy.

Before the recent financial crisis, short-term gains prevailed over long-term sustainable growth for many
commercial banks. Shareholder value was dominant over stakeholder value, thus underrepresenting clients,
employees and society at large.

The financial crisis gave impetus to the demand for a more balanced way of banking, taking into account the
interests of direct and indirect stakeholders. Global long-term trends like scarcity of natural resources, the impact
of climate change, can no longer be ignored by the public and the private sector. Both companies and
governments worldwide are increasingly realizing that a long-term sustainable strategy goes hand in hand with a
change in short term priorities. Banks in Russia are still lagging behind in this area and do not sufficiently
recognize the business case for investing in sustainability.

Key drivers for banks to be sustainable


Sustainability in the private sector is increasingly understood as the creation of not just financial and economic
value but also long-term environmental and social value for a wide range of stakeholders including
shareholders, employees, customers, suppliers, communities, and public-sector partners with particular
consideration for the needs of future generations.

The global importance of sustainability is reflected in changing consumer expectations and emerging national
and international legislation. Companies chances of operating successfully and engaging in international trade
depend more and more on their ability to mitigate social and environmental risks and to capitalize on
opportunities for innovation. Sustainability has become an essential element of competitive advantage and
something businesses can no longer ignore.

Financial institutions, as the providers of finance for businesses of all shapes and sizes, have a pivotal role to play
in promoting sustainability across industries, sectors, and communities. Sustainability also offers vast potential
for financial institutions to improve their own products and services.

For financial institutions, sustainability has two major components. One component is managing
environmental and social risks in strategic decision-making and lending. Financial institutions can strengthen
their portfolio by systematically evaluating these risks in the loan or investment appraisal process. In this way,
they can focus investments on those companies and projects with high environmental, social, and financial
performance. Doing so can help protect their asset portfolio by decreasing nonperforming loans (NPL), thereby
increasing financial stability and protecting the banks reputation. The integration of environmental risks into the
whole credit risk management process is important because only then is an adequate risk management
guaranteed. There exists an evidence of positive correlation between the application of ESG risk management
and the decrease of NPL. The research shows that there are significant differences between banks that have
signed the UNEP statement and those banks that have not signed this statement so far with respect to integrating
environmental risk management in the credit management process. 12

Statistical studies demonstrate positive relation between application of sustainability principles and financial
performance. For example study on influence of sustainability performance and EBITDA margin. The study
confirmed strong relation between all GRI categories as independent variable and EBITDA margin (r2=0.736). 13
Application of sustainability performance relates primarily to integrating new categories in risk assessment tools
in risk management process. However, it should be mentioned that banks more often apply environmental risk
issues at rating stage, while these issues do not get the same attention at other stages of credit risk management
process.

In 2010 the dynamics of overdue debt indicator among groups of banks in Russia was multidirectional. During
the year the share of non-performing loans in total loans volume declined in banks controlled by foreign capital
(from 6.3 to 5.6%), in large private banks (from 6.0 to 3.7%), as well as in medium and small banks of the

12
Weber O., Fenchel M., Scholz R.W., Empirical Analysis of the Integration of Environmental Risks into the Credit Risk Management Process of
European Banks, 2006
13
Webber, O., Koelner, T. Habbeger, D., Steffensen, H., & Ohnemus, P. The relation between sustainability performance and financial
performance of firms. Progress in Industrial Ecology, 2008

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Moscow region (from 3.8 to 3.2%). At the same time the share of overdue debt increased in banks controlled by
the state (from 4.2 to 4.9%) and in medium and small regional banks (from 4.2 to 4.4%).

Table 3. Share of loans to non-financial organisations and individuals in their total volume by bank groups (%)

Bank type 1 January 2010 1 January 2011


Banks controlled by state 49,0 49,3
Banks controlled by foreign capital 17,1 17,5
Large private banks 29,3 28,7
Medium and small banks from the Moscow region 2,1 2,1
Regional medium and small banks 2,6 2,4

Source: Central Bank of Russian Federation, Report on the development of banking sector and bank supervision in 2010,
http://www.cbr.ru/publ/root_get_blob.asp?doc_id=9061v

According to the Central Bank of Russia analysis of sectors in which borrowers operate, in 2010 the highest share
of non-performing loans was among loans to wholesale and retail trade, agriculture and forestry, and
construction (Table 3)14

Table 4. The share of overdue debt in debt under credit by sectors (%), on 1 January 2011

Source: Central Bank of Russian Federation, Report on the development of banking sector and bank supervision in 2010,
http://www.cbr.ru/publ/root_get_blob.asp?doc_id=9061v

Therefore, important conclusion is that the potential for decrease in non-performing loans volume
among Russian banks could be realized through incorporation and implementation of environmental
and social risk management (such additional screening filters protect banks from loan default). Coming
from the current data, the most significant and timely relevance for this is for state banks as well as
medium/small regional banks and for agricultural, forestry and construction sectors.

14
Central Bank of Russian Federation, Report on the development of banking sector and bank supervision in 2010
11
The other component is identifying opportunities for innovative product development in new areas related to
sustainability. This entails creating financial products and services that support commercial development of
products or activities with social and environmental benefits. A growing cluster of these opportunities has
evolved and includes renewable energy, energy efficiency, cleaner production processes and technologies,
biodiversity conservation, microfinance, financial services targeted to women, and low-income housing.
Business models that address these dimensions are yielding new clients and markets. They are also helping
financial institutions differentiate themselves from competitors, improve their reputation among key customers
and stakeholders, attract new capital, and generate goodwill and support from stakeholders.

Banks that look at sustainability from an opportunity-based perspective can gain a competitive edge. Corporate
responsibility has proven to be a proxy for good management, which in turn is the prime indicator of superior
financial performance.

The shift from viewing ESG as a risk to seeing it as an opportunity does not occur overnight. It requires a strong
commitment from the banks management. The bank must set priorities, determine its level of ambition, set
targets, invest in dedicated capacity and guide the cultural change management process. The latter is often
needed to incorporate longer-term thinking and implementation of long-term strategies, as opposed to only
working towards short-term results.

Box 2. Key Sustainability Drivers According to Banks

Source: IFC Sustainability Survey of Financial Institutions, 2005

For the purpose of our review we have split the incentives into 4 main categories credibility and reputation;
stakeholder demand (e.g. shareholders, investors, clients, NGOs); better risk management; new business
opportunities.

Credibility and reputation


One of the worst things can happen is to be found as financial institution, which financed a
project that caused environmental catastrophe. However, this is a direct threat coming from
inadequate risk management at very early stage of the project development. At the same time
reputation and client liability depends not only on direct business image, but also other
external brands with which a bank is associated really matter. It mainly referes to
international initiatives (see above) which are globally recognised, and to participation in the
activities related to mainstream issues, like climate change. Since the Club of Rome report
Limits to Growth back in 1972 issues of sustainable development became a major trend and
different international initiatives, like Equator principles, UN Global Compact, UNEP FI, etc.
(see description above) became brand names and companies can get additional publicity
signing up and following these initiatives in their practices. Cooperation with the international
and national environmental Non-Governmental Organisations is considered by some banks as
a plus to their image and public outreach.

12
The following two cases demonstrate that being part of the global environmental movement within existing
initiatives adds value to reputation, including through being positively ranked.

BRICS focus15

Ita Unibanco

Itau Unibanco is the largest financial conglomerate in the Southern Hemisphere and one of the 20 largest in the
world. It was established as a result of Unibancos take-over by Itau. It has played a central role in promoting the
Equator Principles since 2004. In 2008 and 2009, Itau Unibanco was selected by the largest financial institutions
in the world as chairman of the Equator Principles Steering Committee, a testament to Banks global influence in
support of the adoption of sound socio-environmental practices. Itau Unibanco remains a member of the Steering
Committee and has been initiating numerous initiatives, such as the recent Equator Principles Strategic Review. 16

Since 1999, Itau Unibanco has been the only bank from an emerging-market country to be a component of the
Dow Jones Sustainability Index and in 2001 obtained the highest score in the socio-environmental analysis of
projects (93 points against a sector average of 50 points).

In 2008 Unibanco joined the Principles for Responsible Investment (PRI), a set of social, environmental and
corporate governance standards to be employed in investment decision-making. In addition, Itau Unibancos
portfolio features socially responsible investments funds which focus on companies with good social
responsibility and corporate governance practices, as well as other socio-environmental-related products such as
insurance and credit cards that provide money for environmental conservation projects and organizations.
Finally, Itau Unibanco suppliers are selected in part on their socio-environmental aspects, with contractual
clauses for companies to adopt good employment practices, respect for human rights and environmental
preservation.

In addition to making an environmental impact assessment part of its lending and investment criteria, Itau
Unibanco employs practices to mitigate the direct environmental impacts of its operations. Since 2007 Itau has
used a group of professionals focused on identifying actions, which can produce a more efficient use of natural
resources, while in 2008 Unibanco created a specific structure to centralize all information and establish an
integrated action strategy for the entire institution.

To control their emissions of greenhouse gases, Itau and Unibanco conducted inventories in accordance with the
international GHG Protocol standard. Itau is a founding member of this initiative and both banks are signatories
and respondents to the Carbon Disclosure Project (CDP), a global effort to identify risks and opportunities caused
by climate change. Itau also sponsored the CDPs expansion in Latin America.

In 2011 Itau Unibanco was elected Sustainable Bank of the Year in the 2011 FT/IFC Sustainable Finance
Awards presented by Financial Times and International Finance Corporation. The bank was also recognized as
Sustainable Bank of the Year Regional Winner Americas, competing with institutions from Argentina and
Mexico. In 2009 and 2010, Itau Unibanco had already received the award as Emerging Markets Sustainable Bank
of the Year and Regional Winner Latin America.

Table 5. Itau Unibanco financial data (mln BRL)


2006 2007 2008* 2009 2010

Assets 209691 294876 632728 608273 755112

Operating revenues 47761 52042 91070 111994 120210

Net income 4309 8474 7803 10067 13323

15

16
http://ww13.itau.com.br/portalri/index.aspx?idioma=ing
13
Shareholders equity 23564 28969 43664 50683 60879

Source: Bank Annual Reports *Merger of Itausa and Unibanco

Joining International Initiatives and applying more stringent sustainability requirements did not have any
negative effects on the bank portfolio. On the contrary, the bank demonstrated sustainable economic
performance (with some effects of falling in 2009 due to financial crisis). Better risk assessment improves the
quality of portfolio and any short-term lost profits, which may result in application of sustainability principles,
result in more financially sustainable development in mid and longer term.

BRICS focus

Banco do Brasil
Banco do Brasil is partly state-owned, partly publicly listed at the stock exchange in Sao Paulo. Since 4Q08, Banco
do Brasil has maintained the pioneer initiative among Brazilian banks of disclosing information about its socio-
environmental performance together with the financial result of the company. From 3Q10, indicators related to
BB environmental performance are released in the Investor Relations website. In addition, the Bank has
developed a number of initiatives in order to stimulate the investor market to consider socio-environmental
aspects in its decision-making.17

Investor Market Recognition


BB participates in three indexes of the Sa o Paulo Stock Exchange, one of them is Corporate Sustainability Index -
ISE. ISE comprises the companies with best corporate governance and socio-environmental responsibility
practices of BM&FBOVESPA, which is renewed annually by the application of questionnaires and evaluation of
documents.

In July 2010, Banco do Brasil was selected to compose the Emerging Markets Global Fund portfolio of the British
F&C asset management company. The fund is constituted by shares from companies which contribute to
sustainable development in emerging markets, demonstrate the adoption of good practices and standards,
corporate governance and manage impacts generated by their operations as regards social and environmental
aspects.

Banco do Brasil has signed the following initiatives: Equator Principles, Carbon Disclosure Project, UN Global
Compact, Global Reporting Initiative. Bank uses them as guiding standards responsible policies on financing the
following sectors and issues:

Sector policies Policy document


Mining Equator Principles
Oil and gas Equator Principles
Power generation Equator Principles
Issue policies
Biodiversity Equator Principles/Global Compact
Climate change Banco do Brasil Socio-Environmental
Responsibility Charter/Carbon
Disclosure Project/Global Compact
Toxics Global Compact

Source: http://www.banktrack.org/

Stakeholder demand
Indeed, what we observe today is growing concern of individuals about the environment. In
fact the sum of these individuals creates critical mass for introducing environmental thinking
17
http://www.bb.com.br
14
and putting pressure on business. What we observe is major shift in individual behaviour.
From this perspective pressure on banks is coming from their individual clients, shareholders,
investors (including International Financial Institutions), clients/ investees, environmental
NGOs.

Banks can learn important lessons from clients, many of whom are more advanced in embedding sustainability.
Listed companies such as Unilever and AkzoNobel are far ahead, taking bold steps in integrating sustainability in
their long-term strategies and day-to-day core business. Consumer goods company Unilever set targets to, by
2020, 1) halve the environmental footprint of their products, 2) source 100% of their agricultural raw materials
sustainably and 3) help over 1 billion people take action to improve their health and well-being. It enables to
accelerate innovation, ensure security of resources, reduce overall costs and build sustainability into our brand
propositions, ultimately winning consumer preference and loyalty well into the future. (table 2).

Source: http://www.europeanfinancialreview.com/?p=3228

Another example is paint and coatings conglomerate AkzoNobel. The company sets high targets for integrating
sustainability into its core business and states on its website: Over the last few years sustainability has become
firmly anchored in our regular business processes. Sustainability is fully integrated in our strategy and
management tools.

Both companies show good financial results and have a strong market position in their respective sectors. In
2010, they were among the Dow Jones Sustainability Index Supersector Leaders with the highest CSR scores.
More and more people become concerned about environmental protection, climate change and footprint. For
banking sector it is a challenge and opportunity to propose products and services which can address this
concern, but also to change internal organizational procedures and behavior and thus improve image and gain
loyalty of these customer. The way banks can responce and thus assure loyality of this category of customers is
through:
Reducing paper reports (e-banking)
Calculation banks footprint and development of footprint reduction action plan
Switching to renewable energy suppliers
Introducing green office and recycling

Inspiration from development banks


For market economy development, particularly in the developing countries and countries with emerging
financial system, development finance institutions (DFIs) play particular role in knowledge transfer. This
knowledge goes beyond financial routines and involves social and environmental principles, which are not yet
incorporated into a country economy for the time being.

DFIs can serve as a positive example for commercial banks who want to go further in embedding sustainability
into their core banking business. DFIs are niche banks that focus on private sector development in developing
countries. They operate on the frontiers of commercial banking, taking higher country and credit risks than
commercial banks.

*Book year June-June

DFIs are either publically owned, like the International Finance Corporation (IFC), Vnesheconombank, Eurasian
Development Bank, or take the form of public private partnerships, like FMO, the Dutch development bank. DFIs
traditionally have a long-term relationship with their clients and their mission is to integrate financial

15
profitability with a positive development impact, taking into account economic, environmental and social
impacts.

The DFI Story: from risk to opportunity

DFIs began to institutionalize sustainability in the early 1990s. The process began with a series of small steps
such as hiring dedicated capacity to work on sustainability, assessing potential clients ESG practices, and
integrating ESG into the credit approval process. These steps eventually led to the development of a fully
functioning environmental and social management system (ESMS), which allows DFIs to manage and address all
relevant social and environmental risks and impacts of its business and operations.
Good ESG risk management is not where the story ends however. The long-term relationships that DFIs develop
with their clients show that not only can DFIs protect profits through good ESG risk mitigation, but that there are
opportunities to add value to clients, increase financial returns and positively impact sustainable development.

Case Studies

European Bank for Reconstruction and Development


EBRD has established an Environmental and Social Risk Categorisation List 18 designed to provide the user
(typically credit or investment officers) with an indication of the inherent environmental and social risks
associated with a particular business activity and hence assist in ensuring that the appropriate level of
environmental and social due diligence is undertaken on the project under consideration.
A projects actual exposure to environmental and social risks will also depend upon other factors such as the
nature and size of the transaction and the financial and managerial capacity of the company to effectively manage
environmental and social issues. These factors should be taken into account when using this list.

FMO
FMO is the Dutch development bank. It is committed to growing a healthy private sector in developing countries.
Bank offers a full range of financial instruments for the benefit of private companies and financial institutions in
developing economies. FMO is a public-private partnership, with 51% of our shares held by the Dutch state, and
49% held by commercial banks, trade unions and other private-sector representatives. FMO has an AAA rating
from Standard & Poors.19

FMO believes that incorporating ESG opportunities into business models is essential for both mitigating risk and
creating development impact. The bank works closely with clients throughout the entire process to help them
reach ESG goals. Investment process at FMO is aimed not only at the financial results, it adds value to its clients
businesses by assessing, implementing and monitoring ESG practices, i.e. creating external incentive and
providing learning-by-doing tools to integrate ESG in banks operations.

Box 3. ESG embedded in credit process

18
http://www.ebrd.com/pages/about/principles/sustainability/resources/financial.shtml
19
http://www.fmo.nl/
16
FMO works with its clients to assess their ESG risks, identify where ESG improvements can be made, and agree on
action plans for addressing improvements ensuring that bank supports its clients on their way to meeting them.

Examples of ESG solutions could be:

Developing management systems


Cutting carbon dioxide emissions
Improving labor conditions
Reducing waste and increasing operational efficiencies

Best practice standards


FMO employs best practice frameworks in guiding sustainability implementation in its clients businesses and
support their progress. By further implementing sustainability into risk-return decisions in day-to-day
operations, FMO strives to promote the business case for sustainability and for sustainable finance. Providing a
margin reduction on a loan touches upon the core business model of a bank. After all, integration of sustainability
into the risk-return model of a bank would really make it mainstream.

FMOs policy is based on international standards such as the IFC Performance Standards and OECD guidelines.
But the bank also actively takes part in developing and defining these standards, working together with
organizations such as IFC and UNEP FI. FMO continues to look for new ways to define and incorporate innovative
ESG practices.

FMOs investments are typically evaluated after five years (or upon exit). Ex-post evaluations focus on three
components: (1) projects development outcome, assessed on the basis of their business success, their
contribution to economic growth and private sector development and their environmental and social
performance, (2) projects investment outcome, or their contribution to FMOs financial sustainability, and (3)
FMOs work quality, assessed separately for front-end work, for monitoring and supervision, and on how well
FMO played its role as a Development Finance Institution.

Direct Investments
All FMOs direct investment clients (including those in which bank takes equity) are required to comply with
national E&S law as a minimum standard, and with the Environmental and Social Performance Standards, as
developed by the IFC, whichever stricter.
To help its direct investment clients establish sound E&S practices, FMO uses a practical framework. The
framework comprises of three parts: (1) Risk Categorization of clients, (2) Establishing applicable requirements,
(3) Environmental and Social Action Plans and (4) pricing incentives.

(1) Risk Categorization of Clients


All new and existing clients are subject to a Risk Categorization of their (potential) Environmental and Social
impacts. There are four risk categories A, B+, B and C:
A = high risk: Projects / clients with potential significant adverse social or environmental impacts which are
diverse, irreversible or unprecedented.
B+ = medium high risk: Clients with potential adverse social or environmental impacts that are generally
beyond the site boundaries, largely reversible and can be addressed through relevant mitigation measures.
B = medium risk: Clients with potential limited adverse social or environmental impacts that are few in number,
generally site-specific, largely reversible and readily addressed through mitigation measures.
C = low risk: Projects with minimal or no adverse social or environmental Impacts.

17
The categorization of clients into the A, B+, B, or C category is largely based on an assessment against the
applicable IFC Environmental and Social Performance Standards. At the same time, we cooperate closely with the
European Development Finance Institutions (EDFIs) with the purpose to harmonize our definitions and
requirements.

(2) Applicable requirements


Below table provides an overview of the minimum requirements per category of company. For direct investment
clients in category A and B+, an assessment of the E&S practices is required as part of FMOs due diligence. All
FMOs higher risk clients are required to implement an Environmental and Social Management System (ESMS).
This ESMS is customized for each type of client.

Source: FMO Equator Principles Reporting 2010

Indirect Investments
For financial institution (FI) clients and private equity funds (PEF) in which FMO invests, it focuses on how they
handle the environmental and social risk in their portfolios. Depending on the risk category, bank expects the FIs
and PEFs to apply certain environmental and social standards when financing or investing in their clients.
Basically, FIs and PEFs will be required to establish and maintain an E&S Management System to ensure that its
investments meet (or over time become compliant with) FMOs requirements. The level of detail and
sophistication of this management system and of the monitoring approach will depend on the E&S risk profile of
the FI / PEF and the type of financing that they provide.

(1) Categorisation and requirements


In the tables below, the risk categorisation for FIs and PEFs is presented, together with the applicable
requirements.

18
Source: FMO Equator Principles Reporting 2010

Better risk management


In this section we move on to the most practical incentive - integration of environmental
issues in banks operations. The main way to it is improvement of risk assessment and
management. With existing technologies many projects bare significant environmental risks,
like pollution, noise abuse, fragmentation of ecosystem, waste, unsustainable resource use for
production, etc. Current regulations international prescribe significant fees for use of natural
resources, obligation to rehabilitate territories and of course to compensate any harm caused.
In these conditions environmental risks become inherent to projects, and vice versa
environmentally friendly operations are considered as advantage. Thus environmental issues
become part of project risk assessment and management.

On 16 February 2012 Russian President Mr. Medvedev approved a draft of The state policy framework on
environmental development for the period till 2030 (
2030 ).20 The document was prepared with WWF-Russia
participation. It contains a number of new mechanisms to be incorporated in the Russian nature conservation
policy, for example, application of strategic environmental assessment in the development of plans and
programmes, monitoring and assessment of environmental risks while taking managerial decisions, a row of
measures regarding the evolution of economic regulation and market mechanisms for nature conservation.
The document underpins the importance of voluntary sustainability reporting for state corporations with
necessary third party verification. Following this request, a number of state-owned banks have prepared
sustainability reports, including Vnesheconombank, Sberbank.

Financial mechanisms and legislation measures proposed by the Policy:


Formation of resource-saving and energy efficient economy,
Concessional lending/financing (co-financing) if resource-saving, environmentally-friendly technologies
and environmental standards are incorporated,
Priority of environmental financing and ban on financing projects, which don't ensure compliance with
environmental requirements and restrictions,
Provision of stakeholders participation and their opinion account while taking environmentally important
decisions,
Harmonisation of Environmental Impact Assessment (EIA) with international requirements.

The Policy sends clear signal to government and business to start monitor and assess environmental
risks and prioritize lending to environmentally responsible and energy efficient projects, definitely
financial sector as provider of funding will play a crucial role in realization of this Policy and this
imperative should be well incorporated in Russian financial sector policies.
20
wwf.ru/data/news/7194/ukaz.doc
19
WWF-Russia together with UNEP FI and Vnesheconombank organized first in Russia Training on Environmental
and Social Risks Assessment in Lending in December 2011. After the event several banks-participants
(Vnesheconombank, Uralsib, ) expressed their intention to incorporate ESG risks assessment into their risk
management routines.

Improved access to international financing

Not surprising that responsible company can claim for bonus at a bank if it is capable to identify and manage
environmental risks. Wise management of ESG risk/reward ratio allows a bank not to harm the environment
while still earning good profits. ESG risks integration into lending process is not just ethical act it is about
assessing a borrowers hidden value drivers and risks.

Among the attractive reasons for the Russian banks to be responsible is the pricing incentive
opportunity to get loans from development finance institutions at a reduced interest rate.

The Netherlands Development Finance Company (FMO) developed pricing incentives, where a discount on a loan
can be offered to clients who make substantial sustainability improvements, thereby reducing the risk profile of
FMOs loan. Triggered by these initiatives, two client banks have now implemented an ESMS within a relatively
short period. In total, 15 clients have agreed on a pricing incentive and are working on meeting sustainability
conditions.

Ameriabank CJSC
Ameriabank CJSC is the second-largest bank in Armenia, offering a full range of corporate, SME, retail and
investment banking services. It aspires to become the leading SME bank in the Armenian market.

Employees Total Assets / Net Profit


367 2009 - USD 269 mln / USD 4.0 mln
2010 - USD 421 mln / USD 9.0 mln

Better business
FMO is the first development bank in the world to develop a framework offering a reduced interest rate to
borrowers who meet environmental, social and good governance (ESG) standards within a set time frame. In
2010, within six months, Ameriabank incorporated environmental and social risk management into their
banking processes through the implementation of an Environmental and Social Management System (ESMS).
After implementation of the ESMS, FMO and co-financer DEG granted Ameriabank a reduction in interest rate on
USD 30 million loan.21

Business results
Access to finance Commitment to implementing environmental and social risk management into banking
processes facilitated FMO loan approval to Ameriabank.
Securing investor confidence Based on its fully functioning ESMS, Ameriabank obtained further loans
from development finance institutions IFC and EBRD.
Cost reduction Ameriabank could save up to USD 300,000 on interest payments in case it maintains the
ESMS.

Risks
Reduced portfolio risk Ameriabank finances hydropower plants and ESMS was designed to take into
account the risks associated with hydropower plants and dams.
Reduced reputational risk ESMS mitigates environmental and social risks that might damage the
institutions reputation.
Reduced collateral risk ESMS ensures proper management of sites (ranging from factories to plots of
land) that serve as a collateral, to protect their value.

Companies often see environmental, social, and governance issues as potential risks, and many programs in these
areas were originally designed to mitigate themparticularly risks to a companys reputation but also, for
example, problems with regulation, gaining the public support needed to do business, and ensuring the
sustainability of supply chains. Today, companies manage many of these risks by taking stands on questions

21
www.fmo.nl, June 2011
20
ranging from corruption and fraud to data security and labor practices. Creating and complying with such
policies is an extremely important part of risk management, though one that isnt likely to be a source of
significant differentiation. But leading financial institutions can differentiate themselves by going beyond the
basics and taking a proactive role in managing environmental, social, and governance risks. Such an approach can
have an important and positive financial impact, since negative environmental, social, and governance events can
have significant potential cost22.

Banks response
Integration of ESG issues in policies
Integration of ESG in risk assessment process
Development of green products
Advisory services for clients

At present a great deal of banks are applying ESG risk assessment and evaluation to their project finance
activities. Furthermore, an increasing number are actively developing approaches to integrate these
considerations across all their financing activities, with corporate finance presenting the greatest challenges. The
EPFIs are currently undertaking a strategic review which will identify how the scope of application can be
extended to a range of other financial products (potentially including trade finance, corporate loans and IPOs).

Environmental and social risk management adds a new dimension for banks to the existing risk management
approach that already focuses on assessing financial risks. The operations of a financial institution do not
generate significant environmental and social impacts, but the way their clients/investees manage impacts of
their operations may pose financial, legal and/or reputational risks to a financial institution. Because
environmental and social issues are inherent in client/investee operations, almost all transactions are exposed to
some degree of environmental and social risk. If left unmanaged, these risks can lead to a decline in the financial
institution's reputational image, costly litigation, or loss of revenue. Client/investee operations may also
represent opportunities for additional financing and growth.

The environmental and social risks inherent in a transaction depend on several factors such as the specific issues
associated with a client's/investee's operations, the industry sector and the geographic context. ESG issues
typically include environmental pollution, hazards to human health, safety and security, impacts on communities
and threats to a region's biodiversity and cultural heritage. In most cases, a client/investee has control over the
ESG issues associated with the operation and can take the necessary steps to mitigate these risks. By
implementing an Environmental and Social Management System, a financial institution can enhance its
understanding of ESG risks associated with each transaction E&S risks associated with each transaction, which
can be included in the decision-making process for proceeding with a transaction.

Managing Environmental and Social Risk


The Boards of various banks appear to be taking a wide range of approaches with regard to how to most
effectively motivate staff members to integrate environmental and social considerations into the institutions core
credit risk management processes. What is clear is that the underlying premise - environmental and social credit
risk management as a core business principle - has been adopted wholeheartedly by the credit community and is
here to stay.

What does this mean in practical terms?

The majority of major banks are now:


Adding staff to look at these issues within all functional disciplines: credit risk, client management,
operations, and corporate communication (leading banks have either just hired, or are in process of
hiring, additional senior staff members;
Internalizing the majority of these activities and choosing to out-source only limited activities;
Establishing new or more extensive programs and processes to identify, manage, and mitigate these
risks;
Increasing training activities associated with these risks while also increasing overall bank-wide
awareness on the subject;
Paying a great deal more attention to what representatives of non-governmental organizations (NGOs)
are saying;

22
Valuing social responsibility programs Sheila Bonini, Timothy M. Koller, and Philip H. Mirvis McKinsey Quarterly JULY 2009
21
Seriously questioning current and potential clients about these issues, both before (close to 100%) and
after (less than 25%) funds are committed.23

Table Environmental and Social Risk for Financial Insitutions

Source: http://firstforsustainability.org

Case Studies
Barclays
Barclays is a major global financial services provider engaged in retail banking, credit cards, corporate and
investment banking and wealth management with an extensive international presence in Europe, the Americas,
Africa and Asia.

The environmental and social risks associated with any transaction can be complex, and are based on a range of
factors, which include the sector, geography and transaction type. For example, the environmental risk
considerations for a general corporate credit line to a mining company with operations in different regions
around the world will be very different from those applied in assessing the risks associated with a loan to an
individual South African wind farm project. Barclays uses a range of tools to assess these different risks.

Table Environmental and Social impact Assessment (ESIA) Policy Process at Barclays

Source: Barclays

Post ESIA process

The independent consultant will confirm whether the project currently meets the requirements of our ESIA
policy and the Equator Principles. They are required to highlight areas where full compliance is not clear,
alongside recommended actions that will need to be taken in order for the project to work towards compliance.
The consultant is also expected to provide guidance on the associated costs and timescales. Barclays will then

23
http://firstforsustainability.org/risk-management/understanding-environmental-and-social-risk.php

22
work with the consultants and our client (the borrower) to understand whether the recommended actions to
attain Equator compliance are achievable in the project and commercial context. If this is so, the actions will be
incorporated into an Environmental and Social Management Plan.
The implementation and monitoring of such plans is covenanted in the loan documentation i.e. it becomes a
condition of the loan agreement.

If we feel that that the required action may prove too challenging to implement, or the client is unwilling to
proceed, we will decline to participate in the project.
However, as a general rule, we prefer to collaborate to improve project standards rather than simply step aside to
allow a potentially less environmentally or socially inclined financial institution to support the transaction.

Royal Bank of Canada


Bank is committed to environmental sustainability as an investment in the future of the planet through RBC
Environmental Blueprint which sets out Banks environmental policy, objectives and three priority areas: climate
change, biodiversity and fresh water.
Approach to sustainability
Reduce the intensity of our environmental footprint
Promote environmentally responsible business activities
Offer environmental products and services
Support environmental organizations and initiatives
Objective to help to identify and manage risks associated with a clients environmental and social issues,
minimizing banks exposure to credit, reputational and legal risk. By incorporating environmental and social
issues in the credit risk assessment process, the bank helps to promote the importance of good environmental
and social standards in all types of business.
Procedures
RBC and clients use third-party environmental consultants to perform environmental investigations, which may
involve a Phase I, II, III or IV Environmental Site Assessment. All investigations carried out as part of the financing
process must be performed by environmental consultants that meet the rigorous standards of RBC.
The Bank Board of Directors and senior management committees receive periodic reports and analyses on these
risks. The Bank tracks loan losses resulting from environmental issues and report these to senior management.
For external audiences, the Bank reports on implementation of the Equator Principles in our annual Corporate
Responsibility Report and Public Accountability Statement.
Tools
Enterprise-wide Environmental and Social Risk Management Policy applied for all bank operations.
Capital markets ESRM Policy applied to all debt and equity underwriting, and corporate credit facilities.
The Equator principles applied to project finance (first Canadian Bank to sign for these principles in 2003)
Commercial and Business Markets Policy applied to commercial loans and mortgage transactions in
Canada and US.
Agriculture lending policy, Public sector Lending addressing sector-specific environmental risks.

Industry Certifications
The type, quantity and severity of environmental and social issues that present a risk to a financial institution for
any given transaction depend on a variety of factors, including geographic context, industry sector, and the type
of transaction: corporate, housing, insurance, leasing, microfinance, project finance, retail, short-term finance,
small and medium enterprise, and trade.

Various international sustainability standards and industry certifications have been established, which may apply
to a financial institution's client/investee. Certification helps banks to better understand principles of the
potential client, their exposure to environmental and social risks. In many cases being certified to international
standards can be considered and as proxy indicator of better quality of non-related procedures. For example, for
managing the world's forests and fisheries, encouraging businesses to market products and services that are
kinder to the environment, improving the global supply chain, and reducing the environmental impact of
production sites. Following these principles means monitoring of compliance at every stage, which in turn may
mean that such monitoring is used for other operations as well.

23
Forest Stewardship Council (FSC)24 The FSC is a non-governmental, non-profit organization established to
promote the responsible management of the world's forests by certifying the practices of companies,
organizations, and communities. FSC's certification system consists of 10 principles and 57 criteria that address
legal issues, indigenous rights, labor rights, multiple benefits, and environmental impacts associated with forest
management.

As of 2 March 2012, 8 million hectares is FSC certified and 118 certificates for the forest management are issued
in Russia.
Development of FSC in Russia

QuickTime and a
decompressor
are needed to see this picture.

Marine Stewardship Council (MSC)25 The MSC is a non-governmental, non-profit organization established to
promote the responsible management of the world's fisheries. MSC provides guidelines for certification and eco-
labeling programs to establish environmental standards for sustainable fishing and chain of custody standards
for seafood traceability.

Currently, MSC certificate was awarded to the only one Russian fishing company Gidrostroy, which together with
Russia Government manages salmon fishery on the Kuril Island. Certification of the first fishery in Russia is an indicator
of the necessity to draw more governments attention toward resolving some of the obstacles for effective
management of salmon fisheries in Russia.

International Organization for Standardization (ISO)26 The ISO has developed over 18500 International
Standards on a variety of subjects and some 1100 new ISO standards are published every year. Of particular
relevance to environmental and social issues are ISO 9000, ISO 14000, ISO 22000, and ISO 31000 on quality
management systems, environmental management systems, food safety management systems, and risk
management, respectively.

Some potential environmental and social risks may not seem significant or relevant at the time of approval of a
financial transaction, but may become so during execution, for instance as a result of higher regulatory standards
and increased levels of enforcement. In other cases, environmental and social risks, such as spills or explosions,
may seem unlikely to occur, but when they do, the environmental and social impact is potentially extremely high.

To reduce exposure to risk arising from the environmental and social risks of its clients/investees, financial
institutions need to ensure that their clients'/investees' financial and operational sustainability is not
undermined by adverse impacts on the environment and surrounding communities. Financial institutions need
to have a clear understanding of potential environmental and social risks and implications for a
client's/investee's operations prior to being linked to the client/investee in the context of a transaction.

This requires proactive identification, assessment, and management of environmental and social risks before
they become significant or result in an adverse outcome on the client/investee. A financial institution can best
achieve this by developing and implementing a Environmental and Social Management System (ESMS), to
systematically assess the environmental and social risks and opportunities arising from their clients'/investees'
operations and manage its exposure to risk.

New business opportunities


24
http://fsc.ru/

25
http://www.msc.org/ru

26
http://www.iso.org/iso/home.html
24
Many countries have adopted policies and programmes aimed at creating stimuli for the
development of certain green sectors. In practice it can be grants for environmental
installments at home like solar panels, support to energy effective technologies. At
international level carbon trading now is a significant market; however in this market banks
provide operational services thus being involved indirectly.

Banks Response:
Financing of Leadership in Energy and Environmental Design (LEED) construction/energy efficient
buildings
Participation in government-funded programmes (energy efficiency, renewable energy)
Carbon trading (financial services)

Wells Fargo27
The Bank invested nearly $2 billion in 230 renewable energy projects that account for more than 3,600
megawatts of new renewable energy capacity across 24 states. Combined, these projects generate more than 12
billion kilowatt-hours per year, which is enough clean renewable energy to power about 1.1 million households.
We are also a leading lender for Leadership in Energy and Environmental Design (LEED) buildings, having
provided more than $3.25 billion for LEED buildings since 2004.
We aim to expand on these results through ongoing additions to our organizational capacity and infrastructure to
help customers take advantage of clean technologies and renewable energy. Since 2006, we have established
these new business groups and services:
Environmental Finance offers expertise in the financing of renewable energy projects
National Cleantech Commercial Banking Group provides financial expertise, products and services to
clean technology companies
Clean Technology Investment Banking Group provides investment banking services to clean technology
companies that seek more than $40 million in capital
Sustainable Public Infrastructure Group provides public finance products and services to help
municipalities nationwide achieve their sustainability goals
Additionally, Wells Fargo Investments stock analysts have expanded their coverage to include analyses
of clean energy companies.

Royal Bank of Canada


Government incentive programs
The province of Ontarios Green Energy and Green Economy Act passed in 2009, created the Ontario Power
Authoritys FIT and Micro FIT programs, designed to encourage the development of qualified renewable energy
projects. In this program, businesses who generate power and feed it back into the grid system under an OPA
contract will receive a pre-determined payment for this electricity.
Although Ontario is currently the only province with this legislation in place, there are many other regions and
provinces where similar incentive programs are developing. Some municipalities offer other types of incentives
for renewable energy investments.

Bridge Financing Floating-Rate Fixed-Rate Term Leases


Term Loans Loans
Floating rate term loan during the Floating Loan term up to 5 Lease contracts available in
construction phase interest rate years, and up to 15- Canadian and U.S dollars with
Interest rate based on Royal Bank loan with up to year amortization. similar terms and
Prime. 10-year amortizations as a loan.
Monthly interest-only payments amortization. Potential for higher finance
until construction is complete (up to 12 amount based on eligible asset
months). value.
Interim Lease Financing on eligible Interest rate Fixed interest rate
equipment as it is delivered/installed based on Royal based on a premium
Interest rate based on Royal Bank Bank Prime over Royal Bank Fixed
Fixed rate or floating rate
Prime Base Rate
equipment leases are available
Monthly interest-only rental
payments until all equipment is
delivered/installed (up to 12 months)

27
https://www.wellsfargo.com/about/
25
Flexible rental structures and
Flexible principal and
terms designed to match cash
interest payments Principal and interest flows and/or cost recovery
payments based on
Pre-payable without amortization Programs to assist with
penalty management of supplier
invoices and payments

BRICS focus

Banco Ita BBA S.A.

Itau Unibanco Holding S.A. currently has 107,546 employees, 29,542 ATMS, 3,993 branch offices globally and is
the largest private financial group in Brazil. As of June 2011, it has US$508 billion in assets (R$793) and US$230
billion (R$360 billion) in its loan portfolio. Recurring net income in December 2010 was US$8.3 billion (R$13
billion).28 With a market value of $70.8 billion, Itau Unibanco is now the ninth-largest bank in the world. 29
Banco Itau BBA S.A. serves as the corporate and investment banking arm of the holding company. It has US$114
billion (R$179 billion) in total assets and US$76 billion (R$118) in loans. It provides a range of investment
banking, wholesale banking and institutional treasury services.
Itau Unibanco was named Sustainable Bank of the Year in the 2011 Sustainable Finance Awards presented by the
Financial Times and International Finance Corporation (IFC). Banco Itaus vision is to be "a leading bank in
sustainable performance and customer satisfaction." In 2009 Itau launched innovative green products, prepared
a report on greenhouse gas emissions and created a committee on customer service excellence. Itau has adhered
to the Equator Principles and the Global Pact and follows the guidelines of the Global Reporting Initiative and the
AA1000 standards of management for corporate accountability.
Banco Itau BBA SA will get a loan of up to $100 million from the Inter-American Development Bank (IDB) to
finance green projects in Latin America and the Caribbean (LAC). The proposed Facility supports an approximate
US$200 million A/B loan (the IDB Loan) to support renewable energy, energy efficiency, cleaner production and
carbon credit generation projects (green) in Brazil, Chile, Colombia, Paraguay, Peru and Uruguay. The IDB would
provide a senior unsecured A Loan of up to US$100 million (the IDB A Loan) to Banco Itau BBA S.A. (Itau ),
acting through its Nassau Branch. It is anticipated that the A Loan will be complemented by a B Loan estimated at
approximately US$100 million to be funded through the sale of participations to commercial lenders.
This project will promote the growth of the IDBs green portfolio, and the intended loan to Itau will go beyond a
traditional A loan to the Brazilian bank. The IDB loan will be combined with technical assistance. Itau BBA may
implement an e-learning platform developed by the IDBs beyondBanking30 program, which will allow
participants to improve the origination process of environmentally friendly loans, and adopt various screening
procedures to select projects that qualify for financing. IDB will require that Itau adheres to sector-specific
eligibility criteria for the selection of green projects and follows Bank guidelines for sustainability reports. Such
eligibility criteria and reporting will make sure that steps are taken to guarantee that investments maximize their
social and environmental results through the provision of IDB financing. Also, this line provides long-term
financing (up to 7 years), which is not common in the Latin American market but imperative to realizing
investments in renewable energy, energy efficiency, among others which have longer life cycles. This may
strengthen the financing landscape and competitiveness in the region and ideally encourage other financiers to
provide such long-term financing in Latin America. The project will also be diversified across several countries in
Latin America, including Chile, Paraguay, Uruguay and others.

28
http://www.itau.com/about.html

29
As of 30 September 2011, according to Bloomberg

30
beyondBanking: banking on global sustainability is a program developed by the Financial Markets Division of the IDBs Structured and Corporate
Finance that seeks to promote sustainable environmental, social and corporate governance principles among Latin American and Caribbean financial
intermediaries through financial and technical cooperation. By incorporating nonfinancial factors, such as environmental and social, into analysis of
financial factors, the IDB can strengthen strategic planning and, ultimately, the long-term commercial viability of its financial sector clients and
partners. This will allow beyondBanking to contribute to the development of Banking of the Future, a new banking system that balances financial
and social returns on investments, operates with transparency, expands market coverage and penetration and respects the environment and the
communities where it does business.

26
There is a shortage of financing for green projects in Latin America and this is part of IDB's efforts to bridge this
gap. The project contributes to IDBs strategic target of supporting climate-friendly investments of US$10 billion
by 2015. The Banks financial markets approach has prioritized green investments and in recent years the IDB
approved nine loans valued at US$245 million to regional financial institutions. Through this line, IDB seeks to
have a demonstration effect on other banks in the region showing that banking in the region must go beyond
traditional risk assessment models and include processes that allow investors to maximize their impact. It also
aims to mitigate climate change by identifying environmentally friendly investment opportunities and reducing
the direct and indirect footprint of FIs.
Green Line Banco Itau BBA S.A. *Nassau Branch* Profile

Project Description: The proposed transaction is to finance a diversified portfolio of


environmentally-friendly projects in Latin America through a planetBanking Green Line to Banco
Itau BBA, S.A., acting through its Nassau Branch. The regional Facility entails a long-term senior
unsecured loan of up to US$200 million, which is expected to consist of two tranches: an A Loan of
up to US$100 million to be funded by the IDB and a B loan of at least US$100 million to be funded
through the sale of participations to commercial lenders.
Status

Basic Information

Project Number RG-L1047

Operation Number 2702A/OC-RG

Country Regional

Sector Capital Markets

Subsector Financial Market Development

Project Type Loan Operation

Project Subtype Private Sector Investment

Status Approved

Approval Date FEB 15, 2012

Financial Information

Total Cost - Historic USD 100,000,000

IDB Financing

Financing Type Private Sector Loan

Fund Ordinary Capital

Reporting currency Reporting currency

27
Reporting Date FEB 29, 2012

Approved Amount - Historic USD 100,000,000

Roles & Responsibilities

Borrower Banco Itau Bba S.A.

Executing Agency Banco Itau Bba S.A.


Source: http://www.iadb.org/en/projects/project,1303.html?id=RG-L1047
BRICS focus

Banco do Brasil
Banco do Brasil (BB) is partly state-owned, partly publicly listed at the stock exchange in Sao Paulo. ( Comparison
to Sberbank???)

ENVIRONMENTALLY AND SOCIALLY RESPONSIBLE PRODUCTS AND SERVICES


Banco do Brasil has an extensive portfolio of financial products and services with socio-environmental appeal,
which ranges from saving bonds, which set aside part of the management fee for socio-environmental projects, to
lines of credit that support the modernization of industrial parks by means of the financing of eco-efficient
machinery and equipment.
BB launched the Cheque Especial PF 10 dias sem juros (Revolving Credit Check for Individual Customers 10 days
without interest) in April. The new product is exempt from the collection of interest from customers and
employees that have used the overdraft limit for a period not exceeding 10 days, consecutive or alternate,
considering the duration of the portion of charges. For this purpose, the customer or employee should adhere to
one of the Environment Bonus Service Packages. Besides the benefit of interest rate exemption, part of the
revenue earned (up to 5%), with the fees of the Environmental Bonus Service Packages will be set aside for
Programa A gua Brasil.31

Sustainable Regional Development - DRS


Sustainable Regional Development (DRS) is a business strategy through which Banco do Brasil seeks to drive
sustainable development, by mobilizing the agents of economic, social, and political activities in order to support
activities that are economically feasible and environmentally correct. DRS provides large economic benefits for
the Bank: the opening of new checking accounts, the expansion of the loan portfolio and the loyalty enhancement
of a customer base. The number of beneficiaries served in 1Q11 increased by 31.3% comparing to 1Q10, totaling
1.2 million. The financial volume of business grew by 8.3% in relation to the prior quarter.

Family Agriculture - Pronaf


Banco do Brasil is the country's largest lender to family-run Agriculture. Besides performing the social role of
supporting small producers and the generation of income in the rural zone, PRONAF enables the Bank to
prospect new customers, generate new income and seek new business based on the increase in the loyalty of
these customers. The PRONAF portfolio ended 1Q11 at R$ 22,854 million, reflecting a growth of 3.5% in the
quarter and of 21.1% as compared to the same period in the previous year.

RSA Loans Other Programs


Through these programs the Bank supports the organic foodstuffs activity (BB Produa o Orga nica) and forest
production (BB Florestal). The total amount invested in these two lines was R$ 1.0 billion at the end of the
quarter, representing an increase of 23.5% as compared to the previous quarter and of 58.4% over 1Q10. In the
concession of loans to companies the Bank fulfills social and environmental requirements such as those
contained in the Equator Principles and in the Global Pact to which the Bank voluntarily adhered.

Banco do Brasil also offers alternatives of investment funds that adopt RSA criteria to its customers. For instance,
the BB Ao es ISE portfolio is comprised of companies that form the theoretical portfolio of the Business
Sustainability Index - ISE. The new BB Multi Balanceado passes 20% of the management fee for the Programa
A gua Brasil dedicated to the preservation of Brazilian river basins.

31
Banco do Brasil, Financial Statements Report 2011 www.bb.com.br
28
Industries
Clients/investees operate in a variety of industry sectors with a range of environmental and social risks.
A preliminary risk assessment can be conducted based on the sector of operation. Industry-specific
environmental and social guidelines have been developed to assist both clients/investees and financial
institutions to better understand and manage environmental and social risks in their operations.

In this chapter the following industries are in focus: Energy, Forestry, Construction, Agriculture.

Sector Energy (Energy Efficiency, Renewables and CO 2


Emissions Reduction)
The three new global market drivers sustained higher energy prices, accelerated technology shift and
increased environmental concerns (climate change) form the perfect impetus for clean energy investment.
Case studies in this chapter provide examples of best energy & climate policies and investment projects in energy
efficiency and renewables with corresponding reduction of greenhouse gases, both globally and in Russia.

In 2008 Ceres and RiskMetrics Group released a report 32 reviewing the climate change governance strategies of 40 of
the worlds largest global banks. The best practices of leading companies offer a useful benchmarking tool for
emerging market FIs, including Russia, where financial institutions dont have a day-to-day practice of assessing their
direct and indirect carbon footprint. WWF-Russia introduced a unique Carbon Footprint Tool 33, which allows Russian
companies to measure direct footprint (energy, heat, water, paper and travel). Today several Russian banks are willing
to start assessing it. Leading global banks though went even further and measure not only direct footprint but indirect
as well, i.e. carbon footprint of their lending portfolio, which has much bigger impact on the environment. Today there
exists a number of specialized tools for measuring indirect CO 2 emissions of the banks. Below are examples of climate
strategies and actions of four banks:

HSBC has assigned climate change oversight to its boards Corporate Responsibility Committee, and Group Chairman
Stephen Green is ultimately responsible for the companys climate change activities. Furthermore, HSBC has developed
several climate change investment products, such as the Global Climate Change Benchmark Index.
Royal Bank of Canada established an Environmental Risk Management Group in 1992 (the group is now
incorporated into Corporate Environmental Aff airs). RBC utilizes a suite of environmental credit risk policies, and in
2002 launched a Carbon Risk Management Project. The project includes a carbon risk profile of the firms lending
portfolio and review of the potential physical impacts of climate change to North American business sectors and
regions.
Citigroup has calculated its emissions associated with power plant financing and emissions savings associated with
renewable energy purchases.

Energy Efficiency and Foreign Financial Institutions


Table Financial Mechanisms in Nine Asian Countries

32
Douglas G. Cogan, Corporate Governance and Climate Change: The Banking Sector, CERES, January 2008

33
http://www.wwf.ru/news/article/8901
29
Source: Improving Energy Efficiency in Asia: A Review of Financial Mechanisms, UNEP 2006

UniCredit Italy
theinnovativejointventureofWWFItalyandUniCreditdevotedtoclimateandenergy
http://www.wwf.it/client/ricerca.aspx?root=28624&parent=26248&content=1

Royal Bank of Canada (RBC)


Carbon RBS notes that clients exposure to regulatory, reputation, competitive, insurance and
Disclosure operational risk arising from climate change could potentially give rise to credit, market,
Project competitive, operational and reputational risks for RBC.
RBC notes as an example the Canadian governments recent announcement of the Air
Emissions Framework, which provides a first glimpse at the regulatory effect that carbon
constraint will have on the companys operations. Such regulatory measures, according to
the company, may result in a combination of significant risks that can impact [RBCs]
clients operations and financial conditions [and] possibly impair the companys credit and
securities portfolios.
In addition, RBCs response includes an extensive discussion on five types of climate-related
regulatory risk (credit, market, operational, competitive, and insurance risks), two types of
physical risk (operational and market risk), as well as reputational and competitive risks
associated with shifting consumer demand.
Strategic
Planning
GHG RBC follows an opportunity based strategy for emission reductions, maintains internal
Emissions emissions reduction targets, and will set formal targets once the full suite of data regarding
Targets the banks Sourcing, Operations, Facilities, and Travel Environmental Footprint (SOFT
Footprint, see below) has been obtained and analyzed.
Emissions RBC says that it is in consultation with the International Emissions Trading Association,
Trading international emissions brokers and the Canadian government to explore the opportunities
associated with emissions trading. RBC is also assessing Canadas Bank Act to confirm its
legal capacity to trade in the EU ETS through ICE Futures, of which RBC is a member. It has
established relationship with the Montreal Climate Exchange to ensure that RBC is well
positioned when the emissions trading market is realized in Canada.
Renewable In September 2007, RBC committed to purchase clean, renewable green power for all new
Energy locations expected to open across the country throughout 2007 and 2008. RBC currently
purchases renewable energy to meet 100% of the energy needs for 11 of its banks in Alberta
and Ontario. This amount totaled 1,000 MWh of renewable energy in 2006, mitigating 640
tonnes of GHG emissions.
Since 2003, RBCs Capital Markets Infrastructure Group has been involved in project finance,
underwriting and advisory transactions in the renewable energy and alternative technology
markets regulated under the EU ETS. These transactions total approximately $4.5 billion in
transactions in the renewable energy sector. The company says that it has generated profit
and growth in this sector. In addition, RBC Technology Ventures is a lead investor in the GEF

30
Clean Technology Fund, and RBC Capital Partners maintains a $50 million Alternative
Energy Venture Fund. RBCs Energy and Utilities team, a division of RBC Capital Markets in
London, provides investment banking, financing and advisory services for businesses and
renewable power projects in Europe.
RBC has also arranged a $25 discount for Ontario and Alberta residents who wish to
purchase clean renewable power through Bullfrog Power, the lead provider for the
companys renewable energy purchases.
Energy In 2006, RBC launched a GHG emissions reduction program called the Sourcing, Operations,
Efficiency Facilities, and Travel Environmental Footprint Reduction Program (SOFT Footprint). The
objectives of the program include an expanded environmental data management and
collection system to include the companys entire footprint, a quantitative assessment of
emissions reduction targets, implementation of RBCs emissions reduction strategies, and
improved reporting accuracy and procedures.
Other RBC says that it has acquired quantitative evidence to support [its] long-standing position
Climate- that individual bank consumers are not only conscious of climate change, but are looking for
Related financial products and services to help them mitigate their own impact on the environment.
Investment Based on this evidence, the company says that it is continuing to explore climate-related
Products opportunities and recognizes that the risks related to climate changes are matched and in
many cases exceeded by areas of opportunity. RBC has also stated that the coming domestic
Canadian emissions trading market established by the Air Emission Framework may present
a financial opportunity for the company through transaction fees earned from brokerage,
trading, and hedging. RBC has undertaken an internal review of the success of its climate-
related products and has engaged a consultant to evaluate additional market opportunities.
RBC recently launched the RBC Jantzi Funds, a suite of three SRI mutual funds. The banks
SRI Wealth Management groupbased in San Francisco, Californiaoffers and delivers
solutions for foundations, organizations and high-net worth clients. This teams
environmental investment strategy includes qualitative screening, a clean technology fund
of funds and shareholder engagement.

Inter-American Development Bank (IDB)


The IDB is the main source of multilateral financing and expertise for sustainable economic, social and
institutional development in Latin America and the Caribbean. IDB has general directives applicable to the loans
financed by the Bank, in various economic sectors or special areas.

IDB Energy Sector Policy

Objectives
To efficiently meet the energy requirements of its member countries derived by the process of socioeconomic
development;
To accelerate growth and diversification of the energy supply;
To foster energy conservation.

Fields of Activity
In addition to continuing to support electric energy generation, transmission and distribution projects and/or
programs, as well as the development of hydrocarbon resources, the Bank will actively promote energy development
in the region by means of loans and technical cooperation for technically, socio-economically and financially feasible
projects, aimed at:

developing alternative sources of energy, especially from renewable resources;


reducing and/or replacing the utilization of hydrocarbons in the production of energy;
promoting the efficient use of energy;
creating and/or strengthening the institutional and technological base of the energy sector; and
mobilizing additional resources, either of internal or external origin, required for the implementation of
energy projects and/or programs.

IDB Biofuels Sustainability Scorecard

31
The Sustainable Energy and Climate Change Initiative (SECCI) and the Structured and Corporate Finance
Department (SCF) of the Inter-American Development Bank (IDB) have created the IDB Biofuels Sustainability
Scorecard based on the sustainability criteria of the Roundtable on Sustainable Biofuels (RSB). The primary
objective of the Scorecard is to encourage higher levels of sustainability in biofuels projects by providing a tool to
think through the range of complex issues associated with biofuels.

Millennium bcp (Banco Comercial Portugues)

Millennium bcp is the largest private Portuguese financial group. It specialises in the provision of investment banking
and capital market products and services. Poland, Greece, Romania and Turkey are the key operations in European
context.

The Bank received award Best Sustainability Deal of the Year 2010, assigned by EMEA Finance 34 to the Margonin
windfarm (EDP Renovveis) project in Poland. A consortium of banks, comprising the European Investment Bank,
the EBRD, Millennium, Espirito Santo Investment and Unicredits Pekao, provided 135mn of debt to fund the
construction and operation of the largest wind farm in Poland. Millenniums investment banking business was
the projects financial adviser. Millennium Bank was twice in a row included in the "Respect Index", the first index
for sustainable and socially responsible Eastern and Central European companies (the project launched by the
Warsaw Stock Exchange Issuers Association and Deloitte).

Supporting Customers in the transition to an economy with smaller environmental impact


Bank decided that offering value added financial products and services should be its competitive advantage.
In response to: (1) climate change and biodiversity loss resulting from the intensive use of natural resources and the
increasing emissions and (2) stakeholder pressure plus development of more restrictive legislation to prevent and
mitigate potential environmental damage, Millennium bcp has created solutions that support customers in adapting to
or mitigating these effects:

Credit solutions for acquisition of renewable energy equipment for micro production
With the objective of spreading the use of clean energy, Millennium bcp offers a loan with preferential interest rate
conditions and with no commissions associated, named Renewable Energy Credit, for customers seeking funding to
purchase equipment for micro production of renewable energy.

Investment lines in partnership with European Investment Bank


In 2008 EIB provided Millennium Bank with two credit lines: (1) Mid-Cap Loan for investments of up to EUR 50 million
undertaken by medium-sized companies to promote medium and long-term capital investment fostering regional
development, competitiveness, jobs and environmental protection. (2) Global Loan the fifth contracted by
Millennium bcp with the EIB with focus on SMEs and municipalities, financing investments of up to EUR 25 million.
The targeted projects energy saving, environmental protection, renewable energies or the knowledge economy. For
the first time, this credit line also includes micro-credit, for financing investments of up to EUR 40 000.35

Socially Responsible Funds (SRI Funds)


In addition to the analysis of financial performance, asset management has incorporated environmental concerns into
its investment decisions. Through its online platform, Millennium bcp provides socially responsible investments for
clients who want to invest in companies or sectors that incorporate environmental concerns.

Compliance with Equator Principles in project finance operations


According to Equator Principles, Millennium bcp evaluates the environmental and social risk of all funding on project
finance, with a value exceeding EUR 10 million, and in cases of its financial advisory work.

Project financing for renewable energy sector


Within the project finance scope, Millennium bcp has participated in several structuring and financing projects in
Portugal, Spain, France, Greece, Poland and Brazil, in sectors ranging from energy (including renewable) to

34
http://www.emeafinance.com/emea-finance-magazine/2011/April/Project-Finance-Awards_1106.shtml

35
http://www.eib.org/projects/press/2008/2008-103-millenium-bcp-et-la-banque-europeenne-d-investissement-ouvrent-des-lignes-de-
credit.htm
32
infrastructures. Its current portfolio of about EUR 2.4 billion of direct and signature credit is composed primarily of
road projects (51%) and renewable energy (31%) - mostly wind farms in Portugal. 36

Millennium bcp has kept pace with the increasing importance being given to the environmental policies, followed in
Portugal, European Union and USA, to reduce greenhouse gas emissions and to incentivise an increase in the capacity
to produce electricity from renewable sources. The bet on renewable energy, translated in the financing of wind power
ventures, aims to promote the use of clean technologies to the detriment of the use of conventional processes for the
production of electricity.

Between 2006 and 2010, Millennium bcp participated in several projects for the installation of wind farms in different
countries (Portugal, Spain, France, Germany, Poland, USA, among others), for a total of 112 farms and 3,805 MW
installed. All projects were classified with risk level B - limited social and environmental risk - in accordance with the
Equator Principles.

The possible negative impacts associated with this type of projects - changes in geology and geomorphology, erosion
and entrainment of soils, the destruction of plant species, the disturbance of migratory birds, birds of prey and bats
and changes of scenery - while likely to occur, are minimized as a result of their early detection in environmental
impact assessments that are carried out and of the introduction of mitigation measures. The most relevant impacts -
with the exception of changes to the landscape - are, however, mostly circumscribed to the construction phase, which
is relatively short when compared with the useful life of each project.

Table Selected Project Finance Operations in 2009-2011

During the year 2010, four projects were evaluated, one of which was wind farm Margonin, project funded in Poland -
in addition to the application of the Equator Principles, also benefited of the risk assessment of environmental and
social with criteria specific the European Bank for Reconstruction and Development (EBRD), reinforcing the monitoring
of environmental and social risks identified.

36
http://www.millenniumbcp.pt/pubs/en/sustainability/socialresp/
33
Source: Millennium bcp, Report on Project Finance Operations, Main Social and Environmental Impacts and Mitigation Measures
(1) Financial Advisory

BRICS focus

YES Bank (India)


Profile - CERES

In the financial sector, five of Indias largest banks have developed energy efficiency lending programs targeting
small and medium enterprises. Template-type loans are being developed to support batches of similar projects.
YES Bank, an entrepreneurial commercial bank in India, has become a thought leader in responsible banking and
sustainability integration. The bank is the first Indian signatory to the Carbon Disclosure Project, a non-profit
organization that collects corporate climate change information on behalf of institutional investors. YES Bank is
also the first privately-held Indian bank to become a signatory to the UNEP Statement by Financial Institutions on
the Environment and Sustainable Development.

Yes Bank has set up a specialized investment advisory, the Sustainable Investment Banking division, which
promotes investments in clean technology, renewable energy, water management, and distributed energy,
especially amongst the SME sector. The Bank also acts as the Exclusive Country Advisor for a number of
partnerships with foreign private equity firms, including a collaboration seeking investments across India, Sri
Lanka, Nepal and Bangladesh. Finally, the Bank has initiated a socially and environmentally responsible equity
investment programme, Tatva, which is actively looking to invest equity in early-stage, small-and-growing
enterprises that profi tably deliver a positive people and planet impact.

Bundled Small-scale Rural Renewable Energy and Energy Efficiency Ventures Financing in
India37
Purpose
To define and launch a new credit practice in Yes Bank (YBL) focused on financing for small-scale renewable
ventures in rural India.

Main activities and outputs


Practice at Yes Bank focused on financing small-scale renewable transactions in rural India;
Develop bundles of small-scale rural renewable ventures for financing that utilise a combination of
conventional and carbon finance mechanisms;
Secure conventional and carbon financing for a set of three commercially attractive pilot subject
renewable transactions;
Document best practices and lessons learned for scale-up and replication.

37
http://www.yesbank.in/index.jsp?navigationUrl=%2FYES+Bank+Repository%2Fen%2FAbout+us%2FResponsible+Banking
%2FSustainable+Investment+Banking

34
Expected impacts
The practice in YBL will be an ongoing commercial operation that will continue to finance small-
scale rural renewable ventures after the Project is over. Further, the bundling mechanism will facilitate such
financing;
Financing a bundle of subject ventures will provide evidence that this is possible and serve as a
model to be implemented in other YBL branches as well as other banks in India;

The Projects financed will be active generators of energy from renewable sources,
further proving the viability of such options.

PROGRAMME SECTOR RE & EE (Business & Finance)

STAGE OF PROJECT Completed

LOCATION IN/India
DURATION 2007 - 2009

BUDGET
133,652 including co-funding from Global
Environmental Institute ?Americas., Yes Bank Ltd
IMPLEMENTING AGENCY
Environment Energy and Enterprise Ventures
Source: www.yesbank.in

Turkish Industrial Development Bank (TSKB)


Turkish Industrial Development Bank is the first private investment and development bank of Turkey founded in
1950 with the support of the World Bank and in cooperation with the Turkish Government, the Central Bank of
Turkey and the commercial banks in Turkey. TSKB takes sustainable development criteria into consideration
when evaluating the investment projects. For each project, it is determined whether the investment will
constitute an environmental risk and how this risk can be lessened.
Sustainable banking involves analyzing the sustainable development parameters of the country and finding the
best solutions to this. For Turkey for instance its providing energy from renewable resources, and financing
investments for energy efficiency and environment protection, where TSKB is active player. Bank aims to
contribute to a cleaner environment with lower CO2 emission in Turkey through its project finance activities in
environment and renewables. TSKB intends to increase its support to green projects (hydroelectric, wind,
geothermal and biomass, energy efficiency, investments to prevent all kinds of environmental pollution,
technological investments to provide saving consumable resources, etc.) Bank also takes into account
environmental sensitivity of the loan partners, such as IBRD, EIB, AFD, KfW and CEB.
TSKB was given the Sustainable Banking Award of the Year by the Financial Times and International Finance
Corporation (IFC) in the Southern European region in 2008 and 2009 and is signatory to UNEP FI covenant.

TSKB, Sustainable Development Finance: ENERGY

Hydroelectric Power Plant 52 units, total 1.941MW


Wind Power Plant 2 units, total 53 MW
Geothermal 2 units, total 57,2 MW
Biomass (Methane gas) 1 unit, 11,2 MW
Natural gas 17 delivery regions

Total Capacity of Renewable Energy Projects at TSKB 2.062 MW


Total Generated Renewable-Energy Power in Turkey 13.620 MW
(by the end of 2007)
Total Generated Energy Power in Turkey 40.765 MW
(by the end of 2007)

15% of the total generated renewable energy power and 5% of the total generated energy power projects had
been financed by TSKB.

35
Source: tskb.com.tr

Energy Efficiency and Business Case for Russia


The energy policy choices of Russia a key player in global energy in the coming years will shape the prospects
for Russias own economic development, but will also have important implications for global energy security and
environmental sustainability. Russias policies will affect both the outlook for domestic energy demand, which
will determine the availability of oil and gas for export and related CO 2 emissions, as well as investment in energy
supply.

The energy intensity of Russian GDP has improved in recent years but, even allowing for Russias industrial
structure and harsh climate, energy use in Russia is still highly inefficient. Raising efficiency in each sector of the
economy to the levels of comparable OECD countries would save more than 200 million tonnes of oil equivalent
(Mtoe) of primary energy per year equal to 30% of total demand and an amount similar to the energy used in a
year by the United Kingdom.38

Russia has committed itself to raising energy efficiency of GDP by 40% by 2020 from 2007 level (Presidential
Decree 889 04.06.2008), with corresponding 2020 targets of reducing the GHG emissions by 20-25% from
1990 level and increasing the share of renewable energy (excluding hydropower) in the national power mix from
less than 1% at present to 4,5%.
However, there is a wide gap between these targets and trends in the domestic capital markets. Just a few
financial market participants started to switch from financing 'business as usual' carbon-intensive activities of
their clients to providing funding to eco-friendly projects aimed, first of all, at energy saving and renewable
energy sources.
Raising energy efficiency of the economy and reduction of greenhouse gas emissions are of utmost importance
for the long-term energy policy and sustainable development of economy of our country. 39 Energy efficiency
measures can prove to be extremely attractive for financial institutions from a commercial point of view as well
as from the position of international image and maintenance of competitiveness.
Russian FIs pay quite limited attention to carbon and environmental profile of the projects they provide loans to.
Increasing tendencies among international lenders to impose environmental requirements on the borrowers and
to benefit from it provide strong incentives for the Russian financial sector.
Figure Share of total primary energy supply in Russia in 2009

38
EIA World Energy Outlook Factsheet 2011

39
A.A. Averchenkov, Economy and climate: participation of Russia in global environmental problem solving, Institute of Sustainable
Development, The Public Chamber of the Russian Federation, Moscow 2009

36
Source: IEA Energy Statistics, http://www.iea.org/stats/index.asp
* Share of TPES excludes electricity trade.
Sources of inefficiency
Energy losses from electricity and gas grids
Heat losses from district heating grid
Gas flaring40 is one of the greatest inefficiencies in the production of oil and gas in Russia. In recent years
Russia identified gas sector as being of key strategic importance. According to a recent WWF-KPMG study
(2011)41, Russia remains the worlds biggest associated gas flarer, accounting for about 26% of the global
total. Russia's volumes are more than double those of second-placed Nigeria.

Policy and regulation on renewable energy sources


There is no specific law on renewable energy sources in the Russian Federation. However, the Federal Law No. 35
On the electric Power Industry as amended by Federal Law No. 250 On amendments of legislative acts of the
Russian Federation related to reformation of the United Energy System of Russia, which was ratified on 4
November 2007, contains a number of measures to support generation of electricity from renewable energy
sources. First of all, it constitutes the set of energy sources considered as renewables. Furthermore, the law
obliges the government to adopt long-term state policies in the area of renewable energy source by fixing the
share of renewable energy sources in production and consumption by periods and years. The law envisages
federal budget subsidies, including coverage for grid connection costs for renewable energy sources producers
with a capacity below 25 MW. It obliges grid companies to purchase preferentially renewable energy for the
compensation of their transmission losses. Furthermore, the law introduced a premium to the wholesale market
price for renewable energy224.

Investments in Energy sector in Russia


Russia needs a large-scale retrofitting of energy-intensive industries, especially if the development of the energy-
intensive industry becomes a major driver for its economy. It will be considerably more profitable to retrofit old and
obsolete capital assets in Ural, Siberia, and Russian Far East regions, where most of the minerals, metallurgy, and
chemical industries are placed.
Residential and commercial sectors energy supplies are the largest energy markets in Russia. Business opportunities
are enormous, as both centralised and decentralised heat supply require urgent rehabilitation for the whole chain
from generation to distribution and final consumption, including metering and remote control equipment.
Investments in renewable energy sector in Russia have great yet untapped potential (biomass, hydro and wind).

Figure . Outlook for energy investments in Russia up to 2030, billion 2009 US dollars

40
Gas flaring - the process of burning-off surplus combustible vapors from a well

41
E. Kutepova, A. Knizhnikov, Associated Gas Utilisation in Russia: Issues and Prospects, WWF Russia-KPMG, 2011
http://www.wwf.ru/resources/publ/book/545
37
Source: APEC 4th Energy Demand and Supply, 2009

Financing mechanisms for energy efficiency and renewable energy projects

National financing mechanisms


The Russian Federal Law on Energy Saving and on Increasing Energy Efficiency No. 261 , approved on 23
November 2009, sets ambitious goals to be reached and introduces a comprehensive set of regulations to be
implemented by public institutions, manufacturers, service companies and final customers. Unfortunately, the
Law does not mention the establishment of a National Fund to finance energy efficiency programmes or to
support implementation of the mandatory provisions required by the Law. However, several implementation
Decrees and bylaws are planned to be developed and approved by the Government and the relevant Ministries by
mid- 2010 and therefore, some provisions for financing mechanisms might be approved soon to complement this
new comprehensive regulation.

International financing mechanisms


The EBRD has launched a new EUR 300 million framework facility called the Russian Sustainable Energy and
Carbon Finance Facility (RSECF). This facility, approved in May 2009 by the EBRD Board of Directors, envisages
lending credit lines to participating banks for on-lending to private sector companies for sustainable energy
projects in the industrial sector. It is envisaged that six to seven Russian banks will act as participating banks. In
July 2009, the EBRD provided the first long-term loan under the new facility of up to EUR 60 million to
Promsvyazbank for on-lending to private customers for energy efficiency projects. Participating banks and sub-
borrowers can benefit from free-of-charge assistance to identify profitable energy saving measures and quantify
the associated benefits. Since 2006, the EBRD energy efficiency related investments in the Russian Federation
amounted to over EUR 755 million.

The International Finance Corporation (a member of the World Bank Group) operates an investment
facility, called the Russia Sustainable Energy Finance Programme (RSEFP), to provide credit lines for Russian
financial institutions who will lend these funds to energy efficiency and renewable energy projects. The RSEFP
has been launched in 2005 to stimulate investment in energy efficiency in projects by supporting financial
institutions in building an energy efficiency product. The programme consists of three parts, i.e. advisory
services, investments, and activities to improve the awareness of and regulatory environment for energy
efficiency and renewable energy. The average project financed by this programme is USD 500,000 to USD one
million, while the payback period averages 3.5 years.

Another investment facility in Russia by IFC is Renewable Energy

The Nordic Environment Finance Corporation (NEFCO) , an international finance institution


established in 1990 by five Nordic countries, has financed a wide range of environmental projects in the Russian
Federation. NEFCO places emphasis on direct investments from public-private partnerships and corporate public
services. As of 2007, NEFCO had 20 active and 37 completed energy sector projects in the Russian Federation,
with a specific focus on renewable energy technologies, energy efficiency, fuel switching, waste (biogas) and
wastewater treatment. Project examples are listed in Table .

38
Table NEFCO project examples in Russia

Source: NEFCO, 2008

Commercial financing mechanisms


At present Russian banks actively use syndicated lending as one of the main sources of financial provision. For
example, the Programme of Vnesheconombank (VEB) - Financial Support for the development of small- and
medium-sized enterprises is based on a two-tier lending procedure. The RusDB provides financing to 90 partner
banks, which on-lend money to their clients (small- and medium-sized enterprises). The volume of loans
provided to small- and medium-sized enterprises by VEB as of 1 July 2008, amounted nearly to RUB 7.5 billion.
The loans are provided for the time period of up to ten years. However, the largest part of the Russian
Development Bank loan portfolio in 2007 (47 per cent) consisted of loans with the term of up to three years.
Currently, the Russian Development Bank lends to partner banks at a rate close to the Central Bank refinancing
rate, with the weighted average annual rate around 13 per cent as of January 2009. Final on-lending rate is
determined by the partner bank independently. Range of interest rates for small and medium-sized business
varies from 11 to 22 per cent, with the average annual interest rate about 16 per cent.

IFC - Russia Sustainable Energy Finance Program


Program works across Russia to encourage investments in energy efficiency projects. The project helps financial
institutions and companies to assess modernization projects, and provides long-term credit to banks to enable
energy efficiency loans.42
Program Achievements as of January 2012
12 partner financial institutions (Absolut Bank, AgroPromKredit, Center-Invest Bank, Credit Bank
of Moscow, Independent Leasing, Loko Bank, MDM Bank, NBD Bank, Prime Finance Bank, Tatfondbank,
TranscapitalBank, Ursa Bank)
Over $213 million credit lines to the companies through partner financial institutions;
More than 250 energy efficiency projects in SME sector;
SMEs financial savings: $35 million per year on energy costs;
Annual energy savings: 1675 GWh;
Avoidance of greenhouse gas emission as a result of these efforts: 453 000 tons of CO2 per year

Below are case studies for two selected banks that participated in IFC Russia Sustainable Energy Finance
Program.

BRICS focus

Center Invest

42
http://www.ifc.org/ifcext/rsefp.nsf/Content/Home
39
Center-Invest is a commercial bank founded in 1992 focused on serving corporations and SMEs in southern
Russia (majority owned jointly by EBRD, DEG, Erste Bank and Raiffeisen Bank). It was the first bank in Russia to
offer specialized financing for energy efficiency projects. Since 2005, under a program developed together with
IFC, Center-Invest has provided numerous loans for businesses to obtain new, more efficient industrial,
agricultural and food processing equipment.
Sustaining Market Share through Lending to
Energy Efficinecy Projects and SMEs

BRICS focus

MDM Bank
Profile

In accordance with its CSR Strategy, bank pays special attention to the ecological and social consequences of its
business. An example of this approach was the successful credit product MDM Energy (which was created by
MDM Bank in conjunction with the IFC), aimed at increasing the energy efficiency of small enterprises. Possible
projects within the MDM Energy program were very diverse and included: modernizing light systems, heat
supply, cold supply and water supply systems, installing co-generation plants and the energy efficiency re-
equipment of buildings, and other projects. Under this program, entrepreneurs could receive a loan of RUR 3-60
million for a period of up to seven years.

IFC

.
. IFC:
15,861 ,
.
, .
.
( 2012 )
, .
, .
IFC

.
2005 .
360 72 .

-, 2008-2009 .

40
/ ,
,
/ /

Vnesheconombank (VEB)
Targeted funding of energy efficiency projects

The program targeted financing energy efficiency projects in Russia, suggests involvement of a loan from the
International Bank for Reconstruction and Development (IBRD) amounting to U.S. $ 300 million and up to 18
years under the full sovereign guarantee of the Russian Federation. As a condition of participation in the
Program, Vnesheconombank is to provide co-financing in the amount comparable with borrowed resources.

There is currently a portfolio of projects that can be funded under this credit facility. Interest rate to end-
borrowers may be significantly reduced compared with the market level due to the relatively low cost of raising
funds from the IBRD. The program also includes attracting grant from the Global Environment Facility (GEF) of
U.S. $ 25 million to provide technical assistance in the field of information and analytical support to the policy of
energy conservation and energy efficiency in the Russian Federation. Participation in the program allows the
initiators of the project - Vnesheconombank borrowers:

attract additional financial resources Vnesheconombank, the World Bank and the Global Environment
Facility for the implementation of projects in Russia, aimed at improving energy efficiency;

Get technical assistance from the World Bank and other IFIs in the preparation and implementation of
energy conservation and energy efficiency specific to various industries;

be able to use the experience and involvement FSE "Russian Energy Agency" for purposes of examination
of organizational and technical assistance in the selection of energy efficiency projects and energy
efficiency

Eurasian Development Bank (EDB)


EDB is a sub-regional development bank with a mandate to promote sustainable growth of its member states,
Russia, Kazakhstan, Tajikistan, Armenia and Belarus, to overcome the effects of the global financial crisis,
modernize and improve the competitiveness of national economies.43

The Bank invests in large effective medium- and long-term projects. The minimum size of projects taken into
consideration is usually US $ 30 million with a maximum payback period of usually no more than 15 years. It
provides financing for the following priority areas:
infrastructure projects (transport, energy, telecommunications, municipal);
development of industries with high added value;
programs to improve energy efficiency.

Project Launch of Russias First Large-Scale Venture Producing Polycrystalline Silicon


In November 2010, the Eurasian Development Bank (EDB) signed an agreement to finance Russias first
industrial facility for the production of polycrystalline silicon at Usolie-Sibirsky Silicon (member of NITOL
company). The Bank opened a US $100 million credit facility for the company for seven years. This project will be
implemented in Irkutsk Oblast and is co-financed by Rosnano and Sberbank of Russia. A total of 85% of the
project value is provided by the company itself or by other lenders.
Polycrystalline silicon is the main material for solar energy. During phase one, in 2008, polycrystalline silicon
production was brought to an annual capacity of 300 tonnes. Currently, the project is on the active construction
stage. During phase two, before the end of 2011, the capacity was raised to 3,000 tonnes of polysilicon a year.

43
http://www.eabr.org/
41
The EDBs funds are used for construction and purchase and installation of equipment. In December 2010, the
EDB disbursed to NITOL the first tranche of US $32 million.
The project is intended to create a high-tech, high value added production that will be competitive in the global
markets. Given the EDBs share in financing, the gross output over the project period is expected to reach 9.2
million roubles and tax payments in Russia 736 billion roubles. Sales are expected to exceed 3 billion roubles a
year.
The project will further the goals set by the Russian government to increase the share of renewable sources in the
total power generation and to enhance the efficiency of energy resources. It will also have a significant influence
on infrastructure, as the commissioning of this first plant will become an important step towards the creation
and development in Russia of a new high-tech market within the solar cluster. It is of great economic and social
importance to Russia and especially Irkutsk Oblast. The Usolie-Sibisrkoye production facility is to become a basis
for future development of Russian microelectronics and a key element of solar energy, a new industry to Russia.

Sberbank of Russia
In Russia, the amount of excess energy consumed through inefficiency is roughly equal to the energy
consumption of a number of European countries. There is huge potential to improve energy efficiency but this
will require both public and private investments. Sberbank, largest retail bank, implements a number of projects
to improve energy efficiency. Among the most prominent examples are the Energy Efficient Neighbourhood
projects supported by Zapadno-Sibirsky and Volgo-Vyatsky Regional Banks. Energy Efficient Neighbourhoods
is a Federal Programme on Energy Efficiency of Households.
Energy Efficient Neighbourhoods
The Energy Efficient Neighbourhood project in Tyumen involves developing an area in the city centre of some
430,000 square metres using state-of-the-art energy and resource efficiency techniques. The city administration
intends to achieve an average reduction of 2530% in energy and resource consumption on the base indicator
without reducing comfort levels. This will also help households cut their utility bills.
Within the framework of its cooperation agreement with the city administration, Sberbank acts as financial
partner and consultant on the project. Bank and administration jointly developed a project implementation
schedule with the city administration, as well as an action plan for the promotion of energy efficiency among
businesses and households. It was suggested to create a special information portal on housing and utility services
which would include, among other resources, an energy savings calculator. The system will help households to
estimate in advance their savings from the installation of energy efficient lights and other equipment. In addition,
Sberbank prepared a proposal for a special retail loan product called Energy Saving.
Sberbank also actively promoted its services in Kazan aimed at improving the energy efficiency of housing and
public facilities and at providing financing for corporate energy consumers and suppliers. Energy Efficient
Neighbourhoods is intended to be a replicable project. It can be expanded further in Kazan or Tyumen and the
successful experience can be applied in other Russian cities.
The first loan agreement under the funding of the project "Energy efficient city - Tyumen" was signed in 2010
between West-Siberian Bank (Sberbank branch) and water utilities company "Vodocanal". The amount of the
contract is 50 million rubles. Means from the first loan will be used to implement energy saving measures such as
installing meters and regulating heat and water as well as replacement of light fittings for all the housing in a
pilot district in Tyumen. These measures will reduce the cost of utilities at 40%.
In addition, within the concept of energy conservation "Energy Bank" as a model was developed, which will be
implemented in two offices of the Sberbank located in the pilot district. The experience of Tyumen program will
be used as a basis for implementing similar projects in other cities in our region.

Basic conditions for the loan product "Energy Saving", provided by the public as part of a pilot project:
Credit period - no more than 60 months;
Interest rate - 16%;
Maximum loan amount - 100% of the cost of energy-saving products, as well as the works (services) to
refurbish the population own homes;
Credit limit is determined on the basis of a contract to conduct the work / purchase of goods with an
indication of their value, estimates the cost of goods and payment for work (services) to refurbish
housing with an indication of their value.

42
Clients/investees of the financial institutions operate in a variety of industry sectors with a range of environmental and
social risks. A preliminary risk assessment can be conducted based on the sector of operation. For this purpose
IFC developed Environmental and Social Assessment Tool (ESAT) - a software for financial professionals in
emerging and developing countries. ESAT supplies information and a pragmatic tool for assessing the business
risks and opportunities linked to sustainability issues. The software is tailored to business with small and
medium-sized enterprises (SMEs).44

Risks & Opportunities


Large quantities of water are used, mainly for cooling.
Water use in energy generation is an important issue, especially in areas where water is scarce.
Conventional power plants use large amounts of water for the condensation part of the
The generation and distribution of different forms of energy
thermodynamic cycle.(electricity, gas, steam,
For coal plants, water hot water_
is also used to clean and process fuel.
Related Sectors: Waste from fuel-based power plants must be disposed of appropriately.
Oil and Gas Energy generation may produce large amounts of waste, such as ash and slag. The highest volume
Water Supply of waste is caused by lignite or coal-fired power plants. Waste must be disposed of appropriately.
One potential way of disposal is use in the cement industry or for tarmac.
Fuel-based power plants produce significant amounts of air pollutants.
Power plants based on fossil fuels (e.g. oil, coal, lignite) produce enormous amounts of emissions
to air, depending on the type of fuel used, the combustion technology applied, and the treatment of
the fumes. These air pollutants can cause health and environmental hazards.
The contamination of property presents a risk to its value, to human health and to the
environment.
Spills of fuels, leaks in tanks or pipes, and the disposal of liquid waste may contaminate buildings
and the ground. This contamination may present a risk to groundwater resources, rivers and to
human health. Clean-up costs may be considerable. The market value of contaminated property
may be impaired.
Energy-inefficient processes waste primary energy sources and pollute the environment.
The transformation of primary energy sources, such as coal, oil or gas, to electricity or heat
involves large amounts of these energy sources. The efficiency of this process varies with the fuel
used and the level of technology. This might also be an important cost factor.

44
http://firstforsustainability.org/risk-management/risk-by-industry-sector.php
43
Source: www.ifc-esat.org

Sector Cement and Concrete


Cement production is one of the key CO2 emitters.

Source: www.ifc-esat.org

Sector - Construction

44
Source: www.ifc-esat.org

Sector - Forestry

45
Forests cover 31 percent of total land area. The worlds total forest area in 2010 is estimated to be just over 4
billion hectares, corresponding to an average of 0.6 ha of forest per capita. The five most forest-rich countries
(the Russian Federation, Brazil, Canada, the United States of America and China) account for more than half of the
total forest area (53 percent)45. Despite its value to humanity, over 50 percent of the worlds original forest cover
has disappeared and the overall rate of deforestation remains alarmingly high, although the rate is slowing. At the
same time, the quality of much of the remaining forest is declining rapidly. Without significant changes in policy
and practice, the process of forest conversion and degradation will continue at this alarming rate and pose a
major threat particularly to High Conservation Value Forests (HCVF) 46.

This has serious socio-economic consequences for the lives of forest dependant peoples, and threatens numerous
animal and plant species. In addition, forest loss not only causes job losses and reduced GDP, it disrupts water
balances, causes soil degradation, and impacts at a global scale, through climate change (causing increased
flooding as well as droughts), loss of potential medicinal products, and loss of options for future generations.

By financing projects such as pulp and paper mills, palm oil plantations, mines or dams that impact forests,
financial institutions can have a significant impact on forest conversion, degradation and destruction. In
recognition of such risks, and societys increasing social and environmental expectations of the financial sector,
leading players have started to screen potential projects according to environmental and social criteria. By doing
so, the financial sector is beginning to contribute towards sustainable business models by promoting
environmental stewardship and socially responsible development.

The Russian Federation has the worlds largest forests, comprising 1/5 of the Earths total forest cover. Half of the
countrys territory is covered with forests. Most of them are represented by boreal forest ecosystems dominated
by pine, larch, spruce and fir. Russian forests are of high ecological values, they have important protective
functions, necessary to balance the climate, regulate water flow and prevent soil degradation. They are also of key
importance to biodiversity preservation. Russia represents 26 percent (288 million hectares) of the worlds
frontier, or intact forests. The Russian forest sector faces a number of serious challenges that prevent its effective
development. With respect to forest management, the most serious problems are weak forest management and
high rates of illegal logging and trade. Forest management in Russia explores extensive approach of pioneer
logging which is considered by WWF as a threat to the last massifs of intact forests. WWF proposes to shift this
practice and use intensive sustainable forest management approach for the areas of secondary forests to avoid
further exploitation of valuable from biodiversity conservation point of view forests.

Illegal logging is a serious problem in the Russian Federation. WWF estimations suggest that 10 to 35 % of all
timber logged in Russian is illegal, while in certain regions up to 50 % of timber is illegal or suspicious. The
Russian forest sector focuses mostly upon the export of timber and therefore Russian timber must be in
compliance with requirements of international markets. Currently, about 30 ml ha of forests are FSC certified in
Russia. Being supportive to and promoting the FSC certification, WWF targets at ensuring quality of FSC national
standard and practice of its implementation.

Benefits of responsible forest finance


Financial institutions that adopt a responsible forest investment policy have much to gain, including:
Better client relationship through providing advice on environment and social issues.
Ensuring that investments do not result in the clearing of high conservation value forests.
Ability to manage financial (credit) and reputational risks for forest investments as the sector is
perceived to be highly risky.
Attract new clients concerned with corporate social responsibility (CSR) issues.
Capitalize new business opportunities such as those generated from the drive towards a green economy.
Increased international standing, especially for local financial institutions in emerging markets.

45
The Global Forest Resources Assessment 2010 Main Report (FAO, 2010a), October 2010

46
High Conservation Value Forests (HCVFs) are defined as forests that need special protection because they:
contain globally, regionally or nationally significant concentrations of biodiversity values (e.g. endemism, endangered species,
refugia).
contain globally, regionally or nationally significant large landscape level forests, contained within, or containing the management
unit, where viable populations of most if not all naturally occurring species exist in natural patterns of distribution and abundance.
contain rare, threatened or endangered ecosystems.
provide basic services of nature in critical situations (e.g. watershed protection, erosion control).
are fundamental to meeting basic needs of local communities (e.g. subsistence, health).
are critical to local communities traditional cultural identity (areas of cultural, ecological, economic or religious significance
identified in cooperation with such local communities)
46
WWF encourages responsible forest financing and has been working with financial institutions since 2005 to
develop responsible investment policies that address sector-specific investments impacting the forest industry.
WWF also helps to shape internal banking policies on how these institutions manage their responsibilities in
safeguarding the environmental and social qualities of projects impacting forests. To put all this in practice,
capacity building and training for frontline bankers to screen investments based on social/environment
principles are organised.

Russian Ministry of Industry and Energy introduced the list of Priority Investment Projects in the Field of Forest
Exploitation.47 At present, Russian Industry and Trade approved 95 investment projects of a total financing
volume of around 421 billion rubles and the alleged amount of raw material processing about 74 million cubic
meters per year. 17 priority investment projects in the field of forest exploitation are commissioned, with a total
investment of 59.1 billion rubles, the allowable cut 8 million cubic meters. It is planned to implement around 12
priority investment projects each year.

Source: www.ifc-esat.org

Source: Sustainable Forest Finance


Toolkit, WBCSD, PwC, February
2010

Rabobank
Position on Forestry

47
http://v2009.minprom.gov.ru/ministry/dep/prom/info/0
47
Asian Development Bank
Sectoral policy instructions/guiding principles applicable to bank loans provided in different sectors of
economy or in specific regions.

Summary of ADB Forest Policy

Forest Policy document recognizes the need to balance three imperatives: production, protection and
participation. It also stresses the importance of participation of beneficiaries in the early stages of project
development, before implementation and management, to ensure sustainability of investments in the forestry
sector. The document clearly defines the (1) conditions for the participation of the Bank's investments in the
forestry sector, (2) the potential role of NGOs in the whole process of the project cycle from design to
implementation and monitoring; (3) the protection of remnant forests, and (4) spheres of the Bank's involvement
taking into account new priorities. ADB considers that to be effective, its involvement in forestry should be long-term:
about 10-15 years.

Vision: Stewardship of forests for a healthier and wealthier future for all in Asia and the Pacific

Goal: Improve Sustainable Forest Resource Management for Environmental Protection and Poverty Reduction

Policy Objectives: Provide assistance to ADBs developing member countries (DMCs) to (i) strengthen management of
the regions remaining natural forests to improve their condition, especially those of high conservation and/or
commercial value; (ii) strengthen forest governance to improve resource access and security, particularly for
economically and socially disadvantaged groups; (iii) increase the extent and productivity of plantations and trees on
farms to increase wood supply and rural employment opportunities; (iv) improve the livelihoods of forest-dependent
communities and their access to development opportunities; and (v) improve the efficiency, effectiveness, and
transparency of regulatory and management agencies.

Strategies: ADB will promote sustainable forest management in an integrated manner with human welfare and poverty
reduction.

A. Strengthen Forest Governance, Capacity Building, and Resource Security

- Promote review of regulatory regimes in concerned DMCs, including laws that directly govern the forest sector, land

48
use and tenure.
- Promote the analysis of pricing policies that impact forestry, including agricultural prices and subsidies and include
assistance with strategic planning to balance supply and demand of forest products and services.
- Secure stakeholder and government agreement in principle on the scope of envisaged reforms before project
implementation.
- Promote a broad-based approach to institutional reform and support existing user groups and promote the
establishment of new groups in association with forestry assistance.
- Promote comprehensive approaches to capacity building
- Promote the establishment and management of Protected Areas to safeguard the environment.

KfW
German KfW Bankengruppe gives impetus to economic, social and ecological worldwide. As a promotional bank
under the ownership of the Federal Republic and Federal States, it offers support to encourage sustainable
improvement in the areas of small and medium-sized enterprise, entrepreneurship, environmental protection,
housing, infrastructure, education finance, project and export finance, and development cooperation.
KfW IPEX-Bank GmbH is an international project and export finance subsidiary development of KfW
Bankengruppe. Its main business principles include the assessment of environmental impacts caused by projects
it finances and a particular commitment to environmentally safe and socially sound projects. KfW IPEX-Bank
GmbH is a signatory of the Equator Principles and complies with the environmental and social standards of IFC.
One of KfWs priorities is climate protection and resource conservation. The Bank finances the project aiming at
carbon dioxide storage in the Russian Far East.

KfW Project Forest Protection


Russian forests currently absorb half of the terrestrial carbon in the northern hemisphere, establishing their
central role in the global climate change debate. Revenue from the sale of emission certificates could be applied
towards protection and improved management of the forest areas. In this context the Bikin river valley receives
special political attention based on its importance for protecting tigers and its biological diversity. The mixed
deciduous forests with Korean pines which are limited to the Russian Far East are found in this area.

The Bikin valley lies north of Vladivostok and is largely covered by primary forests, which are home to a number
of rare plant and animal species. They provide habitat for the critically endangered Amur tiger of which there are
only approximately 450 worldwide living freely in nature. Commercial wood-felling is seriously endangering the
habitat of the tiger and other rare species such as the Ginseng or the musk deer. As is evident, many
concessionaires do not stick to the rules so that due to a lack of monitoring more wood is felled than permitted.
In this way the forest in the lower section of the Bikin valley has already been almost completely destroyed. The
upper section of the valley was declared a conservation area.

On behalf of the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety KfW
Entwicklungsbank is supporting the protection of the Bikin valley with more than 2.5 million euros from the
International Climate Protection Initiative (IKI). The funds are being applied in a project for reducing climate
change through protection of the virgin forest on about 461,000 hectares of forest areas. Due to the tremendous
importance of the Bikin region for the flora and fauna there is a good chance that UNESCO will declare the area a
World Natural Heritage site. Along with its function as habitat for plants and animals, the forest areas absorb
about 48.1 million tonnes of carbon and are therefore an important natural carbon sink.

The goal of the project is the long-term protection of the virgin forest and the biodiversity in the middle section of
the Bikin valley. KfW Entwicklungsbank is working closely together with the Russian authorities and local
organisations. The World Wide Fund for Nature (WWF) is responsible for implementing the project activities.
The support of the International Climate Protection Initiative also contributes to securing the natural carbon sink
of the region and preserving its biodiversity over the long-term.

Phase I
In order to achieve this KfW Entwicklungsbank and WWF supported an indigenous non-governmental
organisation (NGO) to purchase special usage rights for non-wood products. The usage rights have a term of over
49 years and give the indigenous people the right to prohibit wood felling in the concession area and practice

49
their traditional hunting and lifestyle traditions. Together with state controlling bodies the members from NGOs
organised themselves into ranger groups who monitor the area for illegal wood felling and poaching.
Phase II
It is calculated that biomass of Bikin forests allows to yearly mitigate greenhouse gas emission of 232,379 tonnes
in carbon equivalent. Therefore, it was decided that strategy for further conservation of Bikin valley forests will
be based on international climate investments.

During the fire season the area is also monitored from the air in order to allow early detection of forest fires and
then to fight them. This prevents the loss of this unique habitat and the release of massive amounts of carbon. In
addition, within the project the WWF is developing a management plan to enable the sustainable use of the virgin
forest, taking into account commercial aspects. It highlights new possibilities for income, such as the sale of
valuable Korea pine nuts, while also developing the corresponding value creation chains. On top of that, project
staff are drafting a strategy through which tradable climate change certificates are to be generated and marketed
based on the ecological and socio-economic services provided by the project. The additional income gained in
this way is to contribute to ensuring the long-term protection of the forest area, also beyond the project duration.

Protecting Virgin Forests to Protect the Climate


Country Russia

Sector / BMZ sector Climate and environment protection

Duration 2008-2011 (Phase I) 2011-2057 (Phase II)

Status in implementation

FC funds in EUR million 2.5

Source: www.kfw.de, www.wwf.ru

EBRD
Biomass Project

In November 2011 EBRD provided long-term funding of EUR120m to OOO Kronospan, to finance the creation of
Oriented Strand Board (OSB) wood panelling in Russia. The EUR120m loan, including an EUR50m syndicated loan, will
be used to create OSB, an exceptionally strong wood-based panel used in the construction industry. About EUR4m of
the proposed EBRD loan be invested in a new biomass furnace, and it will burn bark waste gathered during wood
processing at the plant. The biomass furnace will reduce Kronospan's energy footprint, lowering the company's
greenhouse gas emissions by over 13,000 tons of CO2 a year.48
EBRD is taking a seven-year EUR70m A Loan onto its own books. Raiffeisenlandesbank Oberosterreich is funding a five-
year EUR40m B Loan, while Canada's investment funds company Cordiant Capital is funding a seven-year EUR10m B
loan matching the maturity of the EBRD's A loan.
Kronospan will set up OSB production at its existing plant at Egorievsk in Moscow Region, a wood-processing plant, and
contribute advanced manufacturing technology in the process. OOO Kronospan is a Russian subsidiary of Kronospan
Holdings East, a member of the Austria-based Kronospan group of companies, enagaged in the manufacture of wood-
based panels.

Vnesheconombank (VEB)
Vnesheconombank is a development corporation of Russia with a mandate to
Strategic priorities for the Bank are financing investments with high

The core functionality of VEB is:


Financing of investments with high national economic multipliers, but tough to finance for private capital as
well as state budget in terms of the resources needed, risks implied and maturity terms.
Management of pension savings, servicing Russia's foreign debt, support for small and medium-sized
enterprises through refinancing of the banks that provide loans to SMEs and insurance of Russian exports.

48
http://greentech.cleantechnology-business-review.com/news/ebrd-provides-eur120m-for-forestry-project-in-russia-181111
50
According to its Memorandum on financial policy, Vnesheconombank principally does not have the right to fund oil
and gas production or compete with commercial banks for commercially attractive for them projects. About half of
VEBs loan portfolio is concentrated in infrastructure projects. The second by volume share is represented by the forest
sector. Thus, Bank is stimulating a real economic diversification.

The average interest rate on loans to SMEs is 15 - 20% per annum, interest rate of Vnesheconombank group does not
exceed 13%, and for some products - 10.5%. To date 80% of VEBs loans have a maturity of over 5 years and maximum
term is 15 years old - a unique offer in the Russian banking market.

The share of timber-processing investments in a projects portfolio by industry has risen from 3,5% (as of 1
January 2011)49 to 14,8% (as of March 2012)50 in a bit more than one year.

Figure Projects Portfolio of Vnesheconombank by Industry (as of March 2012)

Source: http://veb.prognoz.ru/

During the past 2,5 years Vnesheconombank is actively working with woodprocessing companies. As of March
18, 2012 the total portfolio value of forest projects, financed by the Bank is 113,5 billion rubles, with bank
participation amounting to 105,35 billion rubles.

Table ... Vnesheconombank's Recent Projects in Wood Processing Industry

Project name Currency Total Volume of Share of VEB Location


Investments Investments

Construction of Wood Processing EUR Khabarovsk


Complex for OSB Production 414,7million 276,5million
Region

Creation of Far East Center for USD 150,2 million 97,3 million Khabarovsk
Wood Processing Region

5620,6million 4600,0million
Establishing of Full-Cycle Wood RUR Krasnoyarsk
Processing Facility Region

86771,0million 86771,0million
Construction of Forest Industry RUR Krasnoyarsk
Complex in Boguchansky District Region

113485,6million 105350,0million
Total RUR

Source:http://veb.prognoz.ru/

49
Vnesheconombank Annual Report 2010

50
http://veb.prognoz.ru/
51
One of the projects that will be financed by VEB is on the list of Priority investment project in the field of forest
exploitation

Trans-Siberian Forest Company - Creation of saw-timber complex 51


Timber Processing Complex of the Irkutsk region

The investor - "Trans-Siberian Forest Company"


The volume of investments - 5887 million rubles.
Construction period - 2008-2012
Payback period - 5 years

Sources of financing
Own (Trans-Siberian Forest Company) - 2943.5 mln.
Borrowings - 2943.5 mln.

The volume of consumption of raw materials - 1971 thousand m3


The size of the annual allowable cut - 1971 thousand m3

Products and production:


Lumber - 500 thousand m3
Timber structures - 94 thousand m3
Wooden houses - 122 thousand m2
Laminated beams - 100 thousand m3
Plates OSB - 300 thousand m3
Pellets (pellets) - 160 tons

Order of the Ministry of Industry and Energy of Russia of 14.12.09 1129 is the basis for inclusion of the project in
the list of Priority investment project in the field of forest exploitation

Irkutsk company intends to install more than 10 briquetting presses from different manufacturers. From bricks "Pini-
kei" TSLK intend to produce charcoal and to export it to the Asian market. The company also plans to sell Cylindrical
pellets in the local market for private consumers. This product allows to replace the wood, and can also be used in
various power plants. The plan of the Irkutsk manufacturer is to create an internal market for biofuels. The company
intends to promote the program to change-over from the northern boilers to briquettes and pellets. The company
accumulates a huge amount of sawdust and other wood waste. During 2011 it produced 400,000 cubic meters of
wood waste.

Sector - Agriculture

Rabobank
Rabobank Group is a full-range financial services provider that operates on cooperative principles. Its origins lie
in the local loan cooperatives that were founded in the Netherlands nearly 110 years ago by enterprising people
who had virtually no access to the capital market. In terms of Tier I capital, Rabobank Group is among the worlds
30 largest financial institutions. The Bank is consistently awarded a high rating by all rating agencies.

Partnership between WWF and Rabobank


WWF and Rabobank have recently joined forces to accelerate the transition to a greener economy. As part of their
global partnership, Rabobank and WWF will show how the financial sector can prompt businesses to invest in
more sustainable practices.
The partnership is specifically aimed at the international food and agribusiness sectors, with goals of increasing
production efficiency and reducing CO2 emissions and water consumption. In addition, both partners aim to
raise awareness among consumers about how they can contribute to a green economy by opting for sustainable
financial products and services.

51
http://lesprominform.ru/news/branch/2692-trans-sibirskaja-lesnaja-kompanija-budet.html
52
Rabobanks position on Aquaculture
Rabobank aims to positively affect the overall sustainability of the operations of its clients. Banks clients in the
aquaculture sector have to deal with sustainability issues in their business operations. Rabobank wants to contribute
to the realization of a sustainable aquaculture supply chain by client assessment and client engagement. Code of
Conduct and the Aquaculture Supply Chain Policy guide the assessment of how clients deal with material issues. The
Policy is a supplement to the CSR section of Rabobanks credit manual.

Source: Rabobanks position on Aquaculture

NEFCO
Agri Credit Facility
NEFCO finances agricultural projects within the framework of the companys agricultural project fund. NEFCO
plays a part in financing biogas reactors in order to generate energy for heating as well as energy-saving
ventilation of the buildings on the pig farm. It is an investment favourable to both the well-being of the pigs and
the climate. The project has other favourable environmental effects as the modernisation of the pig farm has
entailed the removal of old insulation containing carcinogenic asbestos.
As nutrients run off from agricultural production is one of the main sources of pollution of the Baltic Sea, NEFCO
offers small scale financing for investments in manure handling systems at farms in NW Russia and the Baltic
countries. The facility was established in connection with the Baltic Sea Regional Project (BSRP), which was
initiated by the World Bank based on funding from the Global Environmental Fund (GEF). The loans are on
favorable terms with a repayment period of up to 10 years. NEFCO is also the fund manager for the GEF funding.

Implemented projects
So far 22 projects have been approved in the Baltic countries, Leningrad and Kaliningrad Oblasts, 19 of them have
already been implemented. Several projects are being considered. Total investment in these 22 projects is EUR
12,3 million.52
Project criteria
Environmental Management Systems training required
significant reduction of phosphorus and nitrogen discharges to the Baltic sea
52
http://www.nefco.org/
53
cost effective investments
individual farmers or agricultural companies as borrower
own financial contribution required
Typical projects approved for financing
construction of manure storage
manure spreader
reconstruction of cow barn
sawing machine

Mao Agricultural Cooperative, Jasulius Farm, Lithuania


Estonia
The project included construction The project included manure storage,
Description of manure storage, renovation of manure removal system, milking parlor,
stable for young stock, renovation pesticide sprayer and other equipment.
of stable for milking cows and
necessary equipment.
660.000 of which NEFCO loan was 184.000 of which NEFCO loan 82.000
Investment cost 64.000, GEF grant 23.000 and , EU support 82.000 and own
farms own contribution of contribution 20.000.
105.000
The project will result in annual These investments will lead to 2.400 kg
Environmental impact reduction of 200 kg phosphorus annual reduction of nitrogen emission
and 9.400 kg of nitrogen emissions. and 300 kg of phosphorus emission.

Recommendations for further steps to be taken by Russian


banks
ESG Risks Mitigation
So lets look at what various banks have done to implement sustainability in their strategies and core financial
processes. Many banks have assigned Corporate Social Responsibility (CSR) to a dedicated department or to the
communications/investor relations department. Many report on their direct footprint, resulting from offices and
employees indicating for example energy used or waste produced. However, the real footprint of a bank is
derived from its asset side, i.e. what does the bank choose to invest in, under which conditions and what are the
social and environmental impacts of these investments.

A banks drive to further embed sustainability in its core banking business often stems from the wish to avoid
reputational or credit risks. A banks first step in implementing a sustainability strategy is usually adopting an
exclusion list, indicating specific items and sectors the bank does not finance, such as weapons, child labor, and
biodiversity degradation. A step further involves setting up policies for environmental and social risk
management, and dedicating internal capacity to implement these policies. Or implementing a selection process
for clients with a positive footprint in niche sectors such as renewable energy or microfinance.

A genuine impact in banking would be achieved by mainstreaming sustainability. This implies that sustainability
is fully integrated into a banks core business and financial processes. Both in terms of risk management and in
terms of product development and innovation. Ultimately, a bank can turn this into a competitive advantage
through, for example, improved risk management, cost reductions, better client service and/or improved market
access.

Typical risks for FI


Environmental and social risk management adds a new dimension to the existing risk management approach
that already focuses on assessing risks such as credit risk, market risk and regulatory risk in each
transaction.
Table.Types of risks and ESG implications

Type of risk Description and Environmental & Social Implications

54
Liability risk By virtue of taking possession of collateral assets, a financial institution is exposed to
liability risk stemming from a client's/investee's legal obligations. This includes fines,
penalties, and costs for addressing third-party claims for damages due to negligence in
managing environmental and social risks in a client's/investee's operations and clean-
up of contamination. If the financial institution is a principal shareholder of a
client's/investee's operations, it may also be directly liable for all environmental and
social risks associated with a client's/investee's operations.
Financial risk A financial institution is exposed to financial risk stemming from potential disruption
of client's/investee's operations as a result of environmental and social problems. If not
managed properly, these problems can affect a client's/investee's ability to meet its
financial obligations to the financial institution and/ or can drive down the value of a
client's/investee's collateral in the context of a transaction. A client's/investee's failure
to effectively address environmental and social considerations can jeopardize its
business operations as well as the financial institution that is supporting the
transaction. The financial institution will also face liquidity risks from environmental
and social problems associated with collateral. For example, the financial institution
will have to use up internal resources to meet government clean-up requirements or to
clean the site up before it can be sold if collateral is contaminated.
Reputational A financial institution is exposed to reputational risk due to potentially negative
risk publicity associated with a client's/investee's poor environmental and social practices.
This harms a financial institution's brand value and image in the media, with the public,
with the business and financial community, and even with its own staff. For example, if
a client/investee faces strong public opposition against its operations, the financial
institution's reputation may be tarnished through its association with this particular
client/investee.
Credit risk A financial institution is exposed to credit risk when a client/investee is unwilling
and/or unable to fulfill the contractual obligations associated with a transaction as a
result of environmental and social issues. For example, if a client/investee faces
increased capital or operating costs of complying with environmental and social
standards or if operating and emission/discharge permits are absent or expired
resulting in regulatory fines or penalties, there is a risk that the client/investee cannot
meet its financial obligations to the financial institution.
Market risk A financial institution is exposed to market risk stemming from a reduction in the value
of collateral associated with a transaction due to environmental and social problems.
For example, if a production site becomes contaminated, the market value of the
underlying collateral will fall.
Political and A financial institution is exposed to regulatory risk such as mandatory Environmental
regulatory risk impact Assessment of projects, regulations on CO 2 emissions, etc.

There are few practical instruments for addressing these risks, which generally include the following
necessary and sufficient conditions:
A bank formulates core principles
A bank integrates the principles in routines
A bank articulates these principles for stakeholders and sets eligibility criteria for services
A bank checks service provision against these principles
A bank verifies implementation of principles and adequacy of routines

From organisational point of view it means that a bank identifies the policy what is acceptable and what is not,
then identifies criteria for this policy how to measure acceptability, through direct (weapons, drugs, nuclear
energy), soft, i.e. criteria with variable meaning (hydropower, but if it doesnt harm the fish stock), and proxy
criteria (like ISO, FSC, MSC, Green-Labeling certification).

Actions to be taken by a bank can be divided into four major areas, each of them is a mitigation action
from operational level:
1. Development and incorporation of environmental policies regarding internal corporate principles (employees
behavior, footprint reduction)
2. Incorporation of comprehensive environmental and social risk assessment (ESMS) for the whole project cycle
(including assessment of current state, implementation stage, supplies and post-project environmental and social
impact)
55
3. Take into account international sustainability standards, including voluntary (proxy indicator not only for
environment, but for the whole management system of organization)
4. Incorporation of audit & monitoring system on implementation of policies into strategic management

Standard Bank (South Africa)

Figure Integration of Equator Principles into the credit approval process

Process of ESG risks integration is developed over 4 phases. Each phase includes a series of activities, tools and
annexes supported by guidelines and procedures.

Figure : Illustration of how E&S risk analysis can be integrated into the lenders transaction process

Source: UNEP FI / ECOBANKING

Adopting Environmental and Social Management System

56
Reporting on implementation ensures that banks are putting in place an effective environmental and social risk
management system that reflects all potential impacts across all their activities. Each bank needs to adopt an
environmental and social management system (ESMS) that includes the following elements:

Initial review to determine key environmental and social exposures, impacts and risks;
Overall environmental and social policy that sets the banks approach;
Annual action plans;
Committed organisational structure and personnel (staffing, oversight, compensation and training);
Environmental and social procedures and standards for transactions that include deal level transparency,
consultation and compliance procedures;
Documentation, including that required to facilitate implementation audits;
Internal information and training;
External reporting, verification and consultation;
EMS monitoring and corrective action; and
Management review and improvement, feeding back into the cycle and informing annual action plans.

In addition, banks should provide for the use of external transparency, compliance and accountability
mechanisms for especially sensitive transactions. For banks that have agreed to a collective set of standards and
procedures (the Equator Principles, for example), such a system could be applied collectively; this would include
common information disclosure and reporting requirements, and a shared system for receiving third-party
complaints from external actors.

Standard Chartered (UK)

Standard Chartered underlines that greatest impact it has on the environment and society is through the
business it finances. Bank has stringent environmental and social policies for all lending, debt, capital markets
activities, project finance, principal finance and advisory work. The bank seeks to challenge the way its clients
operate by ensuring the projects it finances, across all markets, meet international environmental and social
standards such as the Environmental, Health and Social (EHS) guidelines developed by IFC.

Standard Chartered introduced a formal environmental and social (E&S) risk policy to govern its lending
activities in 1997 and has been a signatory to the Equator Principles (EP) since 2003. It applies the Equator
Principles to all project finance and project advisory transactions irrespective of value.

Standard Chartered is also a founding signatory and adopter of the Climate Principles, and since 2009 have
developed and implemented 14 position statements setting out its approach and standards on specific issues and
industry sectors (including oil and gas, mining and metals, forestry, bio-fuels and dams). They provide a
framework to facilitate consistency in approach to E&S issues for a bank operating in globally diverse locations.
To the deal teams these statements are an unambiguous statement on what SCB stands for and what the bank is
willing to finance. To the clients they provide a clear indication of what environmental and social standards the
bank expects.

E&S risk management process


Frontline staff are provided with specific guidelines to identify E&S risks, known as Environmental and Social
Risk Assessment (ESRA) tools, and are supported by Standard Chartereds Sustainable Finance team, who
provide technical advice and assistance to ensure compliance with E&S standards. Transactions with significant
E&S risks are escalated to Wholesale Banking Responsibility and Reputational Risk Committee (WBRRRC).
Chaired by Group Executive Director and Chief Executive of Wholesale Banking, the Committee includes
representatives from the Wholesale Banking Leadership Team and the Group Head of Sustainability. The
WBRRRC meets on a monthly basis and on an ad hoc basis where necessary.

E&S risk management is an integral part of Standard Chartereds credit process. There are four distinct stages to
the banks lending and E&S risks management processes:

1. Preliminary screening: Transactions are assessed against our position statements and clients are
benchmarked against IFC standards and relevant industry best practice guidelines. All project finance
transactions are categorised and assessed against the Equator Principles
2. Due diligence: Our Sustainable Finance team identifies E&S reputational risks, while our credit
department assesses specific credit risks. Client relationships and specific transactions that require
57
further scrutiny are escalated to the WBRRRC. Where necessary, an external consultant may be required
to perform due diligence to identify the E&S impact of a project and recommend an action plan to
mitigate any associated risks. Throughout this process, our Sustainable Finance team works closely with
the relevant client teams

3. Approval: All transactions require approval from our credit department and, depending on the level of
risk, the WBRRRC

4. Monitoring: If necessary, E&S and governance conditions are included in the loan documentation, and
clients are required to comply with a time-bound action plan to meet these conditions. For project
finance, our portfolio monitoring team is responsible for ensuring client compliance with any agreed
action plans. Any material deviation against the action plan is referred back to the WBRRRC

Figure 1: E&S risk management process at Standard Chartered

Turkish Industrial Development Bank (TSKB)

TSKB has developed its own Environmental Risk Assessment Model:


Internal effects: Paper, energy, water and other consumption goods related environmental effects resulting from
their utilization in the office.
External effects: Investment project related environmental effects and risks resulting from lending.

Environmental Risk Evaluation in Lending


The model was applied as a pilot scheme for 20 projects in 2005, and for 33 and 67 loan applications respectively
in 2006 and 2007. TSKB Engineering Department is also responsible for addressing the environmental issues in
the course of project appraisal. When preparing the credit reports, the project engineer visits the facility to
physically observe the environmental effects, and environmentally positions the facility and/or the project taking
Environmental Regulations and relevant legal legislation into consideration. The project engineer is also
responsible for preparing the ERET Model.

Environmental Risk Evaluation Tools (ERET)53


TSKBs advanced risk assessment model consists of a set of Environmental Risk Evaluation Tools (ERET) that
was developed under a project with the support of the German Development Bank (KfW) when the Banks
Environment Management System (EMS) was originally set up. ERET, which provides a method for rating
environmental risk under 35 separate headings, was developed and implemented at TSKB on a voluntary basis.

53
http://www.tskb.com.tr/sustain/en/m-5-13.html
58
Since 2007 it has been used for all projects that are considered by the TSKB Credit Committee. Implementation
ERET involves a detailed study, taking both existing and future aspects into account, of the potential
environmental impact and potential the legal and financial liabilities that might arise be they from an investment
project whose financing by TSKB is being considered or from the project owners other activities. In situations
where a projects environmental risk is deemed to be above average and/or too high, the Bank works with the
customer to formulate a plan whereby the environmental impact may be reduced and monitored.

ERET is firmly grounded in TSKBs strong banking discipline.


Taking these considerations into account and also as a result of TSKBs careful approach to marketing, no project
whose environmental impact is deemed to be too high goes beyond the initial project evaluation stage. This is a
consequence of the Banks concentrating its attentions on the B and C categories of the ERET results.

The model is based on identifying the financial and legal liabilities that may arise from, and present and potential
environmental effects of, the investment project or the other activities of the project owner. In case its found that
the environmental risk is above the average and/or very high, its carefully planned how to reduce environmental
effects and how to monitor them. TSKB 2008 and 2007 ERET results are summarized below:

Category of 2009 2008 2007


Environmental Risk

Project Owner Project Project Owner Project Project Owner Project

A 0 0 0 0 0 0

B 25 12 50 12 18 6

C 24 37 37 75 49 61

Total 49 49 87 87 67 67

In this environmental classification, project or project owner related environmental risks that are calculated as of
the date of evaluation are classified as:
A: High environmental risk,
B: Medium environmental risk,
C: Low environmental risks.

For financial institutions, it is vital to define the extent and the acceptability limits of the environmental risk, and
prepare the action plans and things-to-do lists with which environmental effects will be eliminated or at least
reduced.

Environmental Procedures
The environment issue has particular importance when TSKB provides facilities from international financial
institutions it cooperates with. Both TSKB and the banks it cooperates with have been considerably sensitive in
this issue and the procedure and methodologies to be followed during the phase of credit appraisals and
reporting have been formed in the course of credit negotiations.
EFIL (export finance intermediation loan) Environmental Evaluation Criteria developed with the World Bank are
as follows. The procedures of environmental risk management essentially consist of Environmental Screening,
Environmental Impact Assessment, and Environmental Mitigation where necessary.

Box Environmental Review Process Flow (*)

59
BRICS focus

MDM Bank
MDM Bank is one of the leading independent providers of banking services in Russia, comprised of two main
banking units: Corporate & Investment Banking (CIB) and Retail Banking. MDM Bank has one of the highest
credit ratings from Standard & Poor's (B+), Moody's (Ba2) and Fitch (BB) among privately owned Russian banks.
In 2009 the Banker magazine announced MDM Bank The Bank of the year in Russia.
In 2009 MDM Bank published its first non-financial report, which corresponds to the GRI standards. This step
evidences about transparency of the Banks activity in CSR field and understanding by Banks top management of
importance of systemic approach to environmental and social aspects of business practice.
MDM Bank defines its ecological/social risks as the reputation risks of the Group and credit risks arising from the
debtors non-compliance with environmental, health, safety, non-discrimination and other legal requirements
regulating ecological, labour and social activities, as well as from environmental damage by third parties to the
debtors activities and property. Assessment of ecological risk is based on the standards and requirements of IFC,
EBRD and DEG (private investment arm of KfW) and is performed for all credit risk limits for corporate and small
business clients.
In September 2010 MDM bank has approved its Policy on managing environmental and social risks. This
document is an integral part of the project preparation cycle. All financial projects falling under this policy follow
Project Environmental Expertise procedure. This procedure includes the following algorithm:

Collecting primary environmental data on Client

Express analysis of environmental risks

Assessment of express analysis results

Deciding on go / no-go with financial project


60
Due diligence of clients compliance to
environmental and social requirements of the
legislation
Site visits

Preliminary results of project environmental


expertise

Detailed analysis of environmental risks

Final results of project environmental expertise

Risk mitigation strategy development

Financial decision on project

Informing Development banks *

Agreement on financing within Ksems**

Monitoring and control over environmental risks

*The Bank has agreements with IFC, EBRD and DEG which specify some obligations related to environmental risk management
** Ksems in accordance with internal regulations prescribing environmental covenant

Exact work plan and expertise required for particular project depend on a number of factors, such as;
Type of financial project
Total amount requested and timing of project
Primary environmental operations of client
Type of collateral
Compliance of client to environmental and social requirement of the legislation
Negative factors and potential environmental risks revealed during initial site visit, etc.

During project implementation the Bank constantly monitors client operations.


The Bank also approved list of environmental exclusions, which states projects, which cannot be funded (see
box) by the Bank, and additional list of environmental exclusions, which includes weapons, production of
alcohol (excluding beer, wine and drinks with low volume of alcohol), tobacco, gaming (gambling), radioactive
products and components.
1. Actions prohibited by national and international law
2. Operations involving harmful and forced labour, child labour, discrimination
practices, breaching human rights
3. Asbestos fiber
4. Operations prohibited by RF law or international conventions on biodiversity
5. Polychloride xenyl
6. Pharmaceuticals, pesticides / herbicides phasing out or prohibited for
production
7. Substances destroying ozone
8. Wild species and plants included in CITES
9. Drifter fishing with nets longer 2.5 km.
10. Trans-boundary transportation of waste under international restriction
11. Oil and other hazardous substances transportation using tankers not certified 61
by IMO
12. Non sustainable forestry and natural tropical forests
13. Trading non-certified goods
All projects falling under this Policy are ranked against their environmental risks. Projects ranked A A/SEMS_1
and A/SEMS_2 can be funded only after informing Development Banks. Depending on the ranking monitoring
schedule for each project is identified.

Category of risk Description


A High risks, probability of long-term and / or wide scale negative sometimes
unprecedented impacts
A/SEMS_1 High risks, significant impacts. Funding to be conducted under covenant
A/SEMS_2 Ksems_1/2
B Increased risks, impacts can be predicted, prevented or reduced within
existing capabilities of client
C Minimum impact
NF Unacceptable risks (not financed projects)

BRICS focus

Standard Bank (South Africa)

Standard Bank Group is South Africa's largest bank, with operations in 17 African countries. Outside the African
continent, Standard Bank Group operations span to 13 countries, with an emerging market focus. Where
appropriate, Standard Bank works in partnership with other stakeholders on global issues, which impact the
bank as a business and as a corporate citizen. During 2010, Standard Bank became a member of the World
Wildlife Fund South Africa (WWF-SA) and the UNEP FI.

Highlights
R9,3 million spent by Standard Bank South Africa on energy efficiency projects.
20% reduction in the power required to operate new branches in South Africa.
Developed assessment tools to extend environmental and social risk management measures to lending
beyond project financing.

Environmental and social risk management (including the Equator Principles)

Environmental and social risk includes both the threat of adverse effects on the natural environment through
emissions, wastes and resource depletion, as well as risks to livelihoods, the health and rights of communities
and cultural heritage arising out of business operations and lending activities. In addition, these risks include the
threat to assets as a consequence of environmental impacts, such as extreme weather events.
The risks falls within the Group Sustainability Management Programme, which is mandated to create a consistent
approach to environmental and social management by facilitating policy, systems, performance standards,
monitoring and assurance within the groups operations and responsible financing.
Environmental and social risk is governed by the Group Safety, Health and Environmental Risk Oversight
Committee (SHEROC). All business units in South Africa are represented at SHEROC, which provides oversight
and guidance in managing health, safety and environmental systems. Similar committees in each business unit
support SHEROC. The Bank is also a signatory to the Equator Principles.
62
Standard Bank adopts a precautionary approach to environmental management, striving to anticipate and
prevent environmental degradation. Ongoing assessment of environmental risk is increasingly becoming a part of
the groups activities, services and operating decisions.
Some of the risks posed by climate change include the costs of complying with regulatory requirements and
damage to property and other assets due to extreme weather conditions. Climate change will also change the
nature in which risks are managed making it necessary that the group re-evaluates its risk assessment models to
include potential climate change risks and their monetary value. As part of risk management for climate change,
Bank has taken an increasing interest in how the companies in which it invests are responding to climate change.
Screening corporate banking loans
During 2010, Standard Bank conducted a pilot project in which environmental and social risk management
measures were expanded to specific short-term and bridge financing arrangements, corporate loans and export
credit finance with a known use of proceeds. Feedback from these initiatives will be used to evaluate the
feasibility of formally expanding these measures into other lending areas in Corporate & Investment Banking. In
addition to risk management, Banks teams advise on and originate renewable energy projects, carbon financing
and Clean Development Mechanism opportunities.
Bank also initiated an independent environmental and social risk review of our operations and current
environmental and social procedures to streamline the process, identify high-risk areas and to clarify the
implementation of a phased system to manage such risks. Following from this, Bank completed a set of tools
applicable to lending products and appropriate to levels of environmental and social risk and the consequent
business risks. These tools are applied within Corporate & Investment Banking.
Environmental legislation
Standard Bank continues to monitor evolving environmental regulations and to put in place the necessary risk
management plans to assess regulatory risk and introduce mitigating controls. Bank is active in developing
environmental and social codes of industry best practice and participates in public consultation processes such
as the South African Governments Climate Change Response Green Paper and the proposed carbon tax
legislation in South Africa.
Equator Principles
Since adopting the Equator Principles in February 2009, the Bank has made progress in integrating the principles
as a risk management measure when assessing what projects to finance. Standard Bank employs two full-time
environmental and social specialists in its Investment Banking division to manage the implementation of the
Equator Principles and oversee the assessment process globally. This Environmental Business team works closely
with the transactional team on a project by project basis. They provide advice to customers and consultants
ensuring that all environmental and social risks are identified, managed and mitigated and that projects funded,
or to which an advisory role is provided, meet Equator Principle requirements.
In 2010, Standard Bank was the first African bank to be elected to the Global Equator Principles Steering
Committee. Through our involvement in the African and Middle East outreach working group, we interact with
other commercial and development finance institutions on environmental and social risk management measures
in lending practice.
Bank met its objectives for 2010, which were to continue implementing procedures to support the Equator
Principles process and evaluate the feasibility of expanding and modifying environmental and social procedures
beyond project finance.
Equator Principles performance assessment process and management tools
Standard Banks Equator Principles performance assessment system includes the following four tools:
Environmental and social screening and categorisation (Tool 1): screens various projects into high
(A), medium (B) or low (C) environmental and social risk based on the International Finance
Corporations (IFC) categorisation process.
Environmental and social appraisal documents (Tool 2): includes an environmental and social
impact assessment template, procedure for site visits, list of potential permits and suggested
observations of operations.
Environmental and social action plan (Tool 3): through which customers must demonstrate their
corrective actions in order to meet the applicable IFC Performance Standards and relevant sector-
specific guidelines.
Environmental and social monitoring report (Tool 4): ensures borrowers monitor and report on the
progress of environmental and social aspects of their projects for the life of the loan. This includes
improvement plans and adherence to social and environmental commitments.
63
In addition to these tools, explanatory process documentation has been drafted to clarify the sequence of events
required to facilitate this process and gain internal approval.
Training
Fifty-five employees in Project Finance, Property Finance, Real Estate Investments and Risk Assessment divisions
in Beijing, Johannesburg and Lagos underwent Equator Principles awareness training on the relevance of the
principles to each division, how these are applied and managing environmental and social risks. Graduates
rotating through the Project Finance division participated in strategic Equator Principles briefings to gain
relevant skills for their careers within the bank.

Project finance lending


The table below shows the number of projects that were reviewed and financed according to Equator
Principles in 2010.
Category A Category B Category C Total
(high risk) (medium risk) (low risk)
2010 2009 2010 2009 2010 2009 2010 2009
Sector
Oil and gas 3 0 1 1 0 1 4 2
Mining 2 1 0 0 0 0 2 1
Power 0 0 0 0 0 0 0 0
Infrastructure 1 0 4 0 0 0 5 0
Industry 0 0 0 1 0 0 0 1
Other 0 0 0 1 0 0 0 1
Total 6 1 5 3 0 1 11 5

Royal Bank of Canada


Royal Bank of Canada, Canadas largest bank and 14 th largest bank globally, provides personal and commercial
banking, wealth management services, insurance, corporate and investment banking and transaction processing
services on a global basis. Proportion of business units within RBC who must consider environmental and social risks
in their organizational decisions is 100%.

RBC is included on the Dow Jones World and North American Sustainability Indices, the Jantzi Social
Index, the FTSE4Good Index.
The Bank has been included on the Global 100 Most Sustainable Corporations ranking since its
inception.
RBC is among 18 financial institutions worldwide named to the 2008 Global Carbon Disclosure
Leadership Index.
RBC has been named one of Canadas Greenest Employers.

Corporate Environmental Policy is a statement of RBCs commitments to: a) reduce its environmental
footprint; b) promote environmentally-responsible business activities (maintaining a high level of due diligence
to identify, assess and help mitigate the environmental risks associated with lending to clients and having a suite
of environmental credit risk policies that cover a range of environmental risks and business activities; and (c)
offer environmental (including climate-focused) products and services. The Environmental Blueprint identifies
climate change as one of RBCs three priority environmental issues for the coming years, along with biodiversity
and water.

Management
Execution
Environmental Policy Corporate Environmental Policy is a statement of RBCs commitments to: a) reduce its environmental footprint;
b) promote environmentally-responsible business activities (maintaining a high level of due diligence to identify,
assess and help mitigate the environmental risks associated with lending to clients and having a suite of
environmental credit risk policies that cover a range of environmental risks and business activities; and (c) offer
environmental (including climate-focused) products and services. The Environmental Blueprint identifies climate
change as one of RBCs three priority environmental issues for the coming years, along with biodiversity and
water.
ESG Factors in Risk Corporate Environmental Affairs group, which is part of the Corporate Risk Management Group, leads and
Management/ oversees corporate environmental management programs, develops lending policies, advises on transactions, and
Financing identifies and communicates emerging environmental risk issues. The group includes environmental
professionals who collectively provide a consultative mechanism for factoring environmental considerations into
RBCs transactions. RBC has now used environmental risk professionals in reviewing nearly 700 transactions
where environmental issues were identified as material.

64
The company has also established a suite of environment credit risk policies to address ESG issues in its lending
and investment activities. In 2002, RBC launched its Carbon Risk Management Project. RBC assessed climate
change-related risks facing the company and evaluated and improved its management of these risks. For example,
RBC undertook a carbon risk profile of its lending portfolio in order to assess potential credit risk impacts, and
undertook a review of the potential physical impacts of climate change to North American business sectors and
regions. Furthermore, the company has developed a proposal for incorporating carbon (and other ESG issues)
risk into the credit and risk rating methodologies of the entire firm. RBC also addresses sector or sub-sector
environmental risks in the companys series of Criteria Papers, a tool used to rate a clients risk profile.
With respect to its wealth management division, RBC says that its portfolio managers are increasingly aware that
environmental, social, and governance issues have an impact on a clients performance, and as a result, are
incorporating some of these factors into the research and investment banking process.
Recently, RBC has assessed the potential risks facing the company from the announced Air Emissions Framework
by the Canadian government. The company has stated that it anticipates that the associated regulatory risks of
the legislation will increase in significance as the first emissions reporting date (currently scheduled for January
1, 2010) approaches. RBC has identified sectors that face the greatest commercial impacts from CO2 regulation,
and says that it plans a comprehensive review of the extent to which specific companies in its portfolio face
exposure to impending climate change legislation.
Investment Research RBC conducts investment research on the alternative energy sector. The company has identified from this
research four key investment strategies for investing in the solar power industry and produced a report to advise
clients and internal business partners.

Energy Efficiency Financing Mechanisms for Banks


This section discusses several banking approaches to financing energy efficiency: soft loans, guarantee funds, and
energy efficiency bank windows. 54

Soft Loans and Revolving Funds

Soft or public loans use public funds to offer loans at interest rates that are usually below the market rates for
energy efficiency investment loans. A soft loan, because it is supported by public funds, is a subsidy of the costs of a
bank loan for energy efficiency projects. By reducing the costs of borrowing, soft loans seek to encourage investments
in energy efficiency that might otherwise not be implemented due to high financing costs. Often more complicated to
set up than a traditional subsidy, however, soft loan programs are generally less broadly used.

Soft loans are often associated with revolving funds where repaid loan funds are cycled back into the fund for
relending for a new project. Money in the revolving fund is fully dedicated to energy efficiency lending (in some cases,
revolving funds lend for a variety of environmental projects, including energy efficiency projects). Revolving funds are
typically publicly supported, through subsidized interest rates or through partial or full public funding of the principal
investment; monies for the fund may come from dedicated taxes on energy sources (e.g., fuel taxes, utility surcharges).
Operation of the fund itself may be set up in cooperation with commercial banks. Such an arrangement allows
evaluation of loan applications, monitoring of loans, and collection of loan payments to be managed by commercial
banks that have existing expertise in these areas. Government offices, as a consequence, do not need to become
bankers to administer the fund.

Bank window

Low interest lending

Collateral free lending

54
Improving Energy Efficiency in Industry in Asia: A Review of Financial Mechanisms, UNEP 2006
65
Source: Appliance Energy Efficiency - Financial Mechanisms, PwC, February 2012

Table 3. Loans for Energy Efficiency in Japan, 1993-1999

Investments Eligible for Low- Subsidy Loan Limit Maturity


Interest Loans
Solar energy Interest rate 2,9%;
tax discount 7%
Wind energy Interest rate 3%;
tax discount 7%
Energy efficient retrofit of buildings Low interest rate

Energy facilities and production Preferential 50% of construction 1-30 years; grace
facilities with proven improvement interest rate cost periods negotiable
of 20% or more in energy
efficiency, and energy savings of
100 kL/year
96 types of facilities on investments Preferential 50% of construction 1-30 years; grace
15 systems approved under the interest rate cost periods negotiable
Assistance Law (on energy savings
and waste utilization)
Co-generation facilities (60% Preferential 50% of construction 1-30 years; grace
energy efficiency and 50kW output interest rate cost periods negotiable
or more)
Small and Medium Enterprises

106 types of energy-saving Special interest Direct loan up to Up to 15 years;


investments specified in the Law rate USD 7 mln/year; grace period up to 2
Agency loan up to years
USD 1 mln/year
74 types of facilities/investment Special interest Direct loan up to Up to 15 years;
approved under the Law rate USD 7 mln/year; grace period up to 2
Agency loan up to years
USD 1 mln/year
Replacing outdated boilers Special interest Direct loan up to Up to 15 years;
rate USD 7 mln/year; grace period up to 2
Agency loan up to years
USD 1 mln/year
Sources: Gabdrakhmanov S., Bessonova E., Participation of Banks in Energy Efficiency of Economy, Center for Economic and Financial
Research at New Economic School, 34, May 2010; Promotion of Energy Efficiency in industry and financing of investments, UN 2001

Green labeling of Energy Efficiency Retail Bank Products

Caisse dEpargne
Caisse d'Epargne, the 4th French retail bank with a net income of 10 Bn, committed in June 2007 to label all its
savings products by mid 2008 and publish their scope 3 carbon footprint in 2009. Labelling scheme &
methodology co-developed with a stakeholder panel, Self-assessments verified by the statutory auditors. This
scheme may be adopted by Sberbank, the largest retail bank of Russia.

66
67
Table 1. Types of Financial Institutions and their role in moving money

Source: WWF analysis

Development banks, investment banks and investment funds represent the most powerful potential to cause indirect ESG impact and to leverage ESG performance of
their borrowers/investees (see Table 2a).

Table 2a. Comparative Analysis of Internal Environmental and Social Responsibility Mechanisms of Selected National Development Banks

68
Feature/FI China Development KfW Banking Group Asian Development Brazilian Development Bank Eurasian Development FMO
Bank (CDB) Bank (ADB) (BNDES) Bank
Affiliation with Under the direct Promotional bank under the State-owned bank Federal public company Operates with the support of Public-private
the state leadership of the State ownership of the Federal the founding member states partnership, with 51% of
Council Republic and the La nder Russia and Kazakhstan shares held by the Dutch
(federal states) state, and 49% held by
commercial banks, trade
unions and other private
sector representatives
Financial Risk Actively promotes the The capital requirement for Before establishing the In 2010 an integrated system of Uses the basic indicative Complies with
Management/ implementation of operational risks is calculated Risk Management Unit, market risk and liquidity approach recommended by internationally accepted
Standards Basel II standard using the regulatory standard ADB introduced in management was implanted and the Basel Committee for banking standards and is
Applied approach according to the February 2004 a risk- Management System for the Banking Supervision. supervised by the Dutch
German Solvency Regulation based capital framework Continuity of Business initiated. In Central Bank
that was designed to addition, a credit risk
In addition, the capital base measure the risks ADB management system is being
was strengthened to secure takes in its lending contracted. Improvements in data
its promotional capacities for activities, and to assess bases, methodologies and policies
the long term and in the risks relative to the for risk management and internal
preparation for stricter amount of capital that controls carried out.
capital requirements in ADB holds.
accordance with the new Operational Risk Management
Basel III requirements. This seeks to identify, assess, treat, and
includes the addition of EUR control the operating risks that
0.6 billion to the fund for the BNDES is exposed to, aiming at
general banking risks. minimizing losses resulting from
failure, deficiency or
inappropriateness of internal
processes, personnel and systems
or external events.
Environmental E&S risk categorization E&S risk categorization in New conceptual E&S risk categorization
and Social Risk in place, place, framework for in place,
Management social protection social
risk management, (SRM)
Total size of the CDB had signed special EUR 419.6 billion (2010) Net loans USD 46.3 billion R 362 billion (2011) USD 3,424 billion (2011) EUR 5.2 billion (2011)
lending loan contracts of USD (Balance Sheet as of 31
portfolio 589million, March 2011)
cumulatively extended
USD 220 million,
committed USD 783
million to various
projects. (2011)

69
Corporate Totalsize: USD 17.5 The KfW Group provided a 8,8% (of outstanding The biggest highlight in 2011 was Not available
lending billion total commitment volume of effective loans) Water and the Banks transfers to large
into the (2007) EUR 25.3 billion to finance other municipal infrastructure projects. The One of the investment
environmental environmental and climate Infrastructure and infrastructure sector led objectives is aimed at
protection protection measures in Services; 5,7% agri. and disbursements, at R$ 56.1 billion efficiency enhancement of
projects Germany and abroad in 2010. natural resources; or 40% of total disbursements. natural resources utilization
Thus, 31 % of the total and environmental
commitment volume of KfW's Environmental operations: protection.
core business was dedicated Proplastic Socio Environmental
to financing environmental investments, Support for
and climate protection Investments in the Environment,
projects. Support to Energy Efficiency
(PROESCO), BNDES Forestry
Compensation (R$2.5 million
project for reforestation of the
Atlantic Rain Forest)

Availability of Available since 2007 Available since 2006 Available since 2007, Availability of Social Report Not available Available since
the Environmental report released once every two (2005 & 2006)
Sustainability released once every three years Availability of Environmental There is a section on social
Report years, published since 2000 Policy and environmental
responsibility in the Annual
Report
The activities which are not
eligible for the banks
financing are thoroughly-
outlined
Bank loans: key Making full use of the KfW Entwicklungsbank is Climate change, emission Environmental projects, power The banks priority sectors: - Financial Institutions,
environmental market forces in the taking an active role in reduction, infrastructure efficiency, reforestation, forest infrastructure development - Energy,
priority areas allocation of resources, achieving EU objectives in and rural developpement handling, forest preservation and projects (transport, energy,); - Housing,
innovating low-carbon development policy and projects, clean energy, efforts to combat deforestation. energy efficiency - Agribusiness,
financial services, climate protection, such as energy efficiency, low- 2 important initiatives, aimed at programmes, agroindustrial - Food&Water
advocating the design and carbon, sustainable preserving the two biomes on the complex Exclusion Criteria (e.g.
environmental implementation of common transport, sustainable planet, the Amazon Fund and the bank does not finance:
protection, energy European financing fisheries in poverty BNDES Rain Forest Initiative. - wildlife or wildlife
saving and emissions platforms. In 2011 new reduction strategies. products under CITES
reduction, and commitments are expected of In its Corporate Plan 2009/2014, ( Convention on
promoting the slightly over EUR 4.0 billion, the BNDES elected innovation, International Trade in
harmonious similar to the previous year. local and regional Endangered Species) or
development between development and socio- Wild Fauna and Flora
people and the environmental development as products,
environment the most important aspects - drift net fishing in the
of economic promotion. marine environment
using nets in excess of
2.5 km in length,

70
- significant conversion
or degradation of critical
habitat like Primary
Forest or forests of High
Conservation Value)

Adopted ESG Member of the United Signatory of the Equator BNDES Clean Development Fund, Not available - UN Principles for
initiatives Nations Global Principles & UN PRI, plus Asia Pacific Carbon Fund, Amazon Fund, BNDES Rain Forest Responsible Investment
Compact internal Sustainability ADB) is co-hosting Initiative, Investments and (UNPRI)
since 2006. In 2010, Guidelines EIA as part of the Asia regional Participations Fund - Forestry FIP - UN Environment
CDB formulated the loan appraisal for individual rollout of the Programme Finance
Guiding Opinions on projects KfW Carbon Fund. A International Year of Initiative (UNEP FI)
Financial revised sustainability Sustainable Energy - Equator Principles
Support for Energy guideline goes into effect for All today, part of
Conservation and from 1 January 2011 for the UNs global
Emission reduction and Financial Cooperation with initiative for
other instruments, and developing countries, in achieving universal
made an which the environmental and access to modern
aggregate loan of 232 social impact assessment is energy by 2030.
billion yuan for energy combined with a climate
saving and emission- change assessment. KfW
reduction, bonds
overshooting the
years 140-billion-yuan
target.

Source: WWF analysis based on the reports on the banks corporate websites as of February 2012.

Table 2b. Comparative Analysis of Internal Environmental and Social Responsibility Mechanisms of Selected FIs
71
Feature/FI Rabobank Royal Bank of Scotland Royal Bank of Canada HSBC Standard Bank (SBG) MDM Bank

Scope Food and Agriculture Universal bank (Retail and The U.S. retail banking Universal bank Retail banking, corporate
financing and Commercial Banking, subsidiary ?? (Commercial Banking; and investment banking,
sustainability-oriented Asset Finance and Capital Global Banking and private banking
banking Markets operations) Markets (investment
banking); Personal
Financial Services (retail
banking and consumer
finance); and Global
Private Banking)
Financial Risk Has implemented the new http://www.rbs.co.uk/cor The RBC Finance BV Risk exposure is Emerging global practices In 2010, the Banks Board
Management Basel II framework, which porate/insight/g4/perspe Group and Royal Bank of calculated based on the are considered by the of Directors adopted a
came into force in 2008. ctives/operating- Canada Europe Limited definitions provided Group Risk Compliance general policy on risk
risk/operating-risk- (RBCEL) implemented the under the Basel II Committee in developing management, including
technology.ashx Basel II Standardised framework. SBGs compliance general goals in the risk
Approach for calculating framework, which management sphere and
credit and market risk and embodies the principles of basic tools to realize these
the Basic Indicator effective compliance risk goals.
Approach for operational management that satisfy
risk on 1st January 2008. the Basel Committee on
Banking Supervision and
South African legislative
requirements.
Environmental Has ESMS in place and http://gbm.rbs.com/conte ESG risk policies and Signatory to the Equator Signatory to the Equator The general principles and
and Social Risk helps its business clients nt/gbmsites/gbm/en/abo processes help to identify Principles, is developing Principles. The risks falls procedures for
Management to assess environmental ut- and manage risks more detailed internal within the Group managing these types of
and social opportunities us/sustainability/environ associated with a clients guidelines for extending Sustainability risks are governed
and risks. mental-risk environmental and social this framework across Management Programme, by the Banks Policy of
issues, minimizing banks export credit loans. which is mandated to Ecological Risk
Rabobank formulated exposure to credit, Corporate Environmental create a consistent Management, which was
targets, established key reputational and legal Affairs (CEA) approach to adopted in 2010.
performance indicators risk. By incorporating ESG environmental and social Verification of clients
and assigned new focus issues in the credit risk management by compliance with actual
areas in its CSR policy. assessment process, bank facilitating policy, systems, Russian legislation
also promotes good performance standards, and (for large-scale
environmental and social monitoring and assurance investment projects over
standards in all types of within the groups 30 million USD) and with
business. operations and requirements of EBRD,
In 2010 launched new responsible financing. IFC, DEG.
Environmental and Social
Risk Management Policy
for Capital Markets
Total size of the Private sector loan 137,4 billion (Q3 2011) Est. 236,5 billion (2010) USD 73,5 billion (2010) Total Loans and

72
lending portfolio EUR 440, 9 Advances to Customers
portfolio billion (30.06.2011) RUB 233,9 million
Corporate EUR 2,855 billion Wind Power Electricity Reduce of the In 2010 social investment Starting in 2007, SBG Specialized product MDM
lending Generation 30.7% (from environmental Footprint was $18.9 million for committed USD 2,5 Energy,
into the Energy, sustainable all Energy related (energy, environmental North America, million over a period of 5
environmental procurement, paper, waste financing), Biofuels 5.6%, procurement, paper use, In 2007 HSBC announced years to the Investment
protection and water management, Solar Thermal and waste management) a five-year, $100 million Climate Facility for Africa.
projects sustainable construction Photovoltaics 4.5% , USD program to help reduce Corporate social
and mobility 197.5 million in the impacts of climate investment spend USD
renewable energy in 2006. change on the world's 18,1 million
rivers, forests and cities.
Availability of Avaliable since 2009 Available since 2009, the Reports: Corporate The Annual Sustainability The Annual Sustainability Corporate Social
the Corporate Responsibility Responsibility Report: Report 2010 is available Report 2010 is available Responsibility Report
Sustainability Report since 2005 Environment Highlights, 2008 is available
Report 2010 Environmental
Footprint,
CDPt, Progress on 2010
Commitments.
Blueprint Report Card
Bank loans: key Innovative solutions for Transition to a low carbon Climate change and Low carbon energy Climate change, Based on
environmental environmental issues, economy, Renewable energy, biodiversity, water, production, energy Infrastructure, low carbon recommendations from
priority areas climate mortgage, energy, green electricity Green Products and efficiency, climate change, economy, sustainable the IFC and
sustainable housing and a Services climate fincance, energy EBRD, MDM Bank defined
credit card that links environmental education, a list of activities that it
purchases to offsetting biodivesity will not credit activities
CO2 emissions harmful to the
environment and other
Subsidiaries: Bank Sarasin activities banned by
- Sustainable Swiss Private national and/or
Banking, Sustainable international legislation.
Asset Management Group The bank credits activities,
(SAM), Robeco which have ecological and
Responsible Investing, social risks in limited
Rabo global Markets Pro volumes not more than
3.5% of the Banks credit
portfolio.
Energy efficiency

73
Adopted ESG Policy and targets for Adheres to the AA1000 Enterprise-wide ESRM Carbon Disclosure Project, Signatory to the Equator Responsible financing,
initiatives achieving sustainable Account Ability Principles Policy Equator Principles, Principles, UN PRI, Carbon MDM Energy
operations are fully in line Standard (AA1000 APS), Climate Principles, financing, African Carbon
with the goals formulated in compiling the Signatory to the Equator Extractive Industries Asset Development
by the Dutch government Sustainability Report Principles, Socially Transparency Initiave, UN facility, UN Environment
to emit 30% fewer considered the Global Responsible Global Compact, UNEP Programme Finance
greenhouse gases in 2020, Reporting Initiative (GRI) Investments, Finance Initiative, Initiative, Environmental
conserve 2% energy G3.1 guidelines and promotion of management system,
annually and generate sought to cover the environmental Green Building Council of
20% of all energy from principles of the UN sustainability, South Africa.
renewable sources in Global Compact, footprint reduction
2020. Carbon Disclosure Project

Source:WWF analysis based on the reports on the banks corporate websites as of February 2012.

74
Part 2 GREEN INVESTMENT FUNDS

Best practices of establishing and operating green investment funds

Another niche for the development of sustainable finance is green investment funds or
Socially Responsible Investment (SRI) funds. SRI traditionally combines investors' financial
objectives with their concerns about environmental, social and governance (ESG) issues. SRI is an
evolving movement, whose most recent development is based on a growing awareness by the
population, investors, companies and governments of the impact of ESG risks on long-term issues
ranging from sustainable development to long-term corporate performance.

In this part of the Guide questions of integration of ESG issues into asset management will be
faced. This field is absolutely new for Russia and some investors might say: Who cares about
ESG issues as long as you are able to make a good return on your equities portfolio? Not all
companies will have a giant oil spill in the Mexican Gulf. These pragmatic views of the world
suggest there is little room for thinking about or acting on broader ESG issues as a company,
let alone an investor. However, these days smart investors realise that ESG issues can be
material. Understanding how companies are managing these issues provides additional
insight with which to make better investment decisions.

While many investors are well-versed in traditional financial analysis, ESG issues are
sometimes difficult to analyse. Investors may recognise the importance of the issue too late,
when the share price has already reacted to a particular event. To really see the potential
problems, investors need to call on those investment analysts who can marry a strong
understanding of ESG issues with an equally strong investment background. Being so called
bilingual is the key to answering the so what? many investors ask when confronted by ESG
issues.

There are two main approaches to responsible investing: integration of ESG criteria (like
negative screening) into mainstream business guidelines and creating purely SRI funds (like
positive screening).

ESG integration
Integration is the explicit inclusion by asset managers of ESG risk factors into traditional financial analysis. It is
the number one strategy in the context of mainstreaming SRI and represents 2.8 trillion of assets under
management at the end of 2009.55 The Netherlands and Belgium have seen this practice increase rapidly, often
driven by a few large institutional investors. The fastest growth in integration comes from the French market,
where the figure has boomed since 2008, mostly due to a handful of large investors.
ESG integration is a process of identifying a companys hidden earnings risks, making a holistic assessment of
how a company is managing the risks, and considering these when forming your final investment decision. Key to
that process is to understand that the majority of a companys value mostly relates to non-financial drivers.
Companies face a broad range of different ESG issues, which can be industry or even company specific. ESG
integration into investment decisions is more than ethics and carbon emissions it is about assessing a
companys hidden value drivers and risks.

Negative screening

Negative screening is also sometimes called exclusion. It consists of prohibiting investment in certain companies,
economic sectors, or even countries for ESG related reasons. A tool in the Box lists common exclusion screens.

Where Negative Screening comes from

55
Eurosifs 2010 European SRI Study, http://www.eurosif.org/research/eurosif-sri-study/2010

75
In the 18th Century, the Quakers in the United Kingdom refrained from investing in industries they were morally
opposed such as tobacco, alcohol, gambling and the slave trade. This was the first negative ethical screening of
investments, later to become known as Social Responsible Investment (SRI). It continued into the 1920s with the
Methodist Church of North America screening out negative activities, or sin stocks from their investment portfolios. In
the 1960s and 70s the conviction that investment funds could be used to achieve social change give rise to the public
demand for ethical investment vehicles such as the Pax World Fund. Negative screening approach was again in the
spotlight when CalPers, California Public Employee's Retirement System, actively campaigned and barred investment in
companies with South African activities in the early 1980's to protest against apartheid. Friends Provident (UK) was the
first financial institution to launch an SRI fund. With its help, the Ethical Investment Research Service (EIRIS) was
established to provide critical research and information on stock listed companies social, environmental and ethical
performance. In the United States, Amy Domini developed her ethical screening advice services and the first ethical
stock market index. 4

Box Tool: Common Negative Screens used by Institutional Investors and Pension Funds

Source: Observatoire de la Finance, Responsible Investment in Europe, online executive summary

Inspired by a civilian wanting to invest in a mutual fund that did not invest in war-related industries, Pax
World Fund was established in 1971 creating the first broadly diversified, publicly available mutual fund to
use social as well as financial criteria in its investment decisions. 56 Nowadays, Pax World seeks to reduce risk and
deliver competitive long-term investment performance to its shareholders through a process called Sustainable
Investing the full integration of ESG fctors into investment analysis and decision-making.

Targeted for the portfolio companies are:


Leaders in their industries
Better-managed, more forward-thinking
Embracing high standards and mitigating risk
Focused on the long term

Pax Worlds investment process combines insights derived from macroeconomic themes, fundamental security
analysis and Environmental, Social and Governance (ESG), or sustainability, analysis. By evaluating a broader set
of data than that associated with traditional financial analysis, Pax World seeks to identify sources of long-term
value creation for the benefit of its shareholders.

56
www.paxworld.com

76
Top Down Analysis
Begin with a global macro view to identify investment trends and themes the Investment Management Team
believes represent the most compelling growth opportunities.
Financial Analysis
Identify companies determined to offer above-average relative growth rates, sound business models, strong
competitive positioning and attractive valuations.

ESG Analysis
Evaluate companies Environmental, Social and Governance (ESG) performance in order to help assess their
long-term growth potential and risk profile.

Portfolio Construction and Management


Within the parameters of Funds benchmark, build, monitor and periodically adjust a portfolio of securities
based on investment themes and companies risk and return characteristics.

Source: http://www.paxworld.com/investment-approach/our-process

Positive Screening
At the beginning of the 1990s, a first attempt was made in The Netherlands to develop a positive ethical
screening to be used alongside the original negative ones. This positive screening involves a best-in-class method,
where company performances were compared with those of competitors. This type of screening has since further
been developed and several ethical screening organisations have been established. Standards of screening have
been developed and screening services are now being widely provided to banks, insurance companies, asset
managers, private bankers, institutions and high net-worth individuals. Most stock-listed companies have had
some form of ethical screening of their social and ecological behaviour so that ethical funds or asset managers
can constitute diversified portfolios primarily based on combined negative and positive ethical criteria. Some of
these funds, such as those of the Triodos Bank Group are also actively involved in (proxy) voting at shareholder
meetings. The ethical investment fund market is developing quickly and many mainstream banks are offering
such products.
Today there are more than 600 ethical investment funds worldwide and their number is constantly increasing.
However the ethical quality of these products differs significantly in terms of quantity and content of positive and
negative criteria applied. As a quality label the generic denomination ethical fund, indicating that some sort of
ethical screening has been applied, is not appropriate.

Box Tool: Environmental Issues and criteria used in positive screening


For trustees considering positive screening, this table indicates issues and criteria used in rating companies.
Note that this approach is not One-size-fits-all, as companies must be rated according to the key issues within their
sector.

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But what real sustainable investing is happening in practice?
Analyzing the current state of the art in SRI world, one may notice that sometimes it might have a very narrow
perspective. Experts claim57 that in practice sustainable investing boils down to just two areas: clean-tech and
carbon finance and trading. Not that these arent important just that they dont represent what sustainable
investing should be about. As Dr. Kiernan58 highlights environmental risks and opportunities are just as central
to the profitability and even survival of oil and gas majors (which would rarely if ever be found in a clean-tech
portfolio) as they are to a pure-play clean-tech company. The reasonable question is why does an institutional
investor feel comfortable investing millions of dollars in a clean-tech fund and no apparent interest in
systematically assessing the climate risks to which the other 99%-plus of their investments are simultaneously
exposed? Therefore, it is very important to apply systematic, institutional-quality research for integrating
environmental, social and governance considerations into their portfolio management decisions.

Pure SRI funds


Pure SRI mutual funds invest not only in companies that dont provide negative environmental and social impact
(negative screening), but rather pick up securities of companies with strongly pronounced positive ESG impact.
They are a kind of an answer to so called compromise SRI funds in a way that such funds are engaged in
shareholder activism and use proxy voting in order to change the environmental behaviour of the companies
they invest in, in case of occurrence of some negative environmental event.

The role of investor activism


The exercise of ownership rights is achieved through the filing of shareholder resolutions. As long as they meet
requirements overseen by the securities and exchange regulatory authorities, activists can bring up contentious
public policy issues with other investors and corporate management. These resolutions are discussed and voted
upon during annual meetings.
When activist shareholders first started using the proxy process, they got little support from mainstream
investors, often earning only a few percentage points of support. This has changed in the last few years, with
votes reaching unprecedented levels as more investors begin to look more carefully at corporate activity and
demand greater levels of accountability.
In 2010 investors in the US produced the highest level of votes ever recorded on resolutions on corporate social
responsibility issues. Between January and July 2010 a record 101 climate and energy-related shareholder
resolutions were filed with 88 companies in the US and Canada. President of Ceres, an investor and
environmental coalition head states that the BP spill is only the latest reminder of why investors are increasing
their attention to climate and other environmental risks across their portfolios.

Green Century Funds

57
Matthew Kiernan, Investing in a Sustainable World; Environmental Finance, September 2010

58
Dr.KiernanisfounderandChiefExecutiveofInflectionPointCapitalManagement.In1992,he hadfoundedInnovestStrategicValueAdvisors,
the#1ratedfirmintheworldinsustainableinvestmentresearch.Hewasinstrumentalinboththe designandimplementationof a number of
innovative,sustainabilityenhancedinvestmentproducts,likeemergingmarketssustainabilityfund,climateriskadjustedbondindex,greenlisted
REIT index. Clients of Innovest were leading international institutional investors, including CalPERS, CalSTRS, APG, and the Norwegian
GovernmentPensionFund.

78
Green Century Funds is a US based family of environmentally responsible mutual funds. Many mainstream Wall Street
investment firms solely focus on a profitable bottom line for themselves. But independent, triple bottom line firms like
Green Century focus on what responsible investors care about: building a sustainable economy while seeking
competitive financial returns.
Green Century provides a new option for investors, empowering them to use the power of investment money to
encourage environmentally responsible corporate behavior. Green Century recognizes that business as usual will not
create the green future.

Green Mutual Funds


Founded by a partnership of non-profit environmental advocacy organizations, Green Century provides investors who
care about a clean, healthy planet the opportunity to use the clout of their investment dollars to encourage
environmentally responsible corporate behavior. At Green Century, green investing means investing in a diverse array
of companies that are helping to build a cleaner, greener future for us all from small, innovative wind power
producers to large, established firms using cleaner technologies to run their businesses and bring their products to
market.
As a shareholder in the Green Century Funds, you can invest in a broad mix of companies selected for environmental,
social, and financial reasons. Without necessarily sacrificing financial performance, you can be confident that your
investment will contribute to a more sustainable economy and help foster a better world for us all.

Shareholder Advocacy
Environmentally responsible investing is about more than just avoiding unfriendly companies. Green Century Capital
Management (Green Century) is committed to shareholder advocacy as a critical component of environmentally
responsible investing, and the promotion of corporate environmental responsibility through active dialogue with
companies has been a primary mission of Green Century since its inception in 1991.
Green Century helps foster a sustainable economy by directly encouraging companies to lessen their environmental
impacts. From strategic dialogue with management and top executives, to raising issues with the public and other
shareholders through the filing of shareholder resolutions, to responsible proxy voting at the companies in which the
Green Century Funds hold shares, Green Century employs numerous strategies to encourage improvements in
corporate behavior. Green Century works in coalition with other socially responsible investors and environmental non-
profit partners to actively encourage companies to adopt cleaner and healthier practices and products.
Green Century's engagement with companies, including with some that do not meet the environmental screens of its
Funds and are not in either of the Funds portfolios, helps to foster a sustainable economy in which good businesses
can succeed. As Green Century works with companies to improve their environmental performance, it also increases
the universe of companies in which the Green Century Funds might invest.
Since its founding, Green Century has engaged over one hundred companies through shareholder advocacy, helping
them to improve their environmental performance, decrease risk, and capture opportunities. One of the advocacy
sucesses was the protection of the Arctic national Wildlife Refuge.

Protecting the Arctic National Wildlife Refuge


For over a decade Green Century has played a vocal role in protecting pristine Arctic wilderness areas from oil drilling
interests. A persistent thorn in the side of major oil companies, Green Century filed its first of 10 shareholder
resolutions on this issue in 1998. In 2001 its sister organization, the U.S. Public Interest Research Group, published the
report False Profits: The Business Case Against Drilling in the Arctic National Wildlife Refuge further debunking the
rationale behind investing in an Arctic-focused strategy to increase oil production. From 2002 to 2004, Chevron, BP
and ConocoPhillips withdrew their support from Arctic Power, an industry lobbying group that promoted drilling in the
Refuge, leaving ExxonMobil the only oil company providing financial support to Arctic Powers efforts. In 2009, Green
Century filed a resolution on this issue at ExxonMobil but withdrew it after the oil giant admitted it had finally pulled
out of Arctic Power. To this day, no oil drilling has been allowed in the Refuge .59

Box .

59
http://www.greencentury.com/shareholder/Green_Century_Advocacy_Achievements#ANWR

79
Strengthening the integration of ESG in the investment value chain
Building consideration of ESG issues into the investment value chain has to happen at a number of levels with a
variety of actors:

Firstly it requires the investor (asset owner) to integrate these issues into their investment policy and
guidelines (such as the ethical guidelines developed by the Norwegian Government Pension Fund
Global) and request regular monitoring and reporting from investment managers on how they are
addressing fund exposure to ESG risk issues.

Secondly it requires investment advisors, appointed by an asset owner to advise on investment strategy and
the selection of investment managers, to proactively raise ESG issues.

Thirdly it requires investment managers appointed by an investor to manage the funds to:
o include ESG considerations in investment analysis; and
o proactively engage companies over their environmental, social and governance performance, for
example, through resolutions and proxy voting during annual general meetings.

Socially Responsible Investments Growing Trend

Europe Growth in SRI

MSCI Morgan Stanley Capital International


Broad SRI focuses on those listed companies that try to diminish their footprint
Core SRI focuses on those listed companies that have made it their mission to leave no environmental footprint at
all. The aim is to create a better world for future generations.

80
Source: Eurosif 2008, Elroy Dimson, Judge Business School 2010

As a result of recent reform, it is now mandatory for asset managers in France to publish ESG
policy. This must be done before July 31, 2012, on respective websites and in 2013 annual
reports. The percentage of SRI assets in global AUM will also have to be published. Non-SRI
actors will have to mention that they dont take into account ESG issues in their investment
policy.

Environmental and social criteria already play an important role in investment


decisions
The national online consumer survey exploring public attitudes to socially responsible investment (SRI) was
conducted in France.60 The results reveal that 60% of French retail investors attach importance to environmental,
social and ethical criteria in their savings decision, which is an evidence of quite high demand for SRI. This survey
was implemented in the framework of the second national SRI week in France launched by the French Minister of
Ecology, Sustainable Development, Transport and Housings in October 2011.

Key survey findings

Growing importance of environmental & social issues


60% of the respondents say they attach great importance (14%) or some importance (46%) to environmental,
social and ethical issues in their investment decisions
28% little importance and 12% not at all
In terms of profile, those that attach the most importance to these issues are in the 50-64 age category (64%).

60
Survey was organised by Ipsos MORI on behalf of non-profit research organisation EIRIS

81
Source: EIRIS http://www.eiris.org/media.html#ASIA2011

Motivation factors for investors to invest in SRI funds

According to the results of the survey, to be coherent with their other consumer choices and to give meaning to
their savings are the strongest incentives for investors to invest in SRI funds.

Barriers

75% of respondents said a lack of information on SRI prevents them from investing ethically; 66% said difficulty
in understanding how investing in an SRI fund can influence corporate behavior was a potential barrier, whilst
57% said a lack of transparency on how SRI might make a positive difference was also a potential barrier.

Preferences in SRI approaches

82
Environmental and Social Toolkit for Investment Funds
Like many development finance institutions, FMO requests its financial-sector clients to comply with various
environmental and social (E&S) requirements. Experience has shown that a significant discrepancy exists
between the high-level nature of these requirements and their implementation within the clients organizations.
One of the main hurdles is the design and implementation of the so-called environmental and social management
system (ESMS). It is FMOs experience that a well-functioning ESMS can help an investment fund to enhance the
business performance of its investments and that it helps in finding better deal exit possibilities. This because
E&S regulations tend to become more strict over time and many internationally operating businesses are
becoming more demanding with respect to the E&S performance of their suppliers and take-over candidates. To
assist its clients with this the implementation of an ESMS, FMO Private Equity has commissioned Triple Value
Strategy Consulting to design an E&S toolkit aimed specifically at investment funds. The E&S tool is based on the
IFC Performance Standards. IFC uses the Performance Standards to manage social and environmental risks and
impacts and to enhance development opportunities in its private sector financing in its member countries
eligible for financing.

WWF-Austria and ERSTE SparInvest Green Equity Funds


WWF Austria and ERSTE SparInvest bank created 2 green finance products focusing on green technology
and climate change prevention (e.g. renewable energy, energy efficiency, recycling, water purification,
alternative mobility, etc.).
An impressive track record: the funds have quadruplicated their volume in the past 3 years despite
financial crisis. WWF-Erste cooperation proves that environmental issues and profit do not contradict.
The cooperation won prizes in Austria and abroad: TRIGOS 2007 (highest CSR commendation in
Austria), Austrian Fund Prize 2008 for Global Environmental Equity, the Funds Europe Awards 2008 for
Socially Responsible Investment of the Year (in London).

WWF-ERSTE Green Equity Funds Performance before & after Financial Crisis

83
The following approach is used to manage the portfolios of both WWF-Erste funds:

ESPA WWF Stock Umwelt (Austria)


WWF Austria and ERSTE Sparinvest bank established a fund that invests in green technologies

ESPA WWF
ESPA WWF Stock
Stock Climate
Climate Change
Change
(Austria)

WWF Austria and ERSTE Sparinvest bank Partnership created a Fund of Investments in Climate Change Reduction

Renewable Energy 32%


Water treatment 27%
Energy efficiency 14%
Recycling / waste recycling 12%
other environmental issues 8%
Health and Development 7%

Renewable energy 40%

(wind, solar, geothermal, etc.)

Alternat. Transport systems 25%


84
Energy efficiency 15%
Filter systems 7%

Other 5%

Living Planet Fund (Switzerland)

The Living Plant Fund (LPF) was launched in 2003 by the Living Planet Fund Management Company, a subsidiary
of WWF International. Fund offers private and institutional investors products that are strict in terms of financial
performance and standards of corporate governance and at the same time meeting long-term environmental and
social goals.

LPF takes account of financial transparency, employment practices, workplace health and safety and the
environmental impact of companies (and, where appropriate, their supply chains). LPF doesnt not invest in
controversial business sectors (tobacco, alcohol and gambling) and avoids sectors where there are potential
conflicts between corporate interest and societal and environmental concerns (such as nuclear and fossil fuel or
genetic engineering).

The Living Planet Fund combines unique environmental and financial expertise to offer individuals and
institutions a range of quality financial products that align with long-term conservation and sustainability goals.
Through our investment funds we direct investment into companies that we consider well-managed and with
high standards of corporate governance and social responsibility. We support companies whose products and
services are relevant to conservation and the sustainable use of natural resources. This reflects financial
judgement as well as the belief that global demand for their products and services is likely to increase and
investments in shares of these companies should offer investors better than average returns.

The LPF is legally established as an open-ended investment fund under Luxembourg law under the legal form of a
collective investment fund in accordance with Part I of the Luxembourg law relating to undertakings for collective
investment enacted on December 20, 2002.

LIVING PLANET FUND GLOBAL ENVIRONMENT: Class B (Institutional investors)

Investment policy Allocation by themes

85
The Living Planet Fund Global Environment (Launched in March 2011) is
a Luxembourg registered fund investing in global equities with a focus on
environmental technologies. The fund has the European passport and is
compliant with European Union UCITs regulations.
This thematic fund offers retail and institutional investors the opportunity
to participate in investment themes with strong growth potential.
The fund has a long-term investment strategy and the investment process
includes the following three steps:
1. Definition of the environmental technology universe.
2. Assessment of companies against stringent financial criteria.
3. Portfolio construction based on extra financial criteria.
Through this method, a portfolio is constructed, constituting 40 to 60
companies that have a proactive commitment to environmental and social
issues and which are leaders in their industry sector.
The investment themes covered are: water, renewable energies,
environmental consulting, energy efficiency, sustainable mobility,
ecological materials, environmental chemistry and biology, waste
management, natural resources management and support to
environmental technologies.

Allocation by geographical region Allocation by market capitalisation

Source: Living Planet Fund Fact Sheet, 29.02.2012

Management Company: Company S.A. Living Planet Fund Management


Investment advisor: Coninco Wealth Management S.A.
Fund administrator: Alceda Fund Management S.A.
Custodian Bank: HSBC Trinkaus & Burkhardt (Intl.) SA
Auditors: PricewaterhouseCoopers
Fund type: Open ended
Domicile of Fund: Luxembourg
Inception date: 01.03.2011
Currency: EUR
Close of financial year: 31 December
Issue/redemption frequency: Daily
Income distribution: Income reinvested
All-in fee per annum: 1.40%
Benchmark: MSCI Daily TR NET World
Minimum investment: 100,000 EUR

86
BILKU 1 Carbon Efficient Bond Fonds
(Germany)

Investment Universe
Investment
philosophy of the fund
Bond Issuers
Fund is aimed at long-term investors with experience in
corporate bonds, knowing their risks and interested in
the diversification of their assets to the environmental Companies with the greatest Companies with minimum carbon Issuers of
protection. footprint
The fund invests globally, even in developing countries, widely efficiency improvement Environmental Bonds
in high investment grade bonds and also to a limited 50% below industry average
extent in promising high-yield title and non-rated 50% below industry average
bonds issued by companies with a good market
position.
Industry selection and weighting
The goal is a portfolio of bonds issued by companies whose consideration of CO2-efficiency
average emissions of harmful greenhouse gases are
at least 50% below the average of benchmark indices
(eg MSCI World).

Regional allocation

Developed countries / emerging


countries

Stock selection

(Rating, return, duration)

Fund Portfolio

Rabobank (Netherlands)

Rabobank of the Netherlands is one of the first signatories of the Natural Capital Declaration, a statement of
intent to work towards recognising the value of ecosystem services in financial products and services.
The declaration, due to be formally launched at the Rio+20 Earth Summit in June 2012, states that we, the
undersigned financial institutions, wish to acknowledge and re-affirm the importance of natural capital in
maintaining a sustainable global economy. It adds that the signatories wish to demonstrate leadership on the
issue by engaging with our customers, investee companies, suppliers, civil society and other stakeholders as
appropriate on a range of tasks. These include developing methodologies to:
Integrate natural capital criteria in the evaluation of bonds and equities;
Systematically consider and value natural capital in credit policies for specific sectors and commodities;
Systematically consider and value natural capital in core insurance activities.
It also stresses the need for regulation and incentives from governments, suggesting they could:
Require companies to disclose the nature of their dependence and impact on natural capital;
Use enforceable fiscal measures to discourage business from eroding natural capital and incentivise
companies that value and account for natural capital in their business model; and
Set an example by reporting on, and eventually accounting for, its use of natural capital in public
spending and procurement.

Sustainable lending is not just about assessing environmental and social risk in project finance and corporate
finance deals. It is also about finding ways of providing access to finance, on commercial and sustainable terms, to
those previously not serviced. One such group is small and medium sized producers, particularly in developing
countries. This is the missing middle, the producers whose capital requirements are too big for microfinance
institutions and too small for regional banks and typically affects agricultural producers and entrepreneurs. Two
examples of innovations to address this issue are the Rabo Sustainable Agriculture Guarantee Fund (SAGF) and
Root Capital, described in the box below. Both initiatives also encourage more environmentally responsible
agricultural practices too.

Box

87
In summary, the call to lenders is not just for robust due diligence and internal risk management systems. It is
also about lenders finding new products and services which support more sustainable business practices e.g.
loans for pollution abatement technologies, cleaner technology, energy efficiency improvements, green housing loans,
SME financing.

Triodos Bank (Netherlands)


The Dutch Triodos Bank played a pioneering role in banking, focused on sustainable development, since its
inception in 1980. The bank finances only those companies who make a constructive contribution to the social,
environmental and cultural problems. Organization and Fair Trade Association of microcredit in developing
countries are financed with the support of depositors and investors who wish to make a contribution to social
justice in a sustainable economy.
The bank has branches in Zeist (The Netherlands), Bristol (UK), Brussels (Belgium) and Spain. Beginning in 1990,
Triodos Bank is actively working in the field of fund management - as applied to own fund and in relation to the
funds of third parties. Such third parties, for example, are charitable organizations, donor organizations and
governments. Energy efficiency is a priority area of activity for Triodos Venture Capital Fund; this fund invests in
the equity of private companies during the expansion of their activities. Other priority sectors of the fund are
called organic food, renewable energy and environmental products and services.
Triodos has its own carbon market - "Climate clearinghouse Triodos. It is an independent system for the
registration and organization of trade CO2 credits associated with projects to reduce and absorb carbon dioxide
emissions. The relevant projects related to afforestation, renewable energy and energy efficiency. CO2 credits are
credited to the accounts of CO2, and trading is done by posting to these accounts, with a guarantee that the CO2
credits, which were used to compensate for the ongoing buyers of CO2 emissions can not be sold again.

Triodos Renewables Europe Fund (I-cap)


Investment fund in small to medium sized clean energy producers
Invests in the European growth market for sustainable energy
Actively contributes to climate protection
Average annual return of 4.8% during the past 3 years

Investments in sustainable energy


Triodos Renewables Europe Fund invests in unlisted clean energy producers across Europe:
Wind farms
Solar energy installations
Biomass installations

88
Diversification across different types of sustainable energy:

Norway Government Pension Fund Global

Norway US$ 560 Billion

Established: 1990 Origin: Oil


Transparency Rating: 10 Firm Investment Style: Index
(out of 10) Entity Structure: Fund

Summary: The Government Pension Fund is a sovereign wealth fund where the surplus wealth produced by
Norwegian petroleum income is held. The fund changed name in January 2006 from its previous name The
Petroleum Fund of Norway. It is the largest pension fund in Europe and the second largest in the world with a
value of NOK 2.09 billion, although it is not actually a pension fund as it derives its financial backing from oil
profits and not pensioners. It is among the most transparent of the Sovereign Wealth Funds (SWFs) in its
holdings & investments. The wealth fund is administered by Norges Bank Investment Management (NBIM), a
division of the Norwegian Central Bank.

Strategies and Objectives


The purpose of the Government Pension Fund-Global is to facilitate government savings necessary to meet the
rapid rise in public pension expenditures in the coming years, and to support a long-term management of
petroleum revenues. The fund invests a large portion of assets in fixed income and equities. Up to 5% has been
allocated to international real estate. They currently do not invest in private equity.

Corporate Governance
The Norwegian Ministry of Finance is responsible for the management of the Fund, and has delegated
responsibility for the operational management of the Funds international assets to NBIM.

Investments have to be in line with the Ethical Guidelines61 based on sector and company behavior. Council of
Ethics closely monitors the companies that the Fund invests in. If companies are operating in conflict with the
guidelines the Fund will consider withdrawal. The guidelines restrict investment where there is a risk that a
company is involved in activities that can contribute to violation of human rights, corruption, severe
environmental damage or other particularly serious violations of fundamental ethical norms and exclude
companies producing and selling weapons and tobacco.

Russian metallurgical and mining company Norilsk Nickel was in the portfolio of the Fund till 2009. In 2009 on
the advice of the Council on Ethics for the Government Pension Fund Global, the Norwegian Ministry of Finance
decided to exclude Norilsk Nickel. The Council on Ethics found it probable that Norilsks operations were
contributing to extensive environmental damage that will have effects far into the future, which definitely was
against the Ethical Guidelines for the Fund. The Council on Ethics has assessed Norilsk Nickels Polar Division on
the Taymyr Peninsula in Siberia and the pollution problems connected with operations there.
In its recommendation the Council on Ethics emphasised inter alia that many years of especially high emissions
of CO2 and heavy metals from Norilsks activities on the Taymyr Peninsula have inflicted extensive, lasting
damage on the environment (forest, vegetation and waters surrounding the operations) and health of local
people. The Council on Ethics has obtained information from a broad range of sources, including investigations
and statements regarding Norilsk Nickel by the Russian authorities, scientific studies under the auspices of the
UN and the World Bank, and articles in Russian and international scientific journals. The Council has amongst
others placed importance on reports prepared by the Russian environmental protection agency
61
http://www.regjeringen.no/en/sub/styrer-rad-utvalg/ethics_council/ethical-guidelines.html?id=425277

89
(Rosprirodnadzor), which is subordinate to the Ministry of Natural Resources, reports issued by the Russian
Academy of Sciences, and scientific and technical assessments made by the Arctic Monitoring Program (AMAP).

Even if a part of the pollution problem was due to plant operation before Norilsk entered the picture, the Council
didnt not regard the companys actions to reduce emissions and discharges of metals then and in the future as
being adequate. To the Councils knowledge, the companys ambitious targets for emissions reductions adopted
in 2003 have not been realised. It was clear to the Council on Ethics that the company has not done enough to
prevent or reduce environmental damage.

The Ministry endorsed the Councils assessments and has therefore decided, pursuant to the Funds ethical
guidelines, to remove Norilsk Nickel from the investment universe of the Government Pension Fund Global. On
31 August 2009, the Ministry of Finance instructed Norges Bank that Norilsk Nickel should be excluded from the
Government Pension Fund - Global and gave 31 October 2009 as the deadline for completion. The sale of all
shares in the company has now been completed.

For Norwegian Pension Fund reputation is not a mere sound. The Fund signalises about its discontent
from environmental performance of the companies in its portfolio by pulling investments out of Wal-
Mart, Boeing or Norilsk Nickel for what they say are ethical failings.

Recommendations for Green Investment Tools - Opportunities in Russia

This part pours the light on the emerging business opportunities in Russia of introducing green
financial products such as environmentally responsible and energy efficiency mutual funds investors
input in mitigation and reduction of negative environmental impact (for example, GHG emissions).

Pension assets represent the largest part in the structure of asset management in Russia. Aggregate share of non-state
pension funds reserves and savings as well as pension savings of the Pension Fund of Russia is equal to 38%. The
segment of close-end mutual funds has the second largest share in total volume (28%). Individual asset management
occupies 25%, while the smallest share is represented by retail mutual funds (7%) and management of insurance
companies reserves (2%). 62 Thus, modern asset management market in Russia is primarily market of close-end mutual
funds and pension money. Therefore the future of fiduciary industry largerly depends on the development of these
segments and the ability to overcome the constraints to development.

Figure Structure of Asset Management market in Russia, as of 31.12.2010

Source: Expert RA

International Financial Center in Moscow

62
Asset Management Market in Russia in 2010: In a search for strategy, Expert 2010

90
Russian government proclaimed that Moscow has to become an International Financial Center. There are a
number of obstacles for introducing this ambitious project, one of them being the current level of domestic asset
management not comparable to the best practices of the leading financial centers of the world like London, New
York or Hong Kong. The features of these centers are characterized by mature and comprehensive approach to
risks assessment and use of business opportunities. Risk/reward ratio of SRI funds is proven to be usually higher
than that of MSCI benchmarked funds and new opportunities in the form of energy efficiency, green technologies
bring sound investment return creating a win-win-win situation (benefiting investors, asset managers and
environment at once). Based on the analysis of the current state of asset management market in Russia and
positive international experience, it is therefore proposed to set up the first in its kind green investment fund in
Russia in the form of pension fund or mutual fund. The preliminary research shows that there is a growing
demand in Russia for such types of financial products from both investors side and investment companies side.

Sustainability Index in Russia

It is a common practice for fund managers in the world to benchmark the portfolios they manage against the
sustainability indices, global and national. For example, global Dow Jones Sustainability Index63 and FTSE
4Good Indexes64 as well as Brazilian Corporate Sustainability Index ISE 65 launched by Brazilian Stock
Exchange BM&FBOVESPA or brand-new Mexican sustainability index.
Worldwide trend among investors to seek for socially responsible, sustainable and profitable companies as objects for
their funds investment eventually came to Brazil. Brazilian investors realised that sustainable companies create value
to the shareholder in the long term, because they are better prepared to face economical, social and environmental
risks. This demand increased in time and the expectation is that it will increase and consolidate rapidly. Aware of this
movement, BM&FBOVESPA, together with many other institutions ABRAPP, ANBIMA, APIMEC, IBGC, IFC, Ethos
Institute and Brazilian Ministry of the Environment decided to join efforts to create a stock index to be a benchmark
for socially responsible investments, the Corporate Sustainability Index ISE.
In December 2011 Mexican Stock Exchange launched Sustainability Index, the third of its type in the world 66.
Together with the Dow Jones Sustainability and FTSE 4Good Indexes, the Mexican Sustainability Index will allow
member companies to realize an additional equity value as they implement sustainability practices across their
organizations. Also, through the Sustainability Index, member firms will support Mexico's commitment to reduce
the amount of greenhouse gas emissions by 30 percent in 2020. The Index is a new benchmark for Mexican asset
managers, which adds significant value to forming the portfolios of SRI funds.

In Russia domestic stock exchange RTS expressed the idea of creating Russian sustainability index, which is a
positive sign of developing market for sustainable investments in our country. After a process of merger with
MICEX, the new stock exchange may take the lead and pioneer the creation of national index for sustainable
companies.

Adoption of Global Voluntary Initiatives on Responsible Investments

Principles for Responsible Iinvestment (PRI) 67 an investor initiative in partnership with UNEP Finance Initiative
and UN Global Compact aiming to help investors integrate the consideration of environmental, social and governance
(ESG) issues into investment decision-making and ownership practices, and thereby improve long-term returns to
beneficiaries.

63
http://www.sustainability-index.com/

64
http://www.ftse.com/Indices/FTSE4Good_Index_Series/index.jsp

65
http://www.bmfbovespa.com.br/indices/ResumoIndice.aspx?Indice=ISE&Idioma=en-us

66
http://www.prnewswire.com/news-releases/mexican-stock-exchange-launches-its-sustainability-index-the-third-of-its-kind-in-the-
world-136018868.html

67
http://www.unpri.org/

91
How will implementing the Principles influence investment returns?
Implementing the Principles will lead to a more complete understanding of a range of material issues, and this should
ultimately result in increased returns and lower risk. There is increasing evidence that ESG issues can be material to
performance of portfolios, particularly over the long term. PRI signatories are also part of a network, with
opportunities to pool resources and influence, lowering the costs and increasing the effectiveness of research and
active ownership practices. The Initiative also supports investors in working together to address systemic problems
that, if remedied, may then lead to more stable, accountable and profitable market conditions overall.
What are the implications for fiduciary duty?
The Principles are based on the premise that ESG issues can affect investment performance and that the appropriate
consideration of these issues is part of delivering superior risk-adjusted returns and is therefore firmly within the
bounds of investors fiduciary duties. The Principles clearly state they are to be applied only in ways that are consistent
with those duties.
How do the Principles relate to Socially Responsible Investment (SRI)?
The Principles are designed to be compatible with the investment styles of large, and often diversified, institutional
investors that operate within a traditional fiduciary framework. The Principles apply across the whole investment
business and are not designed to be relevant only to SRI products. However, the Principles do point to a number of
approaches such as active ownership and the integration of ESG issues into investment analysis that SRI and many
corporate governance fund managers also practise.
How will the PRI help investors in their day-to-day work?
The PRI provides investors with a high-level framework for integrating ESG issues into investment decisions. And as
signatories develop policies and procedures for integration, the PRI secretariat will be on hand to help investors
implement them. Signatories will also have access to collaborative opportunities, guidance on addressing ESG
issues and networks that would be otherwise unavailable. The PRI will also stimulate better research on the
impacts of these issues on investments, which will lead to a broader range of products and services for
investors.
Who can sign?
There are three main categories of signatory. (Commitment is expected from the top-level leadership of the
organisation across the whole investment business.)
Asset owner: pension funds, government reserve funds, foundations, endowments, insurance and reinsurance
companies and depository organisations) This is the principal category of signatory.
Investment manager: Investment management companies that serve an institutional and/or retail market and manage
assets as a third-party provider.
Professional service partner: Organisations that offer products or services to asset owners and/or investment
managers.

Investor Network on Climate Risk (INCR) - Network of investors and credit institutions aimed at promoting an
understanding of loan risks and investment opportunities against the background of climate change. INCR

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partners with investors worldwide to advance the investment opportunities and reduce the material risks posed
by sustainability challenges such as global climate change and water scarcity. INCR has grown from 10
institutional investors managing $600 billion in 2003, to 100 members managing nearly $10 trillion in assets
today. Members include BlackRock, Deutsche Asset Management and TIAA-CREF, as well as public pension funds
in California, Florida and New York. INCR is coordinated by Ceres, a non-profit organization that leads a national
coalition of investors, environmental organizations and other public interest groups working with companies to
address sustainability challenges such as global climate change and water scarcity.

Strategy to set up first green investment fund in Russia

Main Approaches
1. Integration
- Bringing ESG (environmental, social, governance) factors into stock/bond selection

2. Engagement
- Voting and engaging with investee companies

3. Screening
- Negative, positive and best in class
Negative: gambling, tobacco, alcohol, weapons, animal testing, GMO, nuclear
Positive: renewables, water management, responsible forestry and agriculture, biodiversity
Best in class: best environmentally responsible companies in its sector

4. Mission-related investments
- Setting up a fund with particular focus: for example, energy efficiency and climate

WWF has expertise of setting up green mutual funds in partnership with asset management companies and is
interested to introduce such scheme of interaction in Russia. In case of unfolded interest from the asset
management company, joint work on filters for current asset allocation is expected (WWF on environmental side,
asset management company on a financial side).

Part 3 CENTRAL BANKS GREEN POLICIES

During the past years regulators in various countries, both with developed and emerging
economies, realised their role and importance of participation in shaping the sustainable
practices of domestic banking and introduced mechanisms of stimulation in the form of green
lending guidelines, setting up green funds schemes or green investment banks. Below are
described examples of best regulators measures, which might be used as a basis and adopted
to set up analogue regulative measures in Russia in order to provide incentives for smooth
path towards energy efficient, low-carbon economy and stable financial system.
Best practices of Central Banks green policy

Brazil
In 2009, the Brazilian banking association, Febraban, signed an agreement, the Green Protocol (Protocolo
Verde), with their Environment Ministry. Commitments made under the Protocol include the promotion of
green/ social financing, ESRM, internal environmental management, and awareness-raising. A set of indicators on
compliance with the Protocol were developed jointly by the banks, the government and NGOs, under the auspices
of the banking association. Banks have started to report on the basis of the indicators. 68

68
http://www.febraban.org.br/protocoloverde/

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Brazilian central bank has approached the commercial banks and UNEP FI to better understand
sustainability issues and their implications to banks. Also for this purpose UNEP FI has organized a training
workshop for the central bank employees.

Bangladesh
In January 2011, the Central Bank of Bangladesh took a proactive step in promoting the management of
environmental and social issues by the countrys financial sector, by issuing a set of Environmental Risk
Management Guidelines for Banks and Financial Institutions and a further set of Policy guidelines for Green
Banking in Bangladesh. These now make it obligatory for banks to address environmental and social issues in
their lending processes, develop internal frameworks, and introduce sector-specific policies, train staff and start
reporting on environmental and social issues.69

Bangladesh Bank (BB) has issued policy guidelines for green banking aiming to protect environmental
degradation and ensure sustainable banking practices. Guidelines were issued in line with global development
and response to the environmental degradation. The financial sector in Bangladesh should play an important role
as one of the key stakeholders," an executive director of the central bank told. He also termed green finance a part
of green banking that makes great contribution to the transition to resource-efficient and low-carbon industries
i.e. green industry and green economy in general.

Green banking policy needs to be covered through a timeframe which will be implemented in three phases
during the period between December 31, 2011 and December 31, 2013. Under the guidelines, the banks will
formulate and adopt broad environmental or green banking policy and strategy approved by their boards of
directors.

A high powered committee comprising directors from the board in case of scheduled Bangladeshi banks and a
high powered committee comprising regional chiefs of global offices and members from the top management
including CEOs in case of foreign banks should be responsible for reviewing the banks' environmental policies,
strategies and programmes. The banks will approve a considerable fund in their annual budget allocation for
green banking.

"Banks shall comply with the instructions stipulated in the detailed guidelines on environmental risk
management (ERM) in consideration of a part of the green banking policy," the guideline said, adding that the
banks will incorporate environmental and climate change risk as part of the existing credit risk methodology
prescribed to assess a prospective borrower.

The guidelines also said the banks should take steps to save energy from corporate business travel and encourage
employees to purchase energy- efficient cars (that consume less fuel) that can reduce gas and petroleum
consumption. Eco-friendly business activities and energy efficient industries will be given preference in financing
by banks. Environmental infrastructure such as renewable energy projects, clean water supply projects,
wastewater treatment plants, solid and hazardous waste disposal plants, biogas plants, bio-fertilizer plants
should be encouraged and financed by banks.

The banks should determine a set of achievable targets and strategies, and disclose these in their annual reports
and websites for green financing and in-house environment management as well.

China
In recent years, China's understanding of the close relationship between credit policies and environmental
protection has gradually increased. Since 1995, the State Council, the People's Bank of China, Ministry of
Environmental Protection (MEP), China Banking Regulatory Commission (CBRC) and China Banking Association,
have formulated relevant policies to facilitate the sharing of information on corporate environmental violations
between environmental protection authorities and banking financial institutions. Banks should make full use of
this information in order to reduce their credit and reputational risks. Besides, their credit policies should
encourage economic transformation, industrial optimization and upgrading, energy conservation and emission
reduction, and elimination of backward production capacity. In the absence of voluntary social and
environmental principles among Chinese banks, the state used credit policies to promote environmental
protection. Thanks to those policies, Chinese banks have made varying degrees of progress in formulating their
own environmental policies and adopting practical measures.
69
http://www.bangladesh-bank.org/aboutus/regulationguideline/guidelist.php

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In 2007, the Peoples Bank of China (Central Bank), the China Banking Regulatory Commission and the Ministry
of Environmental Protection of China jointly launched the Green Credit Policy. The Policy urges FIs to integrate
environmental issues in their activities, especially in the form of withdrawing lending from high-pollution and
high energy consumption industries while facilitating financial support to green industries. Chinese banks have
since then been actively seeking to understand environmental issues and their implications, with a view to
implementing this policy.

China Banking Regulatory Commission Green Credit Guidelines


In February 2012 China Banking Regulatory Commission (CBRC) issued the green credit guidelines, which
provide a leading regulatory framework in green lending. 70 This is a transformative development for China. The
guidelines, which apply to both national and overseas credit by Chinese financial institutions, acknowledge the
essential role of the banking sector in promoting a green and sustainable economy, as well as the risks presented
by activities that are detrimental to the environment and local communities.

These guidelines place green credit strategies at the highest level, as the banks Boards of Directors will have the
responsibility to promote green credit concepts, including resource efficiency, environmental protection and
sustainable development.

WWF welcomes the new requirements for effective environmental and social risk management, where banks
shall effectively identify, assess, monitor, control and mitigate environmental and social risks and disclose
information as required by laws and regulations and subject themselves to market and stakeholder supervision.

This provides a clear direction for green and responsible lending policies and represents a significant milestone
in transforming Chinas economic development and Chinas growing overseas investments. Based on the CBRC
guidelines, banks will publicly commit to adopt international best practices or standards for overseas projects.

China has become the second largest economy in the world and its growing influence needs to be matched by
responsibility of its investments. This means not only reducing lending to high polluting industries, but also
paying more attention to better management of natural resources and biodiversity protection. From this
perspective, it will be important in the future to quantify the impacts of credit policies in terms of reduced
pollutants and increased resource efficiency.

Netherlands
Green Investment Regulation (Tax incentives for green funds and green banks)

70
http://www.china.org.cn/business/2012-02/26/content_24734496.htm

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The Netherlands Green Funds Scheme (Regeling Groenprojecten) is a combination tax credit and tax exemption given
to investors and savers of all sizes who invest in green funds, as defined by the Ministries of the Environment,
Finance, and Agriculture. The program provides a secure investment for investors while decreasing the costs of finance
for eligible environmentally friendly projects. Since the programs implementation in 1995, 234,400 individuals have
invested more than 6.8 billion in green funds, financing more than 5,000 projects. 71

The Scheme represents a quite advanced, effective and innovative environmental legislation in Europe. This
scheme shows that within an appropriate regulatory framework banks can positively contribute to some
environmental progress. The Dutch government set up the scheme in 1995 as a global policy framework to
encourage environmental initiatives.72 Within the Green Funds Scheme, the term environment was considered in
the broadest sense and also included nature and energy. The early success of the scheme pushed Dutch
regulators to broaden its initial reach beyond environmental goals to serve social and cultural objectives as well.
Thus, the scheme can be viewed more in general as a comprehensive policy tool to promote a sustainable
development path for the Dutch society.
Beyond traditional tax incentives, the innovative character of the scheme lies in its capability to actively involve
the private financial sector in the achievement of national environmental objectives. Thanks to a well-designed
policy framework, financial institutions have an extra incentive to invest into specific and pre-determined
environmental projects, thus improving the allocation of capital towards sustainable investments.
As a result of this scheme, some Dutch banks have polished over time their expertise in financing green,
sustainable and technologically innovative projects and this in turn helps citizens to find the resources to fund
these initiatives.

The scheme is a clear regulatory framework based on three pillars:


A traditional tax incentive to encourage citizens to invest into green projects
The Green Institutions Scheme, which outlines the criteria that institutions need to satisfy in order to
participate to the scheme, i.e. the Green Banks and the Green Funds
The Green Project Scheme, which indicates the project categories eligible for green project status.

It aimed to support access to finance for environmentally worthwhile enterprises in accordance with national policy,
and to increase individual awareness of environmental issues. The targeted projects are on the cusp of viability.
Although they are low-profit, they have the potential to be self-sustaining and need assistance to cover high up-front
costs. Examples of such projects include sustainable housing, agriculture, and wind energy.
The collaborative and progressive format of this regulation is a result of the Dutch history of consensus decision-
making and action, as well as social and environmental awareness. The inclusion of social issues in investment
decisions in the Netherlands dates back to the mid-20th century, and as of the end of 2007, the socially responsible
investment industry in the Netherlands was one of the largest in the world, at 435 billion ($613 billion).73 Since its
introduction in 1995, the Green Funds Scheme has faced only one major challengethe adjustment of the tax system
in January 2001. That year, the Dutch government revised the calculation of income tax in such a way that it
threatened to reduce the tax advantage derived from investment in green funds. In response to strong parliamentary,
press, and public support for the program, the Parliament introduced new regulations designed to counteract the
negative effects of the new tax system and ensure the continued viability of the Green Funds Scheme.
Tax Incentives
Policy in Action: The Green Funds Scheme is a tax incentive instrument included into
Triodos Groenfonds the governments general plan of greening the tax system. This
Triodos Bank founded the first green fund in greening process consists of a shift away from labour-based taxes to
the Netherlands in 1990, and merged its
those that are based on the use of raw materials, emissions or
three existing green funds in 1998 to create
Triodos Groenfonds, which currently expenditures, whereby activities that have more environmental
manages 557.2 million in assets ($785 impact are taxed more heavily 6.
million). Under this scheme citizens that purchase shares in a green fund or
More than 70 percent of the funds portfolio deposit their savings in a green bank are exempted for 1.2% from
is invested in renewable energy, sustainable the flat tax rate on the amount of invested/saved capital. This
farming, and green building projects. Triodos exemption is worth up to a maximum of 55,145 (2009) per
has been a strong supporter of the Green person. Furthermore, investors in green institutions receive an
Funds Scheme.
71
Impact Investing: A framework for policy Design and Analysis, Case Study 7: Green Funds Scheme, Insight at Pacific Community ventures and The
Initiative for Responsible Investment at Harvard University, January 2011

72
European Commission, State Aid: Commission Approves Dutch Green Funds Scheme for Environmentally-Friendly Investment
Projects (press release, October 14, 2009)

73
Scholtens, Financial; Eurosif, 2008 European SRI Study (Paris 2008), www.eurosif.org/publications/sri_studies

96
additional 1.3% tax reduction, bringing the total tax advantage to 2.5%. This tax advantage compensate investors
for the lower rate of interest paid by the green banks, who can in turn offer loans to green projects at
competitive-below market rates to spur their development.

Green Banks
The Green Funds Scheme implements the accreditation of credit and investment institutions as green banks and
sets the criteria within which they must function. The green banks are supervised by the Netherlands Central
Bank and by the governments tax department.
The Green Funds Scheme does not stand alone, but is also closely involved with other schemes such as the
accelerated depreciation of environmental investments (VAMIL), the environmental investment allowance (MIA)
and the energy investment allowance (EIA).
Banks that participate in this program are called green intermediaries. The Ministry of Finance decides whether or not
an intermediary qualifies as green. In order to be accredited a green bank needs to invest at least 70% of all its
capital in green projects. By complying with this threshold, banks keep some flexibility in their investment
strategies, while reassuring depositors that the majority of their savings are effectively devoted to green projects.
Most Dutch banks have set up green departments and offer green funds. As of the end of 2008, there were eight
green intermediaries, representing essentially all of the Netherlands major banks: ABN AMRO Groenbank, ASN
Groenprojectenfonds, Fortis Groenbank, Fortis Groen Fonds, ING Groenbank, Nationaal Groenfonds, Rabo Groen Bank,
and Triodos Groenfonds. Major banks participate in the program because it is profitable, because customers demand
it, and because it makes for good public relations.
Citizens can save money with a green bank by purchasing negotiable bonds, such as green bonds, green
certificates or green banknotes. These have a fixed value (EUR 1,000 or EUR 5,000), a fixed term (often 3, 5 or 10
years), and a fixed interest rate. The total amount is paid back to the saver at the end of the agreed term.
Investors can also purchase shares in a green investment fund, either directly via the stock exchange or through
the banks. These funds pay dividends, depending on the results that they achieve in lending money to green-
certificate projects. Investors can always resell their shares, with the selling price being determined by standard
market forces.

Green Projects
The Green Project Scheme indicates which project categories are eligible for green project status. If a project complies
with specific criteria, including a high level of environmental benefit, a low level of economic output, the ability to be
economically self-sufficient, and a use of applied technology or methods not yet commonly used , then Applications
Department at the ministry of LNV (Agriculture, Nature and Food Quality) will issue a green certificate on behalf of the
State Secretary of VROM (Housing, Spatial Planning and the Environment). The green certificate is valid for up to 10
years and allows project managers to obtain green financing from one of the green banks or green funds.
The program aims for self-sustaining projects that are unlikely to find financing without the reduced loan rate. Projects
with long lifetimes and low operating costs, yet high upfront capital needs, have especially benefited from the
scheme.8 Required returns for the projects are set so that each investment has a positive return, but not so high that it
could be financed commercially. Loans from green funds may not account for the full amount of the project; on
average, they are only 75 percent of the total costs. Green projects are subject to the same economic examination by
banks as non-green projects.
The certification scheme is critical to guarantee transparent procedures and to ensure that the flow of investments is
effectively routed towards the projects with specific, pre determined, measurable and objective environmental
characteristics.

Financial results and Environmental Benefits


The Green Fund Scheme has been well received by Dutch savers and investors and is considered a success. At the
end of 2008, the scheme counted 234,000 savers/investors with an average investment of 24,868 Euro. Citizens
have contributed more than 6.8 billion since 1995 for the financing of 5,000 projects that conceivably would not have
existed otherwise.74
Since 1995, green banks have raised 6.849 billion euro to fund green projects, which translates in an
average sum of 450 million euro per year. Green Label Greenhouses and Renewable energy attracted the
highest number of projects representing 66.8% of the total capital committed from 1995 to 2008.

Between 1995 and 2003, the Green Funds Scheme was responsible for more than half of the growth of socially
responsible savings and investments in the country. The vast majority of projects funded under this program are
focused on organic agriculture and green greenhouses as well as renewable energy and nature conservation. These
projects have led to environmental improvements and reductions in carbon emissions. In the year 2008 the green

74
Ministry of Housing, Spatial Planning, and the Environment, Groen Beleggen, Annual Report 2008 (Amsterdam: 2008)

97
projects funded under the scheme resulted in 307,831 tons of avoided CO2 emissions and 5,996 hectares were
organically farmed, biodiversity is also improved.

Figure Environmental Benefits for the year 2011

Source: Suitable Profit: An Overview of the Environmental Benefits Generated by the Green Funds Scheme, September 2002

Environmental benefits translate into economic benefits than can be quantified and then compared to the loss of
revenues for the government generated by the tax incentive scheme. The economic assessment of the
environmental benefits of the Green Fund Scheme conducted by the KPMG concluded that every Euro the
government invests via the Green Funds Scheme produces 40 euro in investments by the private sector in
green projects.

The scheme has been successful from an economic perspective because it is strongly connected to the mechanisms of
traditional lending and investment, with funds allocated on a market-driven basis, close to average economic returns,
and with minimal governmental costs. 75 A 2007 study found that the financial performance of green funds investments
barely deviated from that of more traditional investments. 76 The commitment and cooperation of all parties involved in
the program have been particularly important to its success. What was originally expected to involve no more than
400 million ($564 million) has grown precisely because there has been so much public demand for additional funds. It
seems that there is an added attractiveness to these low-risk, average-return investments if they demonstrate a
positive contribution to society.

UK
Green Investment Bank
UK Government is committed to promoting green growth and to ensuring the UK makes a successful transition to
a low carbon economy. This will require more sustainable use of natural assets, less environmental damage,
improved resource efficiency and greater energy security and resilience, while also maximising growth and
creating high value employment. This challenge will involve unprecedented levels of investment in new
infrastructure.
The development of well-designed, stable policies is key to providing the incentives needed by business if it is to
have the confidence to invest in new, green infrastructure. We have made significant steps towards this end, with
the introduction of a carbon price floor, proposals on electricity market reform, the Green Deal for energy
efficiency in buildings, a major waste policy review and new initiatives to encourage the roll-out of electric
vehicles.
However, while such policies are necessary, they are not sufficient. In particular, a lack of appropriate finance
might threaten to limit the scale and pace of our transition. The proposals published today set out a vision for a
new and enduring institution the worlds first dedicated green investment bank to complement the existing
policy landscape. The institution will play a vital role in addressing market failures which are constraining the
flow of finance.

75
Koert Jansen, Some Thoughts on Mainstreaming Social Finance with the Help of Government: The Example of the Dutch
Green Funds, in Banking and Social Cohesion: Alternative Responses to a Global Market, ed. Christopher Guene and Edward
Mayo, 242-244 (Charlbury: Jon Carpenter Publishing, 2001)

76
Scholtens, Financial; Eurosif, 2008 European SRI Study (Paris 2008)

98
The GIBs mission will be to accelerate private sector investment in the UKs transition to a green economy. Its
initial remit will be to focus on green infrastructure assets. It will work to a double bottom line of both achieving
significant green impact and making financial returns. It will also operate independently and at arms length from
Government, which will agree its strategic priorities over Spending Review periods.
As the Chancellor set out in his Budget speech in March 2011, the initial capitalisation of the GIB will be 3 billion
and the Government will enable the GIB to have borrowing powers from 201516 and once the target for debt to
be falling as a percentage of GDP has been met. The new institution will need to comply with state aid rules.
Therefore, the proposals I am publishing today will need to be approved by the European Commission before we
can establish the GIB. Given the need for early action, my department will start to make direct, state aid
compliant investments in green infrastructure projects from April 2012. In due course, we will transfer these
investments to the new institution. Once state aid approval is achieved and the final form of the institution is
agreed with the Commission, we will move to enshrine the GIB in legislation.
The GIB will support the Governments green policy objectives
The UK Government is committed to achieving the transition to a green economy and delivering long-term
sustainable growth. However, this transition requires unprecedented investment over the coming decades, with
an estimated investment of up to 200 billion in the energy system alone over the period to 2020, and further
significant investment in other key green sectors such as transport, waste, water and flood defences. The
Government committed in the 2011 Budget to fund the GIB with 3 billion over the period to 2015. The GIB will
become a key component of the transition to a green economy, complementing other green policies to help
accelerate additional investment.
The GIB will play a key role in addressing financial market failures
The transition to a green economy is constrained by a series of market failures. Government policy is focused on
overcoming these market failures using a range of policy instruments including market incentive mechanisms
such as carbon pricing, support for low carbon electricity and landfill taxes.
However, even after these policies are implemented, particular market failures can affect the financing of the
green economy and limit investment. These include risk aversion resulting from a lack of information and
information asymmetries, as well as high costs of transactions, which constrain the total amount of investment.
Without further intervention, these would lead to under-investment against the Governments ambitious green
objectives.
Tailored and targeted financial interventions can help to overcome risk aversion, high transaction costs, and the
resulting lack of capital and complement other policies. Examples of intervention include:
Risk mitigation products to present more attractive risk profiles to a wider range of investors.
Innovative finance mechanisms to overcome high transaction costs of investment and share risks.
Capital provision via either equity or debt, where shortages of capital remain.
A wide range of sectors is likely to be eligible for intervention over the full period of transition to a green
economy and these will change over time. Following a wide, but non-exhaustive, review of different needs across
the green economy, this report highlights three sectors to illustrate the evidence of market failure: offshore wind,
non-domestic energy efficiency and waste. Work is ongoing to explore further the evidence of market failures in
these and other sectors and to establish the GIBs priorities, including assessing the potential and necessity for
the GIB to support the financing of investment in domestic energy efficiency during the first stages of Green Deal
delivery. The Governments primary aim remains for this to be a private-sector led scheme.

These interventions require a new institution, rather than coming as a series of Government interventions. It will
build the necessary deep expertise in financial markets and green investments to mobilise additional private
sector capital and gain market credibility by operating at arms length from Government.
The GIB will be set up as an enduring institution
The GIBs mission is proposed to be providing financial solutions to accelerate private sector investment in the
UKs transition to a green economy. The GIB will work towards a double bottom line of both achieving significant
green impact and making financial returns. This will be enshrined in a series of operating principles, which it is
proposed will also include delivering enduring impact through sustainable investments, maintaining strategic
alignment with Government policy, operational independence from Government, partnership with the private
sector and minimising market distortions.
The GIB will be established as a Companies Act company and follow best practice corporate governance. It will
operate at arms length from Government, setting its strategic priorities in consultation with ministers. The GIBs
strategic priorities will lay out broad guidance on strategy and criteria for investment over each period of agreed
GIB funding, including green policy objectives and likely sectoral focus, the nature of market intervention
priorities to be tackled, high-level green and financial return criteria and its borrowing mechanism. The GIBs
management will then develop this into a business strategy and business plan.

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The GIB will need state aid approval. Once this is achieved, the GIB will be enshrined in legislation to confirm its
independent status as an enduring institution with a key public role.
The GIB will be shaped by its management team, based on the strategic priorities, taking into account market
needs. This will reflect the balance of sectors covered, products offered and the intermediation model. Following
establishment and during this Parliament, the GIB is expected to grow to a staff level of between 50 and 100
employees.
The GIB will use a range of product interventions to achieve its mission. A range of possible interventions has
been tested with market participants. These include:
Risk mitigation: First loss debt in each of the construction and operating phases of projects, for example to help
mobilise additional investment into the offshore wind or waste sectors.
Innovative finance mechanisms: An upfront refinancing commitment which guarantees an exit for long-term
bank finance after construction, upon certain conditions being met. This could apply to offshore wind.
Capital provision: Equity and senior debt on market terms to provide additional capital, for example in offshore
wind or waste projects.
The GIB is likely to continue to explore a range of other products, including innovative finance mechanisms to
increase capital provision for non-domestic energy efficiency, as well as other forms of debt, equity and
guarantee or insurance-like products in a range of other sectors.

Implementation will consist of three phases


The GIB will have 3 billion available for investment and capital over the period to 2015.

Recommendations for the Central Bank of Russia


The principal regulatory body in the Russian banking system is the Central Bank of Russia (CBR). The duties and
authorities of CBR are articulated in Federal Law No. 86-FZ as of 10 July 2002 in accordance with Articles 71 and 75 of
the Constitution of the Russian Federation. There exists Bank of Russia Instruction No.1 as of January 30, 1996, "On
the Procedure for Regulating the Activities of Credit Organisations", which includes regulations on credit,
operational and market risks. 77 The CBR classification of banking risks, which is followed by the Russian banks in their
business practices, does not include environmental and social risks.

However, introducing complimentary regulation on environmental and social risks traditionally inherent to
investment projects would provide a comprehensive set of measures in order to balance and mitigate all existing
potential risks for domestic banks. Therefore, based on the described above experience, it is recommended for
the Central Bank of Russia to:
Set up a goal of preparing Green/Responsible Lending Guidelines, which will provide
recommendations/or regulations for domestic banks on the necessity of measuring ESG risks in addition
to classically measured risks and prioritising green loans.

77
http://www.cbr.ru/analytics/standart_acts/bank_supervision/

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Recommended Framework for Green Credit Guidelines of the Central Bank of Russia

Chapter I. General Rules

1. The Guidelines should be developed on the basis of the Central Bank of Russia's Law, with a purpose to
promote green credit growth among banking financial institutions.

2. The Guidelines should apply to policy banks, commercial banks, cooperative banks and credit unions
established within the Russian Federation (hereafter referred to as banks).

3. Banks shall promote green credit as a strategy, support economy to grow in a green, low-carbon and recycled
model through business innovation, manage environmental and social (E&S) risks, improve banks own E&S
performances, and in doing so optimize credit structure, improve services and contribute to the
transformation of economic growth pattern.

4. Banks shall effectively identify, assess, monitor, control or mitigate E&S risks in business operations, develop
E&S risk management systems, strengthen credit policies and processes that are related.

E&S risks as used in the Guidelines refer to potential impact and risks brought to the environment and
communities by banks clients and their primary supply chains through construction, production and
operational activities, which include such E&S issues as energy consumption, pollution, land, health, safety,
resettlement, eco-system protection, climate change, etc.

5. CBR should be responsible for the supervision and administration of banks green credit operations, and E&S
risk management.

Chapter II Organizational Structure: Roles and Responsibilities

6. Banks Board of Directors or Council shall promote concepts related to green credit including resource
efficiency, environmental protection and sustainable development, emphasize banks role in contributing to
the comprehensive, balanced and sustainable social and economic development, and develop a sustainable
business model that allows win-win for banks and the society at large.

7. Banks Board of Directors or Council is responsible for defining its green credit growth strategy, approves
banks green credit targets and reports that are developed by senior management, monitors and evaluates
banks implementation of the green credit growth strategy.

8. Banks senior management shall, following decisions made by the Board or Council, develop green credit
targets, establish mechanism and processes, clarify responsibilities and jurisdictions, conduct internal control
and performance evaluation, provide annual report on green credit performances to the Board or Council,
and report to regulators.

9. Banks senior management shall identify a senior manager and a department to lead and manage green credit
related work and provide necessary resources. If necessary, a cross-function green credit committee may be
established to coordinate.

Chapter III Policies and Capacity Building

10. Banks shall develop and improve policies, systems and procedures for E&S risk management, identify business
focus and priority sectors for green credit investment in accordance with national environmental laws and
regulations, sector guidelines and sector-specific entry policies. For sectors that (i) fall into restricted category
and subject to national control; or (ii) have major E&S risks, banks shall develop specific credit guidelines,
implement a differentiated and dynamic credit policy and put into a risk exposures control system.

11. Banks shall develop a client E&S risk rating standard to assess and categorize clients E&S risks. The
assessment and categorization results shall become important basis for clients rating, credit approval,
portfolio management and exit decisions. In addition, based on such results, banks shall take different risk
management measures during the 3 checkpoints of the lending cycle (due diligence, credit review and
portfolio review), and in loan pricing, setting of risk-adjusted return target and allocation of economic capital.

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Banks shall develop a list of clients with major E&S risks. Such clients shall be requested to develop and
implement action plans for major risks involved, put in place comprehensive and effective stakeholder
communication mechanism and seek risk mitigation measures, for example through a third party sharing of
potential environmental risk.

12. Banks shall create a mechanism that encourages green credit innovation. Banks shall promote innovation in
green credit business process, products and services under the premises of effective control of risks and
sound commercial viability.

13. Banks shall improve E&S performances of its own operations, put in place relevant systems, emphasize green
credit awareness raising, standardize business conducts, promote green office and improve resources
efficiency.

14. Banks shall strengthen capacity building on green credit, develop and improve green credit business
definition, categorization and statistics, improve relevant credit management system, enhance green credit
training, recruit and train specialized staff. If necessary, banks may use qualified and independent third party
for E&S risk assessment, or other professional service providers for effective outsourcing services.

Chapter IV Lending Process Management

15. Banks shall strengthen due diligence. Banks shall determine scope of E&S risk due diligence based on sectors
and geographic features of clients or their projects, to ensure a comprehensive, thorough and detailed
assessment. If necessary, banks may seek support from qualified and independent third party and relevant
regulators.

16. Banks shall conduct stringent compliance review on clients. Banks shall develop a compliance documents list
and a compliance risk review list on E&S aspects based on sector-specific features of clients, ensure that
documents and permits submitted by clients are compliant, effective and complete, ascertain that clients
have sufficient understanding and effective monitor and control over risks identified and are compliant in
essence.

17. Banks shall strengthen credit approval management. Banks shall determine sound credit approval
authorization and procedures based on the nature and severity of E&S risks faced by clients. Credit to clients
with non-compliant environmental or social performances shall not be approved.

18. Banks shall improve loan agreements to urge clients to improve E&S risk management. For clients that involve
major E&S risks, loan agreements shall request clients to provide E&S risks reports, contain client
representations and warranties on improving E&S risk management, design covenants so that clients shall be
subject to lender supervision, and provide remedies for banks in case of any breach by client on E&S aspects.

19. Banks shall strengthen loan disbursement management. Clients management of E&S risk shall become an
important basis for banks to make decision on loan disbursement. Throughout the project cycle, including
project design, preparation, construction, completion, operations and closure, E&S risk assessment shall be
checked systematically. In case of major potential risks, banks may hold or even terminate disbursement of
funds.

20. Banks shall strengthen portfolio management. Banks shall develop and implement specific portfolio
management measures for clients with major potential E&S risks. Banks should closely follow national
policies impact on clients operational performances, maintain active monitoring and analysis, and make
timely adjustment to risk categorization of assets, loan provisioning and loss write-off. Banks shall develop
and improve an internal reporting and accountability system for major client E&S risks. In case of major E&S
issues, banks should take measures in a timely manner and report to regulators on potential risks that banks
are exposed to.

21. Banks shall strengthen E&S risk management for proposed overseas projects, ensure project sponsors are
compliant with local environmental, land, health and safety laws and regulations in the project country or
region. Banks shall publicly commit to adopt relevant international best practices or standards for the

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proposed overseas project, ensure the proposed project is consistent with international best practices in
essence.

Chapter V Internal Management and Information Disclosure

22. Banks shall include green credit performances as part of internal compliance review, organize regular internal
audit on green credit performances. In case of major issues identified in such reviews, banks shall follow
relevant accountability regulations.

23. Banks shall develop effective green credit performance evaluation, incentive and penalty system, ensure that
incentive measures are in place and implemented, and that green credit is effectively implemented.

24. Banks shall disclose green credit strategy and policies, and green credit implementation status. With regard to
credit information involving major E&S risks, banks shall disclose information as required by laws and
regulations and subject themselves to market and stakeholder supervision. If necessary, banks may engage
qualified and independent third party to conduct evaluation or audit on banks fulfillment of E&S
responsibilities.

Chapter VI Supervision and Inspection

25. CBR shall strengthen coordination with other regulators, establish and improve a long-term information
sharing mechanism, improve information services, and provide banks with timely updates on relevant E&S
risks.

26. CBR shall strengthen offsite supervision and administration, establish and improve offsite control indicators,
strengthen monitoring and analysis of E&S risks that banks are facing, provide timely guidance to banks to
enhance risk management and adjust investment direction. In pursuance to the Guidelines, banks shall
conduct comprehensive evaluation on green credit performances at least twice a year and file self-evaluation
reports to CBR.

27. For on-site inspections, CBR shall take into full consideration of E&S risks that banks face, define scope and
requirement for such inspection. Regions or banks with outstanding E&S risks shall be covered by specific
inspection and be requested to take improvement measures based on inspection results.

28. CBR shall strengthen guidance provided to banks to conduct self-evaluation on green credit performances,
fully assess banks green credit results based on offsite monitoring and on-site inspections, and use such
results as important basis for regulatory rating, licensing, senior management performance evaluation in
accordance with relevant laws and regulations.

Chapter VII Supplementary Provisions

29. The Guidelines shall become effective as of the date of official introduction. Banks and non-banking financial
institutions may use the Guidelines as a reference for implementation.

30. The Guidelines shall be interpreted by CBR.

CONCLUSION
Environmental impact of banks is not physically related to their banking activities but to their clients activities.
Therefore, environmental impact of banks external activity is huge. Moreover, environment management in the
banking business is like risk management. It increases the enterprise value and lowers loss ratio as higher quality loan
portfolio results in higher earnings. Thus, encouraging environmentally responsible investments and prudent lending
should be one of the responsibilities of the banking sector. Further, those industries which have already become green
and those, which are making serious attempts to grow green, should be accorded priority to lending by the banks. This
method of finance can be called as Green Banking, an effort by the banks to make the industries grow green and in
the process restore the natural environment. This concept of Green Banking will be mutually beneficial to the banks,
industries and the economy. Not only Green Banking will ensure the greening of the industries but it will also
facilitate in improving the asset quality of the banks in future.

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It is clear that the post-crisis world in combination with longer-term global trends call for a more balanced way
of banking. Not only can banks improve their own products and services. They have the potential to be agents of
change outside of the direct scope of their organizations, by taking a longer-term perspective on the clients they
choose and the financial products they offer.

Companies that have embedded social, environmental and corporate governance management practices at the
core of their organizations are better able to foresee changing attitudes and expectations in the market so that
they can develop the products and services that meet the future needs of society. This should be no different for
banks. Social and environmental risk management improves the quality of a banks portfolio and lowers
insurance liabilities and compensation claims. Pursuing innovative financial solutions and products generates
direct profits in new markets with new clients.

Russia just joined WTO, it is on the threshold of joining OECD. Moscow is expected to become international
financial center. All these trends have to be aligned with the corresponding level of maturity in the Russian
finance sector. Therefore, it is absolutely necessary to put sustainable finance practice on a stable track.
Regulators, banks and investment companies synergy is needed to implement this.

Authors Julia Polonskaya, Mikhail Babenko (Profiles)

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